Trailer Forecast: High-Level Plateau

June 1, 1999
TRAILER SHIPMENTS will be stable but far from stagnant in the next 18 months, according to Peter Toja, president of Economic Planning Associates. After

TRAILER SHIPMENTS will be stable but far from stagnant in the next 18 months, according to Peter Toja, president of Economic Planning Associates. After consecutive years of strong growth, trailer shipments are expected to ease slightly during the second half of 1999 and into 2000 before resuming the growth path that has characterized the industry for most of the 1990s. "I don't have bad news for you at all. I have a report on the continuation of the long-term growth of transportation equipment. The only message I would give today is that I see reason to exercise caution as we go through the next 18 months," Toja said in a presentation to the April 25 general session of the TTMA convention. Toja said the outlook to 2004 looks very good-but not for everyone. Downturns in some markets will affect the sales of specific types of trailers, including platforms, lowbeds, dumps, and tanks. One of the big ambiguities in the next few months involves the issue of Y2K, Toja said. While downplaying the fear that some people have of wholesale chaos beginning January 1, Toja does expect many companies to take precautionary steps. This would include increasing inventories during the second half of this year to counteract disruptions in the flow of supplies early next year. "Some trailer equipment already has gone into the system for precisely that reason," Toja said. Explaining the Boom Toja spent the first part of his address recapping the growth in trailer shipments the past few years and explaining some of the factors that have brought the industry such prosperity. After a drop in 1996, trailer shipments advanced sharply in both 1997 and 1998. Toja attributed the growth to the following: a strong US economy, expanded trade within NAFTA, technological advances with trailer equipment, the growing use of trailers as mobile warehouses, strong growth in wholesale and retail trade, extremely high demand for light-duty vehicles, and an acceleration in construction spending, led by a strong residential sector. Another reason for the strong demand for trailers has been rail congestion, particularly intermodal rail shipments. "Containers hit a snafu in both 1997 and 1998, particularly with Union Pacific," Toja said. "Someof that traffic was diverted to other railroads, but much of that traffic went to truckload carriers." Areas of Concern While trailer shipments have been strong in recent years, Toja sees several areas of concern in the short term. o Current economic strength is based on heavy consumer spending, which Toja believes cannot be sustained. o Business investment is slowing. o Imports are expanding at high levels. o The export potential outside the NAFTA economy will be very limited. o Corporate profits have slowed dramatically over the past three quarters. "Even though our long-term outlook for trailer demand is strong, we need to look at some of the areas that will slow us down a bit in the second half of 1999 and going into 2000," Toja said. Toja attributes much of the increase in consumer spending to the substantial growth in housing starts. With the purchase of a new home comes corresponding increases in the sale of furniture, appliances, floor coverings, consumer electronics-all of which benefit companies that need trailers. The problem with this growth in consumer spending, Toja pointed out, is that it has outpaced consumer income. For the last three quarters, consumer income has advanced approximately 3%. Consumer spending has grown 5%. The consumer euphoria has been caused in part by the growth in the stock market. Consumers are more inclined to spend when their portfolio has grown sharply, and are less likely to spend when they have suffered a sharp loss, Toja said. "I refuse to forecast an economy based on a continued expansion of a stock market to support consumer spending that outpaces income," he said. "I am arguing for a pause in consumer spending-not a drop, just somewhat slower growth." Another factor influencing consumer spending has been the growing prices for used homes, combined with declines in mortgage rates. The combination has led to a major increase in the rate of home refinancing. This has given consumers additional money every month to spend on other items such as automobiles. However, new home sales are beginning to slow their pace of the past four years. Low Inflation, Interest Rates Toja had good things to say about the present inflation rate, but was less positive when looking ahead. "We have an inflation rate that is missing in action," he said. "One reason is that we have been importing a lot of cheap foreign products. But if foreign economies begin to improve, and other nations send more of their production into their own economies and less to ours, we can look for prices to edge up." Interest rates also remain low, making things more affordable for businesses and consumers alike. However, rates have stabilized, and Toja anticipates increases. "As foreign economies improve and investment begins to flow to those economies, chances are good that interest rates will start to edge up as we compete for funds in our domestic markets," Toja said. The Confident Consumer Consumer confidence remains high. However, a graph that tracks consumer confidence correlates closely with movements in the stock market, Toja said. This is the reverse of what should be the case. Stock market forecasts should be based on the economic outlook. Economic forecasts should not be based on what the stock market might do. Light vehicle sales have been extremely strong for the last four years, Toja said. Sales grew another 4% last year to a total of 15.6 million units sold in the United States. The annualized pace has been even stronger in recent months-meeting or exceeding last year's overall total every month since December 1998. Toja's most recent data was March when the industry was on a pace to sell 16.5 million vehicles on an annual basis. "We don't expect to see that level of demand throughout the year," Toja said. "We look for some slowing of demand for light vehicles. Given the strong sales during the past four years, a lot of the pent-up demand has been satisfied. And we don't believe that the consumer can continue to spend faster than his income growth for an extended period of time. We look for moderation in the growth of light vehicle sales. They will still remain at high levels, but they will not have the impetus that they had in 1997 and 1998." The second major area for the consumer has been housing starts and housing sales. Extremely low mortgage rates and advancements in consumer income have fueled these sales. The gain last year was 9%, and this year has begun strongly. "But we are beginning to see some signs of weakness in home sales and housing starts," Toja said. "Mortgage rates have moved up. The National Association of Homebuilders index, which measures buyer sentiment and traffic, has dropped nine points between December and March. It is at its lowest reading since May 1998. Buyer traffic has slowed, and mortgage applications have dropped in recent months." Toja said that these signs do not point to a major decline, but they do indicate an end to the accelerated growth that has characterized the housing market in recent years. He predicted that the strong performance early in the year would result in a 1% increase in housing starts in 1999, followed by a 4-5% decline in 2000. "I see slower rates of growth in consumer spending, but nothing dismal. The only message I have for you is somewhat slower consumer and economic growth in the next two years than in the last two." Thinking Globally The United States increasingly is doing business internationally, Toja said, but in the last 18 months, this engine of growth has flattened out. "Between now and the end of the year, we face the specter of dampened potential for exports. This will affect sales of manufacturers. For years, manufacturers have been ordering equipment to produce for the domestic market and for exports. With the dampening of the export market, we are starting to see a flattening of manufacturer orders and an adverse effect on industrial production. A significant deceleration in the growth of manufacturing has occurred during the past 18 months. This will affect demand for various types of trailers." Toja cited a flattening of truck tonnage during the past couple of quarters. Truck tonnage had been increasing significantly in recent years. For exports, Toja believes the NAFTA countries hold the greatest promise for sales. The Canadian economy grew 3% in 1998, and Toja expects Canada will add another 3.1% this year and 2.9% next year. Mexico holds even more promise. Mexico is the 11th largest economy in the world, and 70% of its imports come from the United States. "Mexico has very sound fiscal programs, and improvements in oil prices will definitely help," Toja said. "The Mexican economy grew 4.8% last year. It is on target to grow 3.5% this year and 4% in 2000." The United States will continue to have an increasing global presence, both as a market and as a producer of exportable products. "The goods coming into the country and the goods being exported soon will amount to 25% of our economy," Toja said. "Think of what this means for transportation systems, transportation equipment, warehousing, and distribution. And keep in mind that transportation costs are an integral part of a manufacturer's final delivery price. The squeeze will be on your customers to make sure they have reliable, low-cost, efficient transportation equipment to move products through the system." Toja believes the expansion in merchandise trade primarily will benefit intermodal transportation. He considers intermodalism to be particularly effective in transporting goods long distances-especially east and west. Toja expects piggyback trailers to continue to be popular in certain corridors. However, the greatest growth will be in containers because of the double-stack concept. The railroads are investing heavily in container facilities and equipment. Looking at Trailer Niches Toja reviewed trends in several markets that affect trailer sales. Construction spending has been strong for the past three years, Toja said. Last year increased 4%, led by residential construction and rising expenditures in streets and highways. "We have had an extremely good start in 1999 because of the level of housing demand," Toja said. "But we are anticipating some easing this year because these levels of growth are unsustainable. Highway construction, however, will hold up. We believe construction will ease about 2% next year, which has implications for dump trailers, platforms, and lowbeds. Nothing dire, but a different environment than we have had for dry-freight vans." The farm market is doing well in every area except revenue, Toja said. Crops have been so good that storage facilities are filling up, and more grain is on the way. Toja said farm implement manufacturers already are cutting back production. He anticipates lower demand for open-top trailers, bulk commodity trailers, and some tank trailers that transport liquid fertilizer. Specific Numbers Toja criticized the accuracy of the monthly reports on trailer shipments produced by the US Bureau of Census. The 1997 figures had to be adjusted downward 15%, and another major adjustment is expected when the Census Bureau publishes its summary of 1998 trailer shipments this summer. To obtain more accurate results, Economic Planning Associates began surveying trailer manufacturers on a quarterly basis. The company now receives responses from 80% of the industry, Toja said. "It's hard to know where you are going if you don't know where you have been," he said, explaining why his company began conducting its own survey of the industry. Toja summed up the history and the economic indicators by predicting that demand will start to slow through the remaining quarters of 1999. He is predicting that the industry will ship 270,000 trailers in 1999, a 2% decline from 1998. "For all practical purposes, this will be a flat year-a modest pause at extremely high levels," Toja said. "The difference is that where 1998 began on a good note and kept its momentum throughout the year, we believe that trailer shipments will have some deceleration as we go through the year-but nothing dismal. We believe that slide will continue into 2000 before picking up once again and carrying us through 2004." After the decline, trailer shipments will be even better in the next five years than they were during the past five, Toja said. "Long term I see nothing that will derail the growth in demand for trailers," he said. "We see extremely good markets across the board. But aside from the total, there is a big difference in how individual types of trailers will perform."

About the Author

Bruce Sauer | Editor

Bruce Sauer has been writing about the truck trailer, truck body and truck equipment industries since joining Trailer/Body Builders as an associate editor in 1974. During his career at Trailer/Body Builders, he has served as the magazine's managing editor and executive editor before being named editor of the magazine in 1999. He holds a Bachelor of Journalism degree from the University of Texas at Austin.