Trailer Outlook:Slight Slowdown This Year, But Bigger Boom Coming

June 1, 2000
Trailer manufacturers will have a brief period to whittle down their backlogs before demand once again reaches unprecedented levels, according to Peter

Trailer manufacturers will have a brief period to whittle down their backlogs before demand once again reaches unprecedented levels, according to Peter Toja, president of Economic Planning Associates.

Speaking at the Truck Trailer Manufacturers Association convention in Indian Wells, California, Toja predicted 2000 and 2001 will be mirror images of one another. This year is starting strong but will fade, he said. Trailer shipments will be relatively slow early in 2001, but demand will grow as the year goes on.

Toja considers the expected drop-off in trailer production to be nothing more than a digestive phase following an exceptional year in 1999.

"I look for this year to be off from last year's level," Toja said. "But if I told this audience five years ago that the industry would be manufacturing 270,000 trailers, you would have been turning cartwheels in the aisles."

Toja believes that most trailer manufacturers already have posted their best monthly production for this year. Output will slowly decelerate as the year progresses.

"OEMs will be living off backlogs," he said. "Backlogs will be coming down because orders will be coming in more slowly than they did in 1999. As backlogs get leaner, you will see fewer deliveries quarter by quarter. But the important thing is that the fourth quarter will be the lowest quarter of the year-and the beginning of a turnaround. The outlook for 2001 is for about the same number of trailers as this year-270,000. But instead of deceleration, things will gradually improve. It will set the stage for what will be an extremely dynamic period beginning in 2002 that will run through 2005."

Analyzing the Economy Toja's forecast for the trailer industry is based on the sum of his forecasts for individual types of trailers. A variety of factors affect the demand for trailers, and he presented an analysis of them.

"The economic environment is extremely good," he said. "The consumer continues to spend at a rapid rate. Consumer spending is advancing at a 6 to 7% rate in the first quarter of 2000. The reason for the growth is that consumer wealth has increased, whether it is from stock market activity or the value of his home. This keeps the consumer extremely confident and spending at a good pace."

The explosion of electronic commerce is shifting the channels of distribution. "We are not getting the growth in the malls that we would have anticipated in this type of strong economy," he said. "Movement of product is from the manufacturer to regional or local distribution centers. Smaller vehicles are taking it right to the doorstep of the consumer.

"Channels of distribution are changing and will continue to change over the next five years. The implication for truck manufacturers is to shift their attention from the Class 7 and 8 trucks and place it on Class 3, 4, and 5 trucks. That market will grow as we move through the next five years."

Other Factors Toja gave a brief rundown on several economic factors. Among them: * Interest rates. The rate hikes that have been implemented recently will have a cumulative effect, Toja said. The question is when. * Export increases. "Our trading partners in Southeast Asia, Latin America, and Europe all are experiencing economic rebounds," Toja said. "NAFTA trade continues to expand. All of this lends itself to increases in truck traffic." He added that manufacturing output is accelerating, not only for the domestic market, but also for the export market. Manufacturing is particularly important to the transportation system because every manufactured product involves multiple shipments of raw materials and/or component parts. * Production equipment. For the first time in years, factories are now at 80% of capacity or more, Toja said. This tends to signal a wave of new investment. * Consumer spending. Consumer income has increased, Toja said, but consumer spending has increased even more. This reflects high levels of consumer confidence in the economy, caused in large part by growth in the stock market. Even with the recent downturn, the market is still above last year's level, and consumer spending remains high. Another factor contributing to consumer spending has been rising home values. Toja said increases in home equities have combined with lower interest rates to create additional consumer debt, which he considers to be a dangerous situation. Because of lower interest rates, consumers can reduce their monthly house payments by refinancing their mortgages and spending the difference. * Inflation. The consumer price index is not growing as rapidly as the producer price index. That is because the consumer price index includes imported products, Toja said. If the dollar is stronger than the currency of the exporting nation, the consumer pays less in domestic currency. The producer price index will continue to move up and affect consumer prices. * Interest rates. Interest rates are moving slightly, but that movement is very significant, Toja said. The increases are having an effect on consumer credit costs, automotive commercial paper, home mortgage rates, and the cost of business capital. He expects higher interest rates will help slow the economy. "We aren't going to fall off a cliff, but we are going to slow down," he said. * Light vehicle sales. The consumer's love affair with light vehicles continues-particularly with trucks, Toja said. Consumers bought 16.9 million cars and light trucks last year. For the first quarter of 2000, light vehicles have been selling at an annual rate of 18 million. Toja expects that higher interest rates will dampen sales for the rest of this year. Rising fuel costs also will contribute to the decline, as will higher insurance rates. He predicts that 17.5 million light vehicles will be sold during 2000. * Housing. Toja does not anticipate increases in housing starts, especially for single-family homes. In 1999, construction began on 1.67 million housing units. Toja expects a flat year in 2000-with starts of 1.7 million units. "In all, the consumer will continue to spend in 2000, but at a more subdued rate than we have seen in the last couple of years," Toja concluded.

Good News Toja listed several positive factors that bode well for trailer manufacturers. * A robust economy supports the need for trailers, particularly dry-freight vans. * Expanded merchandise trade. Demand will continue for intermodal containers and container chassis. * More manufacturing output. Manufacturing involves the transportation of raw materials to a processing center, the processed material to the site where components are produced, and the shipment of components to the final assembly plant. This multiplier effect creates additional need for platform trailers, dry-freight vans, and tanks. * High levels of construction. * Imports and exports are growing. Some people are alarmed by the trade deficit, Toja said, but it is the total of goods coming in and leaving the country that contribute to demand for trailers. "The United States is a global trader, and international trade has become an integral part of our economy," he said.

International Outlook Although the US is trading more with partners in Southeast Asia, Europe, and Latin America, Toja expects the largest increase in trade from Canada and Mexico. The economies of both NAFTA trading partners are growing.

The Canadian economy is extremely strong, Toja said, and is moving in tandem with the US economy. Consumer spending in Canada is growing, and unemployment is coming down. Construction is up, and exports are growing. He expects the gross national product of Canada to increase by 4% this year.

"If you think Canada is a success story, take a look at Mexico," Toja said. He pointed out that the nation has been under strong fiscal restraints since its recession in 1994. Mexico has spent the past five years lowering interest and inflation rates at the same time that consumer income and spending have been increasing.

"They are now in a very strong position to go through a four- or five-year period of super growth," Toja said. "And while we got socked with major increases in oil prices, this major trading partner of ours has benefited from them." Toja expects Mexican GNP to grow 41/2 to 5% this year and in 2001.

Growth Areas The railroads are spending heavily to expand intermodal capacity, particularly at tunnels. Long term, they also are working to relocate away from downtown areas to faster and more accessible areas in the suburbs.

At the expense of piggyback trailers, containers will continue to become more popular in the intermodal market, Toja predicted. Piggyback trailers will continue to be used, but the ability of containers to be double-stacked will make them increasingly popular.

Industrial production has grown. Toja said, however, that in some areas, companies buy trailers based on increases in profitability, rather than in response to increases in demand for their products. He expects industrial production to increase 5% from 1999.

Truck tonnage continues to increase and should do so throughout the year. Toja's forecast: a 5% increase in the first half and 3 to 31/2% growth during the second half.

Construction advanced for the sixth consecutive month in March. The residential sector is expected to hold up, and the commercial and industrial sectors will increase. However, the biggest area of growth is expected to be highway construction. The recently passed federal highway bill appropriates $216 billion for transportation infrastructure. He said that this market should hold up well for the next year or two, with a record level this year and near-record levels next year. The fall-off next year will be due to higher interest rates that will affect some segments of the construction industry.

"Agriculture has nothing wrong with it except for a lack of profits," Toja said. "We have had record years of harvest for corn, wheat, and soybeans. The problem is that we have all of these record numbers coming in just when the Southeast Asian economies collapsed and when European activities slowed down."

These surpluses were stored instead of consumed, Toja added. He expects the federal government to assist the farm sector again this year and next. However, exports may increase later this year, and orders for equipment may begin coming in later this year and into 2001.

A Discouraging Word After listing the positive factors affecting the trailer forecast, Toja listed some of the things that are expected to dampen demand. Among them: * Recent influx of new equipment. The market has bought heavily in recent years, Toja pointed out. Once the new equipment is in service, companies must be convinced that their business will continue to expand before they acquire additional equipment. Toja expects the market to be cautious for the next 12-18 months. * Carrier profitability. Rising fuel costs will have a major effect on fleet profits. Driver compensation is another factor. Some carriers are giving drivers significant raises. * Higher interest rates. * Rising raw material costs. * Driver shortage. Historically the unemployment rate for truck drivers has been higher than the national average. In 1999, however, it was well below it. In the past, the seasonal construction industry could be counted as a source of drivers during slow periods. The construction industry has no slow time now, though, Toja said.

The combination of these factors convince Toja that a slowdown is coming for truck trailers this year. And unfortunately, the slowdown will occur at the same time that trailer manufacturers will begin paying more for raw materials.

"This is not good for an industry that buys materials for a dollar a pound, assembles them, and sells the completed product for 95 cents a pound," he said.

The downturn, however, is expected to be brief. "As we go through this year, be prepared," he said. "The pressure for trailers will build again. Be ready to take advantage of another dynamic five-year period."

Toja explained the future increase as a result of the volume of goods that will need to be transported in the coming years.

"Long term there will be tremendous pressure on all aspects of the transportation system," Toja said. "The only area of transportation that trucking will not have an advantage is the availability of drivers. What restraints will be on capacity? What kind of equipment will be coming to help increase payload, shorten driver cycles, or maximize driver productivity? It will be up to trailer manufacturers to develop that kind of equipment."

Following his presentation, Toja answered questions from the audience. Among the things TTMA members wanted to know:

Question: What impact do you see trailer tracking having on trailer demand? Toja: Little effect. The more efficient the system, the more existing equipment will be utilized.

Question: How will the November election affect this industry? Toja: Dwight Eisenhower showed us that this country can operate without a president. The current one has shown us that this country would be better off without a president. Whether Bush or Gore wins in November probably will make little difference.

Question: Will emissions regulations affect your forecast? Toja: No. The truck manufacturers say that they are way ahead of the mandates of 2002 and 2005.

Question: What effect will rising fuel costs have on sales of new equipment? Toja: When fuel prices go up as sharply as they are now, the higher prices speed up the purchase of more fuel-efficient vehicles. But the increase can affect sales either way.