THE pros outweigh the cons. That's why Stephen Latin-Kasper, the NTEA's director of market data and research, believes the truck equipment market outlook for this year and 2004 is good, although the growth in 2004 will not be as high as this year.
His forecasted pros: the glut has been cleaned up; interest rates, inflation and unemployment are low; productivity is high; and capital expenditures and trade are improving.
His forecasted cons, however, deserve some attention:
Terrorism and the war in Iraq could damage consumer confidence and “mess up a lot of forecasts.” Latin-Kasper said the assumption is that the war will be short but the occupation long, and “the higher the expectation of a long occupation, the greater the uncertainty in the markets becomes again.”
Government spending will decline. “This is a dead certainty,” he said. “Nobody can forecast this one wrong at this point: Government expenditures, especially at the state and local levels, are going to be down throughout 2003 and probably remain down in 2004.”
Latin-Kasper said the single most significant leading indicator for the industry is the prime interest rate compared to the Business Truck Index 12-12 pressure curves.
“On the average, over the past five business cycles, changes in the rate of interest have led changes in the business truck production index by 15 months,” he said. “If things go as they have been in the last few cycles, we're going to go up a little bit more and start trending down again. We're looking at strong growth through 2003, but the rate of growth is going to start declining in 2004.”
He said that according to Martin Labbe's US retail forecast, Class 7 will experience the biggest gain in 2003 — 41.2%, which Latin-Kasper called “very significant growth” — while Class 8 will fall 4%.
Total transportation and truck equipment shipments were $84.6 billion in 2002, with truck and truck chassis accounting for $58 billion.
“This is what drives the industry — trucks in general, not equipment per se,” he said, “because we don't sell equipment if the trucks aren't selling. There's a direct relationship there.”
Severe declines were experienced in 2002 in Class 7 (24.3%) and Class 3 (21.1%), which account for the majority of the units in the medium-duty segment of the industry, creating what Latin-Kasper called a “big hit.” Meanwhile, Class 2 and Class 8 were experiencing growth in the past two years.
“What was going on between 2001 and 2002?” he asked. “It was very simple. We had new emissions regulations in 2002. There was a huge pre-buy. In the last three to four months prior to Oct. 1, orders were flying in to the chassis guys to avoid having to pay $5,000 more for the new engines. The truck had to be built before Oct. 1, not sold. The pre-buy extended into October and November, so Class 8 sales didn't really fall off until December.”
Truck equipment shipments have declined 5.4%, 5.9%, and 6.1% in the past three years, which Latin-Kasper said has more than offset the gains made in 1997-1999.
Latin-Kasper said the NTEA Shipments Index shows slightly better numbers than the Business Truck Production Index produced by the Federal Reserve Bank of the US. He said the government collects data from “an unbelievable amount of sources” and pays a lot of attention to the truck industry because it accounts for $100 billion every year.
“But one of the problems with the Federal Reserve data is that every time the economic census is done every five years, they go back and benchmark their history and revise it,” he said, noting that it was done two months ago. “The beauty of the NTEA index is that once it's in the can, it's final. We don't have to worry about a historical revise.”
Explaining a graph of 12-12 pressure curves comparing electric and gas utility production and the Business Truck Index, Latin-Kasper said, “Utilities and state and local governments were getting involved in more work, mostly in highways and streets, but also sewage treatment plants and school buildings. When all of that spending is up, obviously sales of trucks go up.”
He cited an important number for distributors, saying 43% of all trucks in 2002 were sold into the construction industry. That's important because in 2002, total state and local construction spending was up from $177.5 billion to $187.8 billion, and total federal construction spending was up from $14.9 billion to $16.5 billion.
“It's been an odd cycle the last three years,” he said. “Despite the fact that construction equipment didn't slow down until the second half of 2002, capital equipment expenditures by all businesses were in a slowdown. People were using trucks longer. Capital expenditures started falling at the beginning of 2000 and did not start increasing until the third quarter of 2002. What we saw was an extension of the replacement cycle for trucks in the last three years. That may mean that when things finally turn around, there's going to be a huge increase in orders for trucks as pent-up demand all hits at once.”
He said the downward slide in trailer production since 2000 was even steeper than it was for trucks, “but the rate of growth has been amazing in the last six months.”
End of the glut
“Generally, it looks like the glut in the market for used trailers has been pretty much cleaned up, as well as most of the glut in medium-duty used vehicles,” he said. “Things are starting to turn around.”
Latin-Kasper said the industry needs to pay more attention not only to the increasing influence of Mexico as a trading partner, but also to Russia.
“The prognosis for Russia's economy is 5% growth for the next 10 to 15 years,” he said. “That's nothing like China, but it's still substantial growth. They're going to need a lot of trucks. Their road system is basically in the same model as ours, and you don't have to make a lot of modifications to take a US-built truck and drive it in Russia. It's reasonable to expect a fairly significant increase in US trade with Russia in the next few years.”