YOU can remove your hardhats now. The sky isn't falling anymore.
Stephen Latin-Kasper, the National Truck Equipment Association's director of market data and research, has been the messenger that people in the industry wanted to metaphorically shoot at various times over the past few years. But the news was good during the recent NTEA Economic Forecast Update Webinar, at which Latin-Kasper provided the newest figures since his September presentation.
Latin-Kasper said that there will be steady growth in the medium- and heavy-duty truck markets for the next five years so that by 2016, they will be producing and selling 40% more than they did in 2010.
“We're looking at a very substantial increase in sales expected at this point for the next five years,” he said. “Far removed from expecting a recession going forward, what we're really expecting is substantial growth — not just for the next year but all the way through 2016.”
He said IHS Global Insight has provided an update on its September forecast, and only in Class 1-2 have the numbers been revised downward for the next five years. Class 3 has been revised upward (5.4%), and all other classes have remained the same. For 2012, Class 6-7 has been revised upward by 4.7% to 89,000 and Class 8 by 3.4% to 181,000.
“In the next five years, we're looking to see 400,000 additional units produced and sold in Class 1-2 than are being sold now,” he said. “In Class 3, we'll go from 187,000 units to 210,000 by 2106. In Class 4-5, from 50,000 units to 80,000. In Class 6-7, also a 50% increase. In Class 8, from 160,000 to 220,000.”
He said those worried about a double-dip recession have a good reason not to be: the 10-year T-Bill rate minus the two-year T-Bill rate was 2.8 by the end of 2011. Any time it falls below the two-year rate, it's a leading indicator of a recession that's about to happen.
“A healthy gap between the 10-year rate and 2-year rate is roughly 2%,” he said, “and that's where we have been, or above, going back to 2009. We aren't likely to have a yield curve inverting and causing a recession because we would have to go from 2% back to zero, which is not likely to happen for some time. We're not looking for a recession in 2012. We are looking for continued growth. That is evidenced in our own industry.”
He said that as of the end of the third quarter of 2011, there had been 27.9% growth in straight truck retail sales. “The biggest chunk of the market in terms of volume” is in conventional chassis, and they were leading the way in the expansion of commercial truck sales, growing 43.9%, followed by LCOEs (27.3%), and cutaways (4.7%), with strips down 0.9%.
In terms of gross vehicle weight rating (GVWR), Class 2 was growing at 101%, with boxoff Class 2 retail sales doubling since 2010. Class 5 was up 56.4% and Class 6 up 48.7%. Class 8 straight trucks were up 42.9%, with tractors at 49.6%. Class 3 was down 11.9%.
“That's holding things back,” he said. “It has to do with the construction segment continuing to stagnate.”
Continued growth
According to the NTEA and the Department of Commerce, the industry was projected to hit $93.5 billion in sales by the end of 2011 and $110 billion in 2012.
“To keep that in perspective, the total dollar volume of sales in 2006 — which was the recent peak — was $125 billion,” he said, “so we have a ways to go. There's still some capacity left in the industry to allow us to get there.
“You can't start installing new equipment on chassis until chassis move through the system. In 2010, chassis increased 23.1% and equipment didn't have a chance to catch up (8.8%). In 2011, chassis were up 24.1%, and now equipment (21.6%) is growing along with chassis growth.”
According to the Federal Reserve's Medium-Duty Truck Production Index (which defines medium duty in GVWR as Class 3-7), there has been 30% growth since the first quarter.
The Federal Reserve's Heavy-Duty Trucks Production Index broke through the zero percent flat year-to-year line in the beginning of the third quarter of 2010, and production has continued to grow strongly to a rate of 80% as of September 2011.
In the index that measures trailer production compared to ATA freight shipments, a peak was reached toward the end of the second quarter — 25%, falling to 20% by the end of the year.
“We can't expect any industry or even a segment to continue growing at 100%,” he said. “The really good news was that the ATA Freight Shipments Index, which apparently hit a peak at the beginning of the year and was starting to move down, stabilized at the end of the second quarter, and turned up in the third quarter. That's a good sign, because the index is not just a leading indicator of trailer production, but of commercial vehicle production in general and, for that matter, the US economy. This is saying things are likely to get better than they already have moving forward to 2012.”
Through October, most of the prices were up for steel and steel products. For the year, hot-rolled bars, shapes, and plates were up 16.7%, steel pipe and tubes 12.9%, hot-rolled sheet and strip 11.5, and aluminum sheet 6.7%. But almost all of them were down in the third quarter.
The only index that has grown through last year and continued growing through the third quarter was iron ore, “which is kind of a harbinger of everything else that goes on.”
Meanwhile, prices for trucks, buses, trailers, and truck equipment were going up. They weren't rising as much in the third quarter as they had been earlier in the year, but that was still much better than in the past three years.
Class 1-3 prices were up 3.9% for third quarter and 2.1% for the year. Dump bodies were up 3.5% for the quarter and the year. Trailer prices “seem to have stagnated,” he said, with large trailers up 5.3% for the year but only 1% for the quarter, and smaller trailers up 4.1% for year, but unchanged in the third quarter.
“We're seeing a trend here,” he said. “Commodity prices were going down more so in the third quarter than in the second quarter, and that is kind of playing through in pricing in the commercial vehicle market. There were lesser price increases in the last quarter than for the year as a whole.”
Diesel volatility
There was a massive spike in diesel prices at the beginning of 2008 to reach $4.80 per gallon, then a big crash to $2.00 at the beginning of 2009 as a result of the recession, then another big rise up to $4.20 in 2011.
“There was a slight drop as the global economy struggled but is back up as result of activity in the futures market for oil,” he said. “That means we're going to stay in the long-run trend of prices growing at a faster rate than the economy at large. That translates into a continuing situation of profit margins being squeezed. As result of that, and of expectations going forward that oil prices will increase more, there will be continued demand on the part of truck fleet owners for alternative-fuel and hybrid-truck technology. That expectation of higher growth will put upward pressure on metals and other commodities by the second half of 2012.”
Latin-Kasper said there has been a long correlation between housing starts and business truck production.
“It's impossible to believe housing starts can go lower,” he said. “We're coming off a very low bottom in 2011 and starting to see some growth in 2012. We won't get back to near-normal levels until the second half of 2013, and maybe 2014. In terms of growth going forward, there's good reason to believe they'll increase in 2012. As a leading indicator, that says we can expect business truck production to continue growing into 2015 or possibly beyond.”
The COLAG (the ratio of the coincident and lagging indicators of US GDP) has been a very consistent leading indicator of the medium-duty truck segment, so Latin-Kasper said the 30% growth in the segment should continue. The COLAG has moved down almost 1% since peaking in the middle of 2011 at a 5% reading, but Latin-Kasper said it would not reach 0% until 2013.
“It tends to give nine months of leading notice of what is likely to happen in medium-duty production, which means we're not likely to see medium-duty year-on-year percent growth fall below zero until late 2014 or 2015,” he said.
He said that when interest rates go down, heavy-duty truck sales tend to go up. He said the average prime rate is stuck at 3.25%, where it will remain as long as the Federal Reserve Board of Governors keeps the federal funds rate near zero (and it's at .07%).
“As a result of recent remarks by the Fed, the forecast for prime has already changed,” he said. “We initially thought rates would increase toward the second half of 2012, but now the Fed is saying it intends to keep rates low until the second quarter of 2013, which means that 3.25% will be extended out. At the current rate of three years' lead time, that's telling us we can expect to see continued growth in the commercial vehicle industry through at least 2015 or 2016.”
Back in September, Latin-Kasper had given an economic update in which he said US growth stalled in the first half of 2011, but he expected moderate improvement in the second half.
The unemployment rate was 9.1% then, but fell to 8.6% in November. Consumer sentiment in September was at the lowest level since November 2008, but has improved significantly since then — up to the mid-60s.
“Which is still not great, but much better than a few months ago,” he said. “We saw good numbers posted in November for auto and light-truck sales. In addition, we had a good Black Friday. So we're seeing some good, positive changes in the trend away from the expectation of 2% growth toward a higher expectation in the vicinity of 2.5% growth in GDP.”
Back in September, oil prices dropped from around $95 to $85 over concerns about the economic outlook. Since then, they have bounced back to peak at $101.
“The reason for that is that the economic outlook for 2012 — not just in the US, but globally — has improved since September, and as a result, higher demand is expected for oil and people buying oil on the futures market has pushed the price back up,” he said.
His pros for 2012:
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The leading indicator has increased for six consecutive months.
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The COLAG is more positive than the leading indicator.
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The dollar is still relatively weak — a positive for exports.
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There is pent up consumer demand. November auto sales were just the leading edge of what should be a substantial increase in consumer expenditures.
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The savings rate is falling.
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Consumers and businesses continue to hold cash reserves.
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Higher inflation could accelerate consumer spending.
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The average age of trucks remains high.
Cons:
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Commercial and residential construction remains stagnant for the first half of 2012 and starts to wake up in the second half.
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State and local government spending constraints. “It will not be a great place to do business for the commercial vehicle industry in 2012 despite the fact that tax revenues have been rising for two years. They haven't risen enough to cover massive debt that was incurred in the three years prior. So state and local governments remain a large market but they're going to be focusing more on maintenance, replacement, and service for the next few years than on buying new trucks and equipment and expanding fleets.”
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Labor market imbalance continues. “There's a shortage of welders and drivers in the trucking industry. Things are going on as result of this long-lasting, deep recession that are still keeping the labor market from getting back in balance. That will make getting back to historic-trend growth in the US economy more difficult than it would have been otherwise.
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Political and election uncertainty likely to keep consumer confidence low.
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Euro Zone uncertainty remains an issue.