Trailer Outlook: Continued Strength

LOOK for excellent years in 1998 and 1999, followed by even better years beginning in 2000, Peter Toja, president of Economic Planning Associates, said at the TTMA convention May 18.

While 1998 and 1999 will be excellent years, they will be mirror images of one another. Toja expects this year to start fast and ease up in the second half. Next year will start slow and then accelerate in the second half.

"Starting in the second half of 1998 and going into 1999, we should see a slight slowdown," Toja said. "A whole lot of equipment has been sold recently, and it just has to be digested. Once that has taken place, even better times are ahead."

Toja's company develops forecasts for individual categories of trailers and then adds the categories to produce a forecast for the entire industry. The company evaluates the major drivers of demand for trailers, including consumer spending, business spending, corporate profits, and interest rates. Individual categories of trailers are driven by sectors such as construction and mining.

In addition, Economic Planning Associates evaluates competitive modes of transportation-such as intermodal-that may affect the trailer industry.

"Over the past five years, we have taken an increased interest in foreign trade," Toja said. "If we concentrate only on domestic trade, we miss approximately 22% of the merchandise that moves through our transportation system. Imports and exports are becoming an increasingly vital part of the US economy."

Toja traced trailer demand throughout the 1990s. During the early part of the decade, the US did not invest sufficiently in transportation equipment, including trucks, trailers, and railcars. After the economy began to expand and the transportation industry geared up for increased trade under the NAFTA treaty, Mexico devalued the peso in 1994 and had a recession in 1995. This triggered a digestive phase in the demand for equipment.

"Now with the economy going along quite well, we are continuing to see increased demand for equipment," Toja said. "The competitive pressures are too fierce for trucking companies not to take advantage of the most technologically advanced equipment.

"All of these pressures will lead to strong demand for transportation equipment over the next five years."

Economic Planning Associates begins its trailer forecast with an analysis of the US economy. One of the major elements in the economy is consumer spending.

"After six or seven years of very decent growth, consumer spending at the retail level continues to post good gains," Toja observed. "But there is very little inflation in those numbers. In the first quarter of this year, there was a strong increase in household goods following the strong performance in housing during the second half of 1997."

Toja examined several factors to project where consumer spending will go in the near future: the consumer's outlook, personal income, wealth, inflation, and interest rates. "If you look at each of these, I am sure you will agree that they all are extremely favorable."

Among the factors Toja considered:

* Consumer sentiment. Toja attributed much of the prosperity of the 1980s to the consumer confidence that former President Ronald Reagan instilled. By contrast, the confidence the nation experiences today is based on sound fundamentals. He predicted that the economy will continue to expand, leading additional people into the labor force. These additional workers will help support further economic growth.

* Income growth. Disposable income-the income that is left after taxes and inflation have been factored in-is one of the chief reasons for the strong economy, Toja said. Disposable income has shown steady growth in recent years.

"We expect to see continued growth in disposable income," Toja said. "The consumer price index on a monthly basis defies historical relationships and analyses. It is inconceivable that in the seventh and eighth years of an expansion, we actually see a decline in consumer prices."

Toja attributed much of this phenomenon to the results of the restructuring of corporations. Other factors include global competition and investments that have allowed manufacturers to lower costs, hold prices, and still make profits.

"As long as we have such benign rates of growth in the rate of inflation, we will continue to see increases in disposable income," Toja said.

Toja expects this year to be the best in this multiyear expansion. He anticipates the strongest growth in income to take place in 1998, with only a slight reduction in 1999.

Increased Wealth It is not just salaries that generate money for Americans. The population is accumulating financial assets, the dividends from which are strengthening the economy.

"Consumer spending is getting a tremendous kick from the enormous growth in the value of equities over the past few years," Toja said. "And even those who sock away all their cash in a mattress are wealthier because of the upward march in the value of their homes."

The combination of increasing property values and decreasing mortgage rates has led to a high rate of refinancing. This, too, has strengthened the economy.

"The beauty of this is twofold," Toja explained. "First, the consumer has a lower mortgage payment to worry about month after month. Second, this puts money in his pocket for other expenditures that he may want to make. With low interest rates, an increasing home value, and a strong stock market, he is less likely to pay down the principal. Most consumers are using this money to finance their expenditures."

The decline in interest rates also means lower rates for credit cards and automobiles, and lower borrowing costs for businesses and lower capital costs. With lower mortgage rates, more people are able to purchase homes, Toja pointed out.

The increased disposable income makes it easier for consumers to buy key commodities. Among them:

* Light vehicle sales. These have been extremely good in recent years, including 15.1 million in 1997. Toja expects sales to remain high this year and next year. The only concern he has involves financing.

"After years of steady advances, Detroit and the importers will be hard pressed to come up with the financing and new model offerings that will stimulate the consumer," Toja said. "We expect a limited digestive phase, one in which sales decrease from 15.1 million to approximately 14.8 million in 1998 and 1999. The big difference will be the continued shift to light trucks at the expense of passenger cars."

* Housing starts. After six or seven years of growth, pent-up demand for housing may have been satisfied. But because of exceptionally strong sales of houses the past three years, inventories of unsold single-family houses are at almost record lows. As a result, Toja expects housing starts to continue to grow in 1998 before slowing slightly in 1999.

"When housing starts increase, so do sales of appliances, furniture, carpeting, and consumer electronics," Toja said. "All of these areas will do well the next two years."

Overall, Toja projects a 3.3% increase in consumer spending this year, followed by a 2.5% gain in 1999. The slowdown will come in the durable goods category, along with a digestive phase for housing starts in 1999.

Looking Overseas The real increase in the US economy has come from international trade, Toja said. The movement of goods both directions across US borders has helped increase the demand for trucks and trailers.

"We are exporting far more than just financial and service areas," he said. "The growth is coming in products that must be moved to and from the port."

Manufacturers are seeking global markets. They also are defending themselves in the domestic market. As such, they are investing in ways to reduce costs and improve product quality, he added.

"There is increased pressure all along the supply chain," Toja said. "OEMs and suppliers are forced to reduce costs because this is how profits will be made in the future-not by raising prices."

Manufacturing activity, however, has been slowing in recent months primarily as a result of decreased sales overseas.

"We still are in positive territory, but the momentum of manufacturing activity has slowed," Toja said. "This is something that we noticed beginning in the second half of last year, and it has continued into this year."

The decrease is particularly evident in exports to Southeast Asia. This trend began in the second half of 1996, Toja said. Because Southeast Asia reduced its role as an export partner, the current crisis there has a weaker effect on the US economy.

"We need to look closely at two economies that give us more business than Southeast Asia," he said. "Those are the economies of Canada and Mexico. Keep your eye on our NAFTA neighbors."

Both Canada and Mexico are expected to grow faster than the United States in the near future, Toja said. "We anticipate continued growth in the volume of goods shipped north and south of our borders."

Intermodal Growth Economic Planning Associates also analyzes forms of transportation that are alternatives to conventional highway trailers. One of the biggest is the intermodal market.

"It is becoming increasingly apparent that intermodal is the preferred method of transporting a variety of manufactured products over extended distances," he said. "Some bulk and liquid products also are increasing intermodal shipment."

Among the options in the intermodal market are piggyback and RoadRailer trailers. But over the long term, Toja said, containers will be the preferred equipment on railroads. He expects the double-stack concept to continue to grow.

"This industry does not talk about platforms or cars-it talks about slots," Toja said. "And when they talk about slots, 90% of the time they are thinking about containers-not trailers. We anticipate that the container market will be extremely strong over the long term-reaching perhaps 50,000 units produced annually by 2003."

Intermodal equipment shipments might be twice the numbers reported by the US Bureau of Census because Census tracks only shipments from domestic manufacturers, Toja said. Shipments from Hyundai, with its plant just inside the Mexican border south of San Diego, do not appear in Census reports.

How Many Trailers? Toja questioned the accuracy of the estimates of trailer shipments published by the Bureau of Census.

"There is no way in the world that trailer shipments last year amounted to 271,000," Toja declared. "As our clients know, we went through a step-by-step process to develop a more accurate estimate. We believe US manufacturers shipped 240,000 trailers last year. Aside from that, the monthly figures published by the Bureau of Census reflect the momentum in trailer activity that occurred throughout 1997 and into 1998."

Toja expects trailer shipments to continue strong through 1998 and then flatten out in 1999. Here's why:

* Industrial production will continue to increase at rates between 3% and 3.5% this year and next.

* Manufacturers will continue to reduce inventories of raw materials. The days of stockpiling raw materials and finished goods are gone, Toja declared. More raw materials and finished goods are placed in trailers instead of warehouses.

* The farm sector will have decent years in 1998 and 1999, despite a reduction in exports. Asian countries will not buy as much US grain as they would like because of their financial crisis. The market looks particularly strong for soybeans. "The world will consume all the soybeans we can produce," Toja said.

* The Freedom to Farm Act has led to changes in where crops are grown. Toja cited the Southeast where farmers who have never planted corn are beginning to do so. Such changes may require changes in regional demand for trailers.

* Construction spending was strong in 1996 and 1997. Coming into 1998, spending was well balanced between commercial and residential. Toja expects the construction market to remain strong in 1998 and 1999.

Toja believes total van shipments will increase 16% this year, led by a 20% increase in demand for dry-freight vans. Remaining trailer types should slip about 6%, he said. Van demand in 1999 is expected to be relatively flat, but nonvans will pick up the slack. Toja looks for a 3% increase in nonvans during 1999.

Beyond 1999, Economic Planning Associates projects good demand for trailer equipment. "We should have an extremely good environment for transportation equipment all the way to 2003," Toja said.

"We believe the major fleets will want to see the latest and largest equipment. Fleets have to satisfy drivers by buying the best tractors. That is an additional reason for them to purchase larger and more flexible trailers."

Regardless of whether the trailer is a van, platform, tank, or lowbed, customers across the board are under pressure to maximize their tractor purchases, Toja said. The things that the customer wants make the outlook extremely favorable for trailer manufacturers. He expects the next five years, on average, to be better than the past eight.

"The market is there for you," Toja said. "With the exception of containers and chassis, US manufacturers face limited international competition. You should have another year or two of extremely good sales-and the next three years should be even better."

Question: Where will the skilled labor come from to support the growth you predict?

Toja: Without a doubt, spot shortages of skilled labor exist. While this industry has shortages, others such as the machine tool industry find it even more difficult to find skilled labor. The short-term effect is that industries will not grow as rapidly as they could. Long term, shortages tend to drive up compensation, which in turn increases the enrollment in vocational schools. Such has been the case during the past couple of years, and I would expect enrollment in vocational schools to continue to grow. Another trend has been to make computer technicians out of people who otherwise would be working on the factory floor.

The United States undoubtedly will suffer because of a lack of skilled labor. However, the United States also will suffer if its transportation system cannot move fast enough to accommodate the growth in global trade. Transportation is an integral cost of the price when a product arrives at its destination. The manufacturers of those products will be jumping on trucking companies to provide equipment that offers the lowest cost per mile."

Question: Will the problems in Asia have any impact on Hyundai?

Toja: All this will strengthen its position. Hyundai will be able to receive steel more inexpensively. This will make it more difficult for domestic manufacturers unless domestic manufacturers also do the same thing. This will irritate a lot of domestic steel mills-and when steel gets in short supply, you may not be number one on their priority list."

Question: Some truck manufacturers are complaining that some of their suppliers are undercapitalized. Do you see that in our industry?

Toja: No matter how much suppliers make, it will never be enough. Everyone would like everyone else to do a better job.

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