Trailer shipments poised to rebound in the second half

IT HAS BEEN one dismal year, industry analyst Peter Toja said at the TTMA convention in Tucson.

Delivering his trailer industry forecast for the 19th consecutive year, the president of Economic Planning Associates is convinced, however, that the industry is poised to begin another boom that will last several years.

“Actually, its has been a very dismal year and a half,” he said. “I don't believe we will see any significant improvements until we get into the second half of this year, and it is going to be real slow going. But I do believe that towards the end of this year and into 2003, we will see the next upward step in trailer demand that will take us into the year 2007.”

A major blow to the industry has been the 18-month decline in the manufacturing segment of the economy. Retailers were content to draw down inventory, a decision that cut into the amount of manufactured goods that needed to be shipped — along with the shipments of the raw materials required to produce the goods.

“We think the worst is over,” Toja said. “Consumer spending continues to advance, construction activity is at higher levels, manufacturing is rebounding, and corporate profits are beginning to show some improvement.”

Toja cautioned, however, that those hoping for a rebound in the trailer market will have to be patient because the recovery will be slow.

Toja pointed out that the economy was already ailing when the terrorist attacks of September 11 sent it into a tailspin. However, the fiscal and monetary policy changes that have been implemented in response to September 11 are helping the economy. For example:

  • Government aid has helped the airline industry.

  • Infrastructure spending is up.

  • Monetary policy has strengthened the economy by reducing interest rates 11 times during 2001, the most aggressive interest rate reduction to date.

  • The Federal Reserve was able to convince central bankers around the world to reduce their own interest rates, a move that pumped liquidity into their systems. This helped accelerate economic activity worldwide.

Coming back

Toja had nothing but good news regarding the coming months. For example:

  • Consumer confidence has rebounded.

  • Retail sales are improving. The fourth quarter was great, fueled by incentive programs for cars and light-duty trucks. First-quarter 2002 was even better. “The consumer is back in the game,” Toja said.

  • Inventory draw-down is complete. “If you have sold down your inventory and have major demand from your customers, the only response is for manufacturing to pick up,” Toja said. “That's what we are seeing. Manufacturing was up in January and February of this year, and the March increase was the largest in two years. Manufacturers are coming back.”

  • Potential corporate tax incentives. Accelerated depreciation has been brought in, Toja said, and similar incentives for investment are expected.

  • Energy projects will continue to be emphasized. “We have to reduce our dependence on foreign oil,” Toja said. One possibility is through the use of coal. He said that the United States has more Btu potential in its coal reserves than all of the oil in Arab countries.

The consumer continues to be the driving force behind the economy, and Toja expects consumer spending to increase. He cited continued improvement in the consumer confidence index following a sharp drop September 11.

What is the consumer expected to buy? Positive outlooks can be found for:

  • Housing. The low mortgage rates have helped drive demand for housing, raising the value of existing homes and leading to an increase in new construction.

    “We expect housing starts to stay at high levels this year and next,” Toja said. “Next year may be interesting because we expect the economy to be somewhat stronger than it is this year. We also believe that after-tax income will increase next year as Congress continues to look for benefits for the worker.”

  • Light-vehicle sales. Zero percent financing in the fourth quarter wiped out a lot of inventory, Toja said. The strong fourth quarter enabled manufacturers to sell 17 million vehicles last year — only 200,000 below the previous record of 17.2 million that were sold in 2000. Toja expects only 16.5 million light vehicles will be sold during 2002. However, the fact that inventories have been drawn down so low will mean that production (and transportation) will have to increase to meet demand. Sales should remain strong in 2003, with 16.8 million light vehicles expected to be sold.

Overall, Toja expects consumer spending to increase 3% — about the same as last year. But unlike last year when spending started strong and then faded, spending in 2002 should speed up as the year progresses.

An ugly market …

Toja described last year's trailer market as one beset with multiple problems, conditions that must improve for trailer shipments to improve. Among them:

  • Low asset valuations. A glut of recently manufactured used equipment made it difficult to sell brand-new trailers.

  • Tight credit conditions. Toja compared bankers to people who lend umbrellas only on sunny days. When conditions get tight and you need a loan, they are nowhere to be found.

  • Constrained carrier profitability. Fleets found it tough to make money last year because freight volume collapsed and operating costs such as insurance increased.

Toja pointed to turnarounds in several of these factors. For example, the manufacturing segment — a major contributor to overall freight volume — has been increasing sharply now that excess inventories have been drawn down.

… poised to improve

Toja believes the trailer market will improve for several reasons:

  • Conditions are in place for increases in freight volumes.
  • The drawdown in inventories is complete.
  • Declines in merchandise trade are slowing.
  • Construction is strong.
  • Interest rates remain low.

Certain trends in the economy have special implications for trailer manufacturers. Toja sees a major shift toward grain-based alcohol as a motor fuel, something that should increase demand for open-tops and tank trailers.

Exports should rebound as a result of improvements in the economies of our major trading partners. Toja expects an increase in exports in the second half of this year and even stronger growth next year. Look to sell more containers and container chassis, he said — including 53-ft high-cube containers.

Stumbling start

Toja expects the industry's lousy first half will be enough to make it difficult for trailer manufacturers to top last year's lackluster performance.

The trend, however, is good. He believes trailer shipments in 2002 will be within 5% of last year's.

“But given the second-half pickup extending into 2003, we look to 2003 to be the beginning of the next up cycle in trailer demand.”

He also expects to see stability returning to domestic steel prices after enactment of new tariffs on imported steel.

“All in all, the next five years will not be all that bad for the trailer industry,” he said.

The economy is already on its way back, but Toja pointed out that it takes time for economic growth to reach the trailer manufacturing industry. He recalled after the last major downturn (1990-1991), it took until 1993 for the industry to post decent numbers.

“Things will only get better once the rebound begins,” Toja concluded.

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