US retail sales of trucks to increase 15.4% this year, but Latin-Kasper says service and maintenance for existing customers still important

THE truck equipment market outlook for next year is buoyed by low interest rates, increasing exports, productivity growth, and low inflation.

But as has been the case for the past year, it is being negatively impacted by erratic consumer confidence, federal budget deficits, persistent unemployment, real-income issues, and lower state and local expenditures.

What to do? Steve Latin-Kasper, the National Truck Equipment Association's market data and research director, gave these tips to companies in his annual presentation at the Business and Market Planning Summit at the Hyatt Regency Dearborn in Dearborn, Michigan.

  • “There will be plenty of opportunities for new sales in 2011, however, taking care of existing customers in terms of maintenance and service will remain almost as important as it was in 2010.”

  • “Try to stay ahead of the curve regarding hiring, especially high-skill positions. Hiring should continue increasing slowly in the fourth quarter and into 2011. The labor market could heat up in the second half of 2011. Hold on to critical personnel.”

  • “Continue searching out export markets for your products in 2011. Because of the US dollar remaining low in terms of other currencies, 2011 will be another good year to find customers overseas.”

  • “Many truck equipment companies had to start building product inventories in 2010. Because of the slow growth rate, it was fairly easy to stay ahead of the curve and not get into a position of having to extend lead times. That should remain true in 2011.”

According to IHS Global Insight, US retail sales of trucks are projected to grow 15.4% this year, 14.2% in 2011, 24.1% in 2012, 15.7% in 2013, and 6.3% in 2014, declining by 5.7% in 2015.

Total work truck industry shipments were expected to be up 11% this year after falling 23% in 2009, with every segment showing gains, led by trailers (30%).

Commercial chassis shipments (+10%) and truck equipment shipments (+11.3%) were projected to experience increases in 2010 after falling three straight years.

The production indexes for medium-duty trucks (+40%) and heavy-duty trucks (+21%) grew in the first half of the year. Trailer production was closely following ATA freight shipments, which surged 9% in the first half of the year.

In terms of straight truck retail sales, conventional chassis were experiencing slightly bigger gains than cutaway, strip, and LCOE.

In the first half of the year, state and local government spending on equipment had fallen while business truck production had increased, and they had nearly met at a negative 3% year-to-year change. The picture was nearly identical in state and local government spending on construction. Meanwhile, total private construction had slowed to a negative 20% growth rate year-to-year.

In the past year, producer price indexes had grown substantially for all steel products except for iron ore (-0.8%), with the biggest increases coming in carbon steel scrap (85%) and hot rolled sheet and strip (53.2%).

“Keep abreast of changes in metals prices as we move into 2011,” Latin-Kasper said. “If the Chinese and Indian economies grow faster than predicted, metals prices could start rising swiftly. Be ready to increase inventories of metals if those markets start trending up.”

Producer price indexes for trucks, buses, trailers, truck equipment, and selected materials stayed relatively flat, with the biggest increase coming in trucks, truck tractors, and truck chassis of 33,001 pounds and more (+3.7%) and the biggest decrease coming in truck trailers and chassis under 10,000 pounds per axle (-0.3%).

Based on figures through June, the US was projected to import more than twice as much from Mexico, Japan, and Germany than it had in 2009, with Canada falling by over 30%. Exports to China and Brazil remained fairly stable, but increased by 43% to Canada and 58% to Australia.

In terms of US exports of trucks, buses, bodies and other truck equipment, the biggest gains were to South Korea (+150.3%), the UK (+107.5%), and France (+103.3%), but Canada had by far the biggest volume ($11.8 billion) and was projected to grow by 43.4%. Overall, exports are expected to increase by 30.2%.

Truck Industry Market Forecast: A Subpar Recovery

Ken Kremar, Principal

Industry Practices Group

Kremar said there are “signs of life” on the order front, with medium-duty truck net new orders doubling since the start of the year and Class 8 orders nearly doubling.

In percent change from a year ago, Class 3 leads the way (+42%), followed by Class 8 (+18%) and Class 6-7 (+13%), with Class 4-5 continuing to struggle (-3%).

It's been a long road back, because despite the upsurge, Class 8 sales this year are estimated to be 61% lower than they were at their peak in 2006.

For trucking companies, the news has been good because the ATA Truck Tonnage Index has staged a strong comeback; inventory restocking has provided considerable support; carriers have pulled capacity out of the market, giving them some rate clout as traffic flows improved; and tame diesel fuel prices have helped carrier earnings.

However, while TL carriers are reporting gains, LTL carriers are lagging.

“Carriers tied to construction continue to struggle,” Kremar said. “Slower growth in the key sectors of the economy means slower growth in trucking activity.”

He said the economic recovery in the US has been “uneven and subpar.”

“Growth boost from fiscal stimulus and inventories is fading,” he said. “Weak employment growth is holding back consumption and housing. Consumer spending is rising, but still faces major headwinds. Housing is bouncing up and down due to on-off tax credit, and there's no underlying improvement. Non-residential construction and state-and-local spending remain a drag. Exports, business spending on equipment, and software are the main growth areas. Inflation is a long way off; deflation is the immediate risk.”

He said the bottom line is that slower growth is expected, but not a double-dip recession.

He said business equipment investment, consumer durables, and housing construction will drive the expansion. Nonresidential construction will decline through late 2011. Excess capacity will keep wage and price inflation subdued, while oil prices will climb gradually.

The Fed will hold rates near zero until late 2011, he said.

“The federal government needs an ‘exit strategy’ from deficit spending or financial markets will impose one,” he said. “We assume that all the Bush tax cuts will be extended temporarily.”

Job gains in 2010 have exceeded the expectations of the spring forecast in the Midwest, while the Pacific region has fallen short of that forecast, he said. For 2011, they have downgraded their forecast, most significantly in the South and West as consumers retrench further and housing continues to falter.

GDP growth will slow to less than 2% in the second half of this year and just 2.4% in 2011, he estimated. The gross state product forecast reflects this sluggishness, with Nevada downgraded the most among states since the spring. Nevertheless, relative growth has been upgraded in South Carolina, Illinois, Washington, and Michigan.

He said Texas will easily lead all other states with 4% real income compound growth over the next five years. That top rank is unchanged from the spring (when 4.2% growth was projected). Colorado slips a bit in the growth rankings, while Maryland, Illinois, and Michigan advance in this forecast.

“The payback in home sales from the homebuyer tax credit has sent activity down sharply,” he said. “Although this scenario was expected, the depth of the fall indicates that real estate markets have not yet begun to recover. Our housing-starts forecast has been lowered since the spring, with 2010 changes of greater than 10,000 units each in California, Texas, and Florida. Only Massachusetts, New Hampshire, and Hawaii will see more new construction than was anticipated in the spring.”

Kremar said consumer confidence remains in recession territory.

“Stock market volatility and depressed home values are not helping,” he said. “Employment gains are the key to any recovery in consumer spending. Unfortunately, employment recovery will come slowly. Consumers are striving to rebuild assets and reduce debt. Households will spend cautiously as they rebuild their savings.

“Retailers are continuing to lean on aggressive discounting to draw in consumers. Recovery in retailing will be subpar, but cost-cutting will help profits.”

Kremar said non-residential construction is awash in excess capacity, and there is little incentive to invest in new brick and mortar.

Office vacancy rate has risen from 14.7% in 1Q 2009 to 16.7% in 2Q 2010. Office construction remains depressed until while-collar employment improves. The industrial vacancy rate has risen from 12.3% in 1Q 2009 to 14.1% in 2Q 2010.

In terms of public construction, state and local governments face huge deficits.

“Aided by stimulus spending, infrastructure construction spending fared relatively well in 2009,” he said. “The first round of ARRA stimulus disbursements helped state and local governments fill in some of the budget gap created by sagging tax revenue. State and local budget deficits will be the larger hurdles in the near term, as the stimulus funds merely cushioned the decline in revenue, rather than created new opportunity.

“Although tax receipts increased in the latter part of 2009, for the year, they were 5.5% lower compared to 2008.

At the same time, spending fell only 1.5%, as there was greater social need, and budgets are now under even more strain. As budgets for 2011 are written under weak revenue conditions, few increases are expected in state and local infrastructure spending in 2011.”

Construction Market Forecast

Charles Yengst

Yengst Associates

Yengst said the economy is “sick, and has been for two years.”

Although a short burst of growth came along late in 2009 when the giant stimulus package started to kick in, promised funding for infrastructure projects fell far short of what was advertised. He said no one seems to know where that money went, but it likely went into general state funds to help keep unemployment checks flowing.

“Confusion, anxiety, and uncertainty are words we have all heard a million times over,” he said. “The media is playing a big role in keeping the bad news in front of us all. That is their job. Politics are also hurting matters a lot with mid-term elections coming up and voters angry with Washington's spending and legislative agenda.

“Unemployment is the big issue. It's hovering around 9.5% and not getting smaller. Some good news recently indicated that the private sector was hiring more people, while government agencies were letting people go. Some of this has to do with temporary census works that are no longer needed.

“Real unemployment is more likely around 15%, give or take one or two points, with approximately 15-17 million people out of work. There are a lot of under-employed people and many that have just given up looking for work.

“The employment situation is likely to get worse before it gets better this year, although we believe the jobless rate will start to drop during the next six months and get smaller as 2011 progresses. We could be below a 9% rate by early 2011, but unemployment is going to be a problem through 2011 and possibly even 2012.

He said GDP faltered early in 2008 and stayed that way through half of 2009. GDP growth was positive in 3Q 2009 and jumped to 5% growth in 4Q 2009. That was followed by 3.7% growth during 1Q 2010, and then 1.6% in 2Q. The outlook near term is even weaker growth for 3Q and 4Q 2010.

Overall, GDP this year could be near 2%, which is “weak considering past recoveries. With some luck, we might get to see modest improvement to 2.5% in 2011 and 2.5 to 3% in 2012. Any improvement in GDP or employment at this stage of the game would be welcome.”

He said more stimulus funding is “not likely” and tax changes are “very likely, but just how they might work is very uncertain.”

“Small business is not going to get much help until 2011,” he said. “Big business is going to continue reaping benefits from overseas activities, particularly in emerging countries and very tight domestic budgets.

“If corporate taxes were to be cut, big business might be more inclined to expand and make investments. Of course, politics get in the way again. We continue to look for slow growth for the next two years and that means continued slowness in construction.”

He said the construction industry is “hurting,” with residential construction collapsing after 2006 and US housing starts dropping from two million to a half-million units annually in less than three years.

“There's a huge inventory of new and existing houses,” he said. “Sales are not moving fast enough to make a dent in the situation. The tax credit offered by the government only helped on a temporary basis. Housing has generally helped bring US recessions to an end in recent decades. That won't happen this time around because of the financial crisis, which has changed banking around the country.

“Mortgages are more difficult to obtain, even though money is there. Buying a house with a low down payment is getting very difficult. Less people are able to buy houses and those with money are sitting tight, not moving. Interest rates are certainly not the factor holding things up. People — consumer spending — and banks are the problem. This all leads back to the jobless situation and the outlook for those with money and jobs.”

He gave these reasons why we will not have another boom soon:

  • Declining equity in properties as the bubble deflates.

  • Income to housing price ratios as income levels and prices fall.

  • Shadow inventory.

  • “Baby boomers” trading down and more income spent on health care and not housing.

  • Serious unemployment problem.

  • Foreclosures are running at a record pace.

“We see housing starts remaining near 550,000 units in 2010, expanding about 5-10% in 2011, which is pretty low, and 15-20% in 2012,” he said. “In 2012, starts are projected to be 700,000 units. By 2014, we should see starts near 1.125 million. These levels are far short of normal, which we believe falls between 1.4 and 1.6 million units.

“Residential construction was king through 2005, then non-residential construction spending swung to the top billing from 2007 through 2009. Currently in 2010, non-residential spending is biggest and will remain so for the next three or four years or longer.

“Non-residential construction spending peaked in 2008 and has been declining since then. Even with modest improvements in the US economy, non-residential construction spending is expected to decline by more than 20% in 2010.

“Poor conditions remain because oversupply of nonresidential facilities in most construction categories, weak demand for space, continuing declines in commercial real estate values, and a strong reluctance to provide credit from real estate lenders.

“The major areas where non-residential construction spending will be declining during 2010 include: hotels, down 43%; office buildings, down 29%; retail space, down 26%; industrial buildings, down 21%; amusement and recreational, down 14%; education, down 13%; religious, down 10%, public safety, down 9%; and health care facilities, down 6-7%.”

Economic Outlook

Mark Vitner, senior economist

Wells Fargo

Vitner said real GDP is expected to moderate as the lift from fiscal and monetary stimulus and inventory rebuilding winds down.

“Slower growth is expected in the second half of the year as firms adjust operations to match weaker demand,” he said. “Inventory rebuilding is expected to moderate during the second half of the year. Private final demand is soft, but more resilient than widely thought. The rebound in consumer spending appears to have topped out

“Core retail sales rose well ahead of income earlier this year, but have slumped more recently. Demand for equipment and software remains a rare bright spot.”

Vitner said the labor market remains the primary concern as job losses exceeded every post-World War II downturn and the recovery has been unusually tepid.

“Large portions of the United States continue to face serious unemployment issues,” he said. “Re-entrants and new entrants are beginning to account for a larger share of the unemployed. Incomes are making up the steep losses incurred during recession, but there is a great deal of lost ground to make up.

“Increased corporate profits have stood out recently, but easy gains from cost-cutting are largely behind us and year-to- year comps will get tougher.”

He said profits currently represent a sizable portion of GDP. Employment costs are rising, but remain contained on the whole. Core inflation is running at — or slightly below — the lower bound of the Fed's comfort zone.

Yield curve spreads widened, although the Fed's cash flow reinvestments are expected to put a downward bias on long- term Treasury yields for the rest of this year. Mortgage rates are currently at an all-time low, even though spreads have returned to their historic norm.

Corporate spreads fell and the stock market rallied once the Fed began its quantitative easing, but markets have remained stagnant since the end of the first quarter.

Corporate bond spreads fell across the credit spectrum after the first quarter, but credit markets have remained stagnant, awaiting a potential second round of quantitative easing.

Since bottoming in January 2009, housing starts have moderately increased, but the ongoing housing correction still imposes challenges for the economy.

“Most regions have seen modest price gains over the past year,” he said. “Various mortgage foreclosure moratoriums and stimulus programs may be supporting prices, however. Both new and existing home sales plummeted following the expiration of the home-buyer tax credit program

“Commercial real estate prices have improved slightly since last year, but transactions volume remains low with many distressed sales. Retail fundamentals will likely remain weak until a self-sustaining recovery takes hold. The apartment market remains weak, but is starting to show signs of stabilization, rebounding in the South and West.”

Truck tonnage has increased, but data suggest growth is slowing following the inventory correction during the first half of the year, he said. Slowing economic growth has kept fuel prices low for a number of months.

“Truck sales have improved, but continued improvement will depend on the strength of the broader economy,” he said.

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