EXPECTING the trailer business to be booming by the end of this year? Temper those expectations, according to Ken Kremar, principal of the Industry Practices Group.
“Trailer buyers will re-enter the market slowly,” he said. “We don't think we'll see them flood back into the market. At the end of 2010, you will look back and say, ‘We gained ground.’ You'll be mindful of the fact that there's still a ways to go before you can say, ‘Business is good.’
“2010 is going to be that transitional year. When you have a tough recession, you don't come back in a year. It takes two years, sometimes three years, until it comes back to levels you had before. We have turned the corner. Now is the time when you have to get your ducks in a row with planning. We're in the early stages of recovery. You have to manage resources and gather up your crew now.
“We are optimistic about where the economy is heading and where the trailer business is heading over the next year or two, but we have to be honest and say that we're conservative about where the trailer business is heading, particularly this year. There will be much more meaningful change for your business in 2011 and 2012.”
In his “Economic and Truck Trailer Industry Outlook,” Kremar said complete trailer shipments will be 90,000 to 95,000 this year, 125,000 in 2011, 220,000 in 2012 and 270,000 in 2013.
“We're very cautious,” he said. “We'd rather err on the side of caution. Until we see more numbers, we're going to remain cautious. There's a lot of uncertainty out there and a lot of excess capacity.”
He said the key trailer-buying markets are for-hire carriers, construction companies, wholesalers and retailers, manufacturers, agriculture, and mining and logging.
Kremar expects a recovery in freight flows this year. The growth, he said, will be triggered by a 10% increase in general commodities and a 6% increase in bulk. Freight is beginning to climb out of a “very deep hole,” with a 15% increase in tonnage expected this year. The process may take a couple of years.
“The bad news is that it will be 2012 or so before we get back to pre-recession levels,” Kremar said. “Ton miles for trucks were down 17.8% in 2009 and are expected to grow 4.5% this year, 6.4% in 2011, and 7.2% in 2012.
“Consumers are returning to shopping centers, malls, grocery stores, and restaurants. But there's no way that it's the kind of levels of spending we saw before we fell into the recession.”
Construction market
Sales of trailers into the construction market will remain weak until 2011 as the nation crawls out of the fifth year of the housing dip.
“There's a lot of excess capacity floating around there,” he said. “That overhang will keep a lid on spending, particularly in construction-oriented equipment. Construction markets are out of sync. We're starting to see some signs of life in residential construction (estimated to increase 0.7% this year and 28.2% next year). Non-residential construction is dead in the water until 2012 (down 29% this year and 0.7% next year, with a 31.4% gain projected for 2012). There's no incentive to build industrial plants, warehouses, and retail stores. That will be a drag on the economy.”
He said the inventory correction in traditional manufacturing is over, and final demand has turned the corner. Manufacturing is forecast to grow 24% in 2010 after a 12% decline in 2009.
The economy and “big trucking” took a big hit during 2009, with GDP down 2.5%, industrial production down 9%, ATA Truck Tonnage Index down 9%, TL loads down 17%, LTL tonnage down 20%, and LTL revenues down 35%.
“So it's not surprising companies slashed capital spending,” he said. “Until they start to increase spending on equipment, any type of recovery in the trailer or truck business is going to be weak. The good news is that we're starting to see a big pickup in activity. The ATA Truck Tonnage Index is certainly heading in the right direction. As 2010 unfolds, trucking companies are still saddled with idle/underutilized equipment. But better days do lie ahead for the trucking industry. There are some signs of life as far as utilization of equipment. It's difficult to capture capacity utilization of trucking companies, so we're probably understating the improvement.
“Profit margins will improve slowly. Gross operating profits for all major equipment-buying markets went down in 2008 and 2009, but all will show improvement in 2010. And by next year, it will be strong enough that this will be a recovery with legs on it. You're seeing improvement in profitability. It will not immediately transfer to capital spending. I think they want to see more recovery in profits and demand and sales before they really start to ramp up capital spending. They're just a little cautious. Replacement pressures will mount, and the more aggressive and successful fleets will expand capacity. It will lead us in this recovery.”
Kremar said that when a nation goes through something this severe, “nobody comes through unscathed. There are no bright spots — no segments of the market where you can say, ‘OK, things are terrible, but this part of the industry is OK.’ ”
The 72.3% decline in trailer shipments between 2006 and 2009 was the sharpest since a one-year collapse of 62.9% between 1974 and 1975.
“The economy is the key to any turnaround,” Kremar said. “When the economy is going well, the trailer industry is going well. The need to invest, the ability to invest, and the willingness to invest have to be there. When things are going well, you are much more likely to invest.”
He said the US economy ended 2009 on a strong note but the pace of recovery in 2010 will be comparatively slow.
“Exports and business equipment spending will be the most important supports for growth in 2010,” he said. “Non-residential construction will lag. Consumer spending is improving, but cannot lead strongly as in previous recoveries. We have seen over the last year that unemployment is stabilizing. It's nothing like we've seen in the worst times. They will drift back into the marketplace.
“Employment will begin to rise in the second half of 2010.
If inflation stays low, excess capacity will keep wage and price inflation subdued, and the Fed does not need to rush to tighten. The Federal government needs an ‘exit strategy’ from deficit spending. Expect higher taxes. On healthcare reform, I still don't think everybody knows what's in the bill. The key provisions do not kick in until 2014. Costs are likely to go up in the near-term. And the problems in Europe now present a risk to the global recovery.”
Expansion in the works
He said supply managers' indexes signal an expansion. He said the country's annual growth rate for 2010 is 3%, “which is not particularly robust.” He said certain sectors will remain weak.
“There will be enough of a recovery in the economy to fuel the next trailer-buying cycle,” he said, “but it takes time for markets to hit their stride. Eventually it filters down to where there's business investment in new equipment. Although we do think things will improve, it's going to take awhile.
“The Federal Reserve will keep interest rates low until late 2010. We don't think the Fed is in any rush to raise rates. The focus now is to get the economy moving in the right direction. That is not the time to raise interest rates.”
“Oil prices will head higher as the global economic recovery continues. As the global economy improves, oil prices will go higher and fuel prices will go higher. But we won't get to the level we saw in 2008.
“Excess capacity will keep a lid on prices. Consumers went through a difficult period. That will make it difficult for manufacturers and retailers and wholesalers to raise prices in that environment. So we don't see inflation in the near term as being problematic.”
He said consumer are “coming back down from the hills,” and have started to drift back into auto dealerships, shopping centers, and malls. Employment has stabilized, and consumer confidence and the stock market have gained considerable ground over the past year.
An upturn in employment this spring should bolster household incomes, he said, supporting sustained growth in consumer spending. As income and wealth rise, pent-up demand for new homes, vehicles, consumer electronics, fashion apparel, and travel will be released.
“But consumers will cautiously increase spending,” he said. “Expect less debt, higher savings, and a premium on value in the future. Still, expect better days ahead for US manufacturers of consumer/housing products and retailers of all stripes.”
Kremar said the recession drove auto sales to a 25-year low at the start of 2009. The auto market got a huge boost from the housing boom and paid the price with the housing bust.
“Auto credit conditions have become better, but subprime auto lending is still dead,” he said. “Leasing is showing signs of life. The GM and Chrysler bankruptcy and now Toyota recall have put tremendous amounts of market share in play. Incentive spending will be intense in the first half of 2010 as OEMs fight for share and the consumer is responding.
“The auto market has bottomed out, but the selling pace is still sub-par. We had a string of years with 16 million in sales. We're nowhere near that. Light-vehicle sales don't get back to 16 million until 2013.”
Housing market overview
The improvement in single-family housing activity has stalled out. Kremar said that beneath the tax-induced gyrations, the market remains fragile. House prices have been propped up temporarily by the homebuyers' tax credit. As employment improves, housing sales and starts should begin to turn up on a sustained basis.
The picture is still “gloomy” in the multi-family housing market, he said. Credit restrictions are still biting and multi-family starts have fallen so far that there is literally very little further room for decline.
“Housing continues to struggle, but better days do lie ahead,” he said. “Housing starts will not get back to their 2005 peak. Existing home sales will also not get back to their 2005 peak.”
He said the US dollar has been helped by better news on the economy and bad news from Europe.
“We still see the dollar's long-run trend as downwards, but more against emerging-market currencies than against major currencies. Our forecast for the Canadian dollar has been raised to near parity (C$.099/US dollar). GDP growth for major-currency trading partners of the US is forecast to expand by 2.1% in 2010 versus a decline of 3.4% in 2009.
“GDP for other important trading partners is projected to rebound 4.9% in 2010, led by China, after declining 1.2% in 2009. US exports are benefiting from rapid demand growth in Asia and, closer to home, Canada. US imports will gain ground as consumer spending and business-equipment investment gain ground. As consumer spending and CAPEX come back, imports will regain their forward momentum. As the global recovery continues, US exports will gain additional ground. After a slight uptick the dollar will decline further, bolstering our overseas sales efforts. Exports will once again become a major contributor to US economic growth.”
Business investment
Corporate America is “flush with cash,” he said. Capital goods orders are heading higher. Replacement spending should pull equipment purchases higher in the near term. High-technology equipment is leading the way. Excess/idle capacity is keeping a lid on traditional capital goods.
For business structures the outlook remains poor as vacancy rates are still heading higher. The trend for retail, office, hotel, and industrial constructions is still downward.
Idle/underutilized capacity has been keeping a lid on capital spending.
“Corporate America's pocketbook is getting fatter because there was a tremendous amount of cost-cutting during the recession. That's helping corporations put up good numbers in terms of profitability.
“Equipment spending has started to turn the corner, led by high-technology equipment. But non-residential construction will not turn positive until 2012. Rising vacancy rates spell trouble for new commercial and industrial projects. They will probably decline through 2011 and not be positive until 2012. Corporate America is slowly easing up on the purse strings when it comes to equipment.
“Industrial-sector activity will benefit from the recovery in the domestic and global economies. Freight is what drives your business. A combination of growth in domestic demand and exports is what is going to fuel fairly significant percentage increases in industrial output. That means movement of components and parts will be ramped up significantly. That will provide considerable support to the trailer business.
“The swing from inventory slashing to modest expansion will provide additional support. People were scared to death, and inventories were slashed, and that had a dramatic impact on truck and trailer markets. We will start to see very modest increases.
“Industrial output will not make up the ground lost in 2008-09 until 2012. You do not climb out if this recession overnight. You are not going to wake up at end of this year and be where you were in 2007 and 2008. That is not going to happen.”