Total US trailer production is projected to hit 277,000 units this year before falling to 246,000 units in 2017, according to Don Ake, FTR’s vice president of commercial vehicles and resident trailer expert.
And after that? He expects they will climb back to 265,000 units in 2018.
But the trailer market is being buffeted by a very uncertain economic environment—Ake already has reduced his 2016 projections since July, when he forecast 279,700 for 2016 and 250,000 for 2017—so he said he might reduce his 2017 projection by another 10,000 units to 236,000 units due to a deeper pullback in dry van orders.
“Within the last week, I’ve found my dry van numbers are at the ‘high end’ of my (forecast) range,” Ake said. “You don’t want projections to be at the ‘high end,’ so I may pull them back down towards the middle.”
In his FTR Transportatioin Conference presentation, “Trailer Outlook: Can We Land Softly This Time?” he said the trailer market is in adjustment now and the fourth-quarter cycle will bring the numbers up.
Ake said a strong van trailer segment is helping the trailer industry outperform the truck market, and he expects trailer sales eventually will weaken further and more closely align with tractor sales, which is typical. Vocational trailers already have done so. Ake recommended that people in the trailer business—particularly those selling vocational trailers—pay close attention to Class 8 truck sales.
Ake gave his assessment of what is happening in the trailer market, segment by segment:
• Dry tanks: The market is still devastated and isn’t coming back because of overproduction. Tank trailer inventories are too high, and industrial markets are weak. Because of the energy crash, too many newer units are parked or available for sale.
• Liquid tanks are being hurt by energy markets. The chemical market is below expectations. Food markets are decent, but not enough to lift the market.
• Lowbeds, particularly those targeted for energy markets, are weak. Construction market is not growing fast enough to help, and the industrial market is flat. The market is better for medium-duty low beds, but Ake was not sure why.
• Flatbeds: Backlogs are down 56% vs. last year, dealer inventories are bloated, and trade-in values are down. Enough are out there to handle the current freight demand. Aluminum flats are doing better than steel.
• Dumps: The supply of trailers has caught up with demand. Revenues of fleets are not increasing.
• Dry Vans: Orders have slumped but backlogs are still better than 2014. Cancellations are elevated because of a slushy backlog. Big fleets are still ordering trailers, but smaller fleets are pulling back. Dedicated/private fleets are placing stronger orders, and there is still some pent-up demand. Ake said this is a correction, not a collapse. Pricing pressures are due to tighter capacity. Demand doesn’t seem to be there, but if prices get low enough, fleets may buy more.
• Reefers: Refrigerated vans are facing stricter requirements, leading to a potential need for them to be replaced sooner. Trends in the refrigerated market include increased CARB standard enforcement, consumer preferences in food quality and variety, more refrigerated food warehouses, and more products being shipped at room temperature.
Looking at the North American forecast, he said Canada has held up better than people expected. Mexico’s numbers have been supported by some big fleet orders, but might not stay that high.
Analyzing the trailer market history, Ake said the fourth quarter of 2014 featured a record number of orders, then there was a record backlog last December. Trailer orders plunged from record-high levels, and it was more severe than in previous dips due to cancellations.
“We’ve seen cancellations lower in the summer,” he said. “These numbers are kind of a false read. Trailer logs have fallen. They’re still higher than average. Even though orders have gone down, cancellations are up, and backlogs are not that bad.”
He said the trailer build numbers compared to the nine-month moving average of orders have stayed consistent.
“The July build was down because the market is down, but July is typically a weaker month,” he said. “August numbers will look better. July is a seasonal blip.
“Other economists have slashed their forecast. Why has FTR not slashed its forecast? We are adjusting it, but not significantly. 2016 US build-by-quarter actuals are very close to the forecast. When things hit in Q3, we were not surprised. We were close, but not that far off.
“The downward slope in build rates reflects a market stabilization because we are not forecasting a recession. However, if you do have an economic downturn, the baseline bottom is around 20,000 trailers per month.”
Ake said the trailer industry is in “completely new territory” when it comes to the new Phase 2 greenhouse gas (GHG) rules and he isn’t sure yet how those mandates will affect order rates.
OEMs expect some “minor” price impacts due to the new rules, which could crimp sales, Ake said, but while it’s “something to watch,” he’s not building anything related to that into his forecast.
“We’re looking at additional cost for trailers and that could crimp sales, but we just don’t know,” he said. “We have no historical trends to look at.”
He said that what’s more important is what happens to freight volumes—especially if the ongoing “inventory correction” that some blame for sluggish economic activity dissipates by year’s end.
“If the (freight market) is up next year and there’s money to buy trailers ahead of the GHG mandates, there may be a pre-buy,” he noted. “That could add 16,000 to 20,000 units to the forecast. But the money has to be there to do it. If freight is weak, then I would not expect to see a pre-buy.”
TRAILER RIPE FOR INVESTMENT
Kauffman believes trailers are
‘a fun place to be right now’
because industry has underinvested
in recent years
Jeff Kauffman, President of Tahoe Venture LLC, believes the productivity of trailers has only been thinly scratched.
In his mind, they are no longer trucking’s “red-headed stepchildren” and instead represent a major unexplored opportunity to create solutions for many industry issues.
“The trailer industry is a fun place to be right now,” he said.
Kaufman said trailers have largely been “ignored” due to all the mandated technological changes to trucks in recent years—exhaust emission controls being the most costly so far—and are ripe for investment.
“Trailer capex (capital expenditures) have been crowded out due to all the truck capex cycles in recent years,” he said. “The industry really underinvested in trailers through the zeros (2000 to 2009), and that’s why I think the outlook for trailer investment is still good.”
For example, he said that 150,000 or so trailers still haven’t been replaced from the late 1990s “super cycle” of trailer buying and thus remain a key source of replacement demand.
Kauffman also feels that because the driver shortage is projected to get worse, the creation of “trailer pools” will be vital, and will require more investment in trailers by the trucking industry.
“They (trailers) are part of the solution of what ails drivers in this industry,” he said. “We’re simply not going to get any more productivity from the truck. And neither the population of trucks or drivers will grow as fast as freight demand in the future.”
Eric Starks, FTR’s president and CEO, introduced Kauffman by saying he’s a “stone thrower”—his firm, Tahoe Venture LLC, has an outlook for the US economy that includes more warnings and weak spots, but it’s an “alternative” outlook that differs on many key points, usually in a more positive manner.
For example, while most of FTR’s economic experts—most notably Larry Gross and Bill Witte—kept the impact of the ongoing presidential election out of their forecasts, Kauffman jumped right in.
“The thing that concerns me is that both candidates are against trade; that could affect the supply of goods coming into the country,” he said.
Kauffman also said that historically most economic recessions begin during the “new term” of a presidential administration—but not always.
In the case of the current track of the US economy, Kauffman thinks we’re experiencing a massive “inventory correction” at the moment, whereby the ongoing de-stocking efforts by both industrial and retail sectors cause economic growth to flat line and reduce freight volumes.
Add that to a financial market pull-back due to “jitters” over who will win the presidential race—he believes a more polite term is “risk aversion”—and it’s no wonder there’s been a lot of short term economic “malaise” of late.
He believes the ongoing “inventory correction” should be wrapped up by the fourth quarter of this year, meaning freight volumes will once again starting increasing, and the driver shortage will continue to get worse, meaning new ways need to be explored to move more freight more efficiently.
PHASE 2 GHG STANDARDS 'ACHIEVABLE'
But DTNA’s director of compliance says
a substantial R&D investment will be
required to meet the challenge
Substantial research and development will be required to meet the new Phase 2 greenhouse gas (GHG) regulations, but there is sufficient lead time built into the rules and Daimler Trucks North America (DTNA) supports them, according to Sean Waters, director of compliance and regulatory affairs.
“It will be a challenge—these are tough standards that will cost a lot of money for R&D, but they are achievable,” he said.
The regulations, crafted by the National Highway Traffic Safety Administration (NHTSA) in partnership with the Environmental Protection Agency (EPA), require the following improvements by 2027:
• 25% reduction for combination tractors designed to pull trailers when compared to Phase 1 standards.
• 5% reduction for heavy-duty diesel engines to be installed in Class 7 and 8 combination tractors.
• Up to 24% reduction for vocational vehicles.
• 9% reduction for trailers when compared to an average model year 2017 trailer.
Waters said DTNA is “up to the challenge” of meeting the mandate, but he also said that traffic congestion in the US will consume the same amount of fuel as the Phase 2 rules will purportedly save over a decade.
He said 1.4 billion gallons of fuel are wasted annually due to roadblocks and 800 million gallons due to accidents and incidents, and the EPA estimates that two billion gallons of fuel will be saved over a 10-year period by Phase 2.
“That means we really need better roads and we need to spend money on them,” he said. “You can’t get everything you want (in terms of fuel savings) out of (truck) OEMs. We need better roads and infrastructure.”
In terms of generating the fuel savings required by the new Phase 2 rules, Waters said DTNA is petitioning NHTSA to get rid of the side mirror requirement for Class 8 trucks.
“That’s a big thing in terms of improving aerodynamic improvement; we can get 1% fuel economy right off the top by doing that,” Waters said.
He said the key parts making the Phase 2 rules “good” from DTNA’s perspective are its long lead times—with compliance deadlines of 2021, 2024, and 2027—along with “flexibility” in terms of deploying solutions to meet the rules’ fuel economy targets.
“There are lots of different things we can do; we’re allowed to mix and match features,” he said. “We are also not forcing customers to buy specific technologies. That’s why we don’t think there will be any ‘cliff events’ or pre-buys due to the rules.”
Waters stressed, however, that this doesn’t mean meeting the Phase 2 GHG goals will be easy, because it runs to over 1600 pages in length, with between 4000 and 5000 pages worth of supporting documents.
Other points Waters made:
• While the Phase 1 GHG rules won’t be fully implemented until 2017, they’ve also been “successful” in DTNA’s view. “They’ve been a non-issue, with no impact on customers and no pre-buys. They are a win for the industry and the environment; we’ve been very pleased with them.”
• Waters said the EPA believes the Phase 2 rules should push the “acceptance rate” for automated manual transmissions (AMTs) to near 90% by 2027.
• The Phase 2 rules should encourage broad adoption of engine “start/stop” technology for Class 8 trucks. “That’s one technology that stands out that we haven’t seen in heavy trucks yet,” Waters said. “We’re seeing that a lot in passenger cars. We look forward to seeing it in the Class 8 segment.”
• If suppliers can come up with “better technologies” to save fuel as the rules are implemented, they can receive more credits. “That’s a big positive; that will motivate innovation,” Waters said.
• DTNA remains mum on how much extra cost complying with the Phase 2 rules will add to a Class 8 truck’s base sticker price, but Waters noted the EPA’s projection of a two-year payback window for line-haul operations is fairly accurate. “We think that’s a reasonable payback period,” he said. “We think we’ll be delivering a value package that will reduce total cost of operations for the customer.”
MEDIUM DUTY: SLOW, STEADY GROWTH
Starks forecasts 210,500 units this year,
up from 188,100 in 2015
Back in July, Bloomberg ran a story with this headline: “A New Normal for the U.S. Economy: Slow and Steady.” It was accompanied by a photo of a turtle lumbering down the edge of a city street.
The reporter, Conor Sen, a portfolio manager for New River Investments in Atlanta, wrote, “The ‘new normal’ of the 2010s has so far entailed slower growth, but it has also meant that a bust in one industry need not take down the entire economy.”
Slow and steady isn’t so bad. And that’s where the medium-duty truck market is.
In their presentation, “Medium-Duty Outlook,” Jonathan Starks, Chief Operating Officer of FTR, and Steve Latin-Kasper, market data and research director for the National Truck Equipment Association (NTEA), said that the “slow yet steady” growth pattern is expected for the next several years, with production dipping slightly next year but swinging back upward in 2018 and 2019.
Starks said that overall North American production of medium-duty trucks is expected to reach 210,500 units this year, up from 188,100 units in 2015, then drop to 201,800 units in 2017 before climbing back up to 206,000 units in 2018 and 209,900 units in 2019.
Production of Class 4-5 trucks is expected to reach 70,600 units this year, up from 55,800 units in 2015, then decline to 67,200 units in 2017 before climbing to 68,300 units in 2018 and then to 70,400 units by 2019.
He said production of Class 6-7 trucks—which constitute the majority of the medium-duty market—is expected to follow the same path, rising to 139,900 units in 2016 (up from 132,300 units last year), then fall to 134,600 units in 2017 before climbing back to 137,700 units in 2018 and 139,300 units in 2019.
“The medium-duty outlook is for continued slow and steady growth,” Latin-Kasper said. “No one is predicting a recession for 2017 or 2018.
“We should also maintain 2% GDP growth this year and into next year, but that really comes down to whether Millennials open their wallets.”
If they do, Latin-Kasper said GDP could accelerate to 3% in 2017, which could spur demand for more trucks.
“If they don’t, it will be more of the same ‘slow growth’ we’ve experienced so far in this economy,” he said.
In terms of medium-duty truck trends, Latin-Kasper said the “fleet buying cycle” as a whole has been shifting from Class 4 and Class 6 trucks to more Class 5 and Class 3 units, with a lot of growth in the commercial van segment occurring, especially for high-roof vans.
Latin-Kasper said US/Mexico box-off chassis shipments (Class 2–7) slowed down in the middle of 2015, but started increasing again to start 2016.
He said shipments are heavily influenced by OEM expectations of future sales, and those expectations got too high at the end of 2014. Those came down along with the growth rate for sales in 2015, then got too low at the beginning of 2016. And now, instead of having an inventory build like there was in 2015, inventory is getting drawn down, which means lead times have been extending in Class 2-7. Shipments got well below sales as 2016 began, and he expects improvement in lead times in the second half of this year.
Some leading indicators:
• Housing starts as compared to business truck production.
Latin-Kasper said that over a long period of time, housing starts and the business truck index have been highly correlated. At the end of 2012 and beginning of 2013, the growth rate peaked about two years after business truck production peaked. The rate of both forecasted going forward was relatively flat. Housing starts are predicted to grow at a rate of 11-12% through the rest of this year and continue at that rate in 2017. He said that with business truck production, some are forecasting it to go down in the second half of 2016. But overall, the forecast going forward has growth continuing through the second half of 2016 and into 2017.
• US real gross domestic product (GDP).
He said growth peaked in 2014 in terms of US economic activity, reaching 5% briefly in the third quarter and then sliding down again. The forecast going forward doesn’t show the bumpiness indicative of the last three or four years. He said the National Forecast for Business Economics (NABE) expects more growth—anywhere between 2% and 2.5% for the rest of the year and through 2017.
Starks gave his positives for the medium-duty market:
• Nearly all responses show a return to modest growth in 2018.
• Forecasts don’t suggest any expectation of an economic recession.
• A very stable market is expected on an annual basis for the next five years.
• While expected to generally grow, the growth rate is very flat.
• 2017 is showing some weakness compared to 2016.
EQUIPMENT MARKETS IN DECLINE
High inventory levels are contributing to the problem,
reducing freight volumes and the need to buy Class 8 trucks
With the goods economy and freight demand sluggish, there is growing concern that the equipment markets could see further deterioration.
Eric Starks, CEO and chairman of FTR, said it’s “a very interesting time right now.” FTR is predicting a stable market, but he said everyone in the room feels that equipment sales will be down.
In his presentation, “Class 8 Outlook: The FTR Perspective,” he asked the age-old question and then answered it.
“Why do you buy a truck? To move freight,” he said. “And if you don’t have freight to move, you don’t buy a truck.”
He said that high inventory levels are contributing to the problem—reducing freight volumes and thus the need to buy trucks.
Starks said North American Class 8 production should be about 230,000 units in 2016, down from 320,000 units in 2015. Class 8 production rates will then increase slightly to 231,000 units in 2017 before re-accelerating to 264,000 units by 2018.
Starks said that the roughly 1.5% average gross domestic product (GDP) growth over the last few quarters is “just enough to keep freight stable” but that “flatness in volumes” is causing issues as well.
“Flat is difficult; the trucking industry doesn’t like flat,” Starks said. “It’s used to growth or decline; events you can take action upon. With flat, you do nothing and you don’t think positive thoughts, either. You are waiting for the other shoe to drop.”
Starks said fourth-quarter production will be about 50,000, adding that it’s important to pay attention to quarterly numbers because: the economy is showing mixed signals; freight demand will increase modestly; truck capacity is balanced (not tight); and regulatory changes will impact productivity.
He said if regulatory changes have a higher-than-expected impact, that could result in a “catastrophe” if everything else hits when they say the regulations will hit. If that happens, it could take production down by 30,000-40,000 Class 8 units.
The regulatory changes that he thinks will have a negative impact on productivity and will be a game-changer:
• Electronic Logging Devices (2017 Q4). “Most of the large fleets already have them. Smaller and mid-size fleets have yet to convert and could drive many out of business.”
• Speed limiters on trucks (2017 impact; regulation likely in 2018).
• Drug and alcohol database (2018). “Will end up disqualifying many current drivers who jump from company to company.”
• Driverless trucks (start in 2017). “Platooning appears to be the likely early adopter. It won’t take hold until at least 2020 and beyond. They’re much safer than a ‘real’ truck driver. The biggest obstacle is public opinion.”
• Greenhouse Gas Phase 2 regulations (start 2018 and 2020). “It impacts both power units and trailers.”
Starks said it’s important to stay with the basics to understand the marketplace. The forecasting process involves what’s happening with the economy, truck freight economy, and movement, and what will impact numbers from a productivity standpoint. How productive fleets are at moving freight makes a difference. Those factors give FTR a number, and then its analysts do a reality check by looking at backlog and builds. They check numbers with dealers, OEMs, and fleets to ensure the numbers match the real environment.
Some key facets:
• ISM Manufacturing Index. “Manufacturing is a big deal. When looking at data, anything above 50 equals an expansion phase. It’s phased out right now, but not contracting.”
• Industrial production. “ISM data in conjunction says manufacturing is flat. The last couple of months are pointed upward, but we’re not ready to celebrate. It will continue to flatten back out because of other indicators for manufacturing. The industry is used to growth or decline and makes everyone uncertain. It’s difficult to act on flat because everyone is waiting for the other shoe to drop. What’s the downside? That’s the issue. Keep the recession in your back pocket, but look at the data to see whether it is actually pointing to a recession environment.”
• Core capital goods orders. “Business is still weak, but has it reached the bottom? We’re not at the bottom yet, but things are up and down.”
• Total business inventories. “The big problem for trucking and the economy is inventory. What is the right size for inventory? Look at it relative to sales activity. The higher the number, the less pressure on freight. The business inventory relative to sales ratio says things are not getting worse. In the short term, there’s not a lot of demand for trucking. If your customer has inventory sitting on the ground, they do not need to move it. The supply chain will kick in when inventory levels come down. It will take some time to do this and get back to a more normalized range. It will be the first quarter of next year.”
• Housing. “There is a lot of upside to housing. We are at the front end of things picking up: 1.5 million in housing starts and the overall trend is up. But, overall over last year, the numbers are flat. That goes along with manufacturing being flat. The existing home market is very tight for inventory. If supply diminishes and demand goes up, prices will increase. Sales are not pointing up, but they are not going down.”
• Retail sales. “Who is supporting the economy? Consumers. Will they be here tomorrow and are they buying? Sales were very flat and it has turned upward over the past few months. Consumers are not completely shying away. There is not strong growth, but it’s not pointing downward. If consumers decide they are out, it will lead into recession. It happens about every five years due to the global economy. Is that enough to pull us down? It might not be a recession but it may be 1.5% growth in GDP. It’s a matter of perspective: 1.5% growth is awful, but it’s better than a decline. It’s enough to keep freight stable. That’s kind of what we are seeing. It’s a flat market.”
• Business construction spending. “It had been flat, jumped, and then flattened back out. It’s a head scratcher. This one is moving higher, so there is a lot of conflicting data. Most data is flat to marginally up, so what does this mean for freight?”
He said US truck freight levels are easing back on growth.
“Year-over-year American Trucking Associations (ATA) and FTR data shows levels moving in a similar fashion, but never exact,” he said. “There was deviation early in the year. ATA showed strong year-over-year growth, but was not consistent with manufacturing and housing. More recent data shows similar numbers between ATA and FTR. Any number at zero is a flat market. The overall trend continues to be there—some ups and down per month—but flat overall. It’s a very slow, slow growth market.”
He said truckstop.com spot rates for dry vans were depressed earlier in the year and are just getting back to normal.
“We are seeing more loads and less trucks looking for those loads,” he said. “We have not felt this all the way through the system. Indicators are relatively positive for the dry van market, and not nearly as strong on the reefer market side. Flatbed is not seeing any recovery there.”
Starks said North American Class 8 orders clearly have weakened. While August orders came in stronger than anticipated, they are still at fairly low levels.
“Class 8 retail sales typically tells us that the vehicles are getting into the system, and then we back into production based on inventory cycles,” he said. “Retail sales held up fairly well in the first half of the year. From August on, they should hold up. Sales will not be a game-changer, but production will get hit because they have got to roll back on activity. Clearly the build activity has been weakening, so this is not a surprise. Backlogs are also coming down.”
He said total Class 8 capacity utilization is improving.
“Why do we care about capacity for trucks?” he asked. “It typically tells us above/below/at replacement. Right now, data tells us that solid line is at a typical replacement demand market. Carriers can get higher rates for shipping their freight. We were below replacement levels for six quarters. That is why we are seeing weakening demand. Replacement demand is up the last three quarters. The regulatory environment will tighten this market. So orders will marginally improve in the first part of 2017.
“Build versus orders line up historically very well and they converge. Now these numbers are back in line. Order and build behavior is more equalized. There is less pressure to reduce build rates. Net orders have been below what is happening on the back side due to back orders. Sales are coming out of inventory.” ♦