FTR Associates president Eric Starks wanted very much to stand in front of the TTMA attendees and deliver a “Trailer Outlook” presentation that would have them dancing in the aisles like they had just won the lottery.
Starks didn't want to be the deliverer of bad news, but everything he had at his disposal — historical charts, trends, current market conditions, and his intuition — told him that trailer manufacturers will not see any significant upturn in their business until the second half of 2010.
“If you have no freight, you don't buy a trailer — it's that simple,” he said. “Sometimes we try to make it too complex, do all this analysis, and make all these equations.”
He's forecasting a 10.6% decline in total truck loadings in 2009, with declines in freight volume bottoming out in July.
“Fleets are going to feel like things are very problematic,” he said. “We're not seeing freight pick up anytime soon. Year-over-year, the declines are less, but from a freight perspective, it will hit bottom in July. To crawl out of it is going to be very, very slow. We don't see any positive year-over-year growth until the second half of 2010. That means that these guys are not going to be buying any equipment until the second half of 2010. This is the worst freight environment we've seen since ‘82. Historically, the growth is 2%. Last year, it fell at 2.5%. This year, it will fall at 10.6%. This is unprecedented. This is uncharted territory for the industry.”
He said trailer capacity utilization peaked early in 2004, fell steadily until mid-2007, but has been “falling like a rock” since. Net orders topped 100,000 in 2006 but will bottom out at fewer than 10,000 this year. Trailer utilization also will bottom out at under 80%.
“This suggests orders will continue to remain weak for the next few quarters and not see any type of life until the middle of 2010,” he said. “Sorry.”
Truckload rates are expected to bottom out in June at a year-over-year decline of 5% and still will be hovering at around a 2% decline next March.
“They're cutting rates left and right,” he said. “Shippers are coming back to the fleets and saying, ‘We renegotiated the rate a few months ago, and now we're going to do it again. I can't afford to do this. We're getting too much pressure from management.' Management says, ‘You have to cut costs, too.' The only way logistics guys can cut costs is to go to the shippers and say, ‘You have to give me something back.' We think the larger guys will continue to make money. The problem is the medium to smaller guys and owner-operators.
“As fuel prices continued to come down in the second half of ‘08, these guys were able to pay off some of their debts. We thought we'd see higher bankruptcies in the first quarter, and that didn't happen. Bankers don't want these guys to go belly-up and be sitting on all this equipment. They seem to be willing to finance them through it. Somebody used the term ‘Trucker Zombies.' I think that's an apt term. There are some guys who shouldn't be operating equipment but have some life left. I don't think it's a lot of life. So the bankruptcy numbers will start to gain some speed over the next several quarters and park additional trucks.”
He said TL fleets are shedding equipment: The trailer/tractor ratio has risen to 3.0 because tractors experienced a year-over-year decline of 10% in 2008, with trailers down almost 1.5%.
“What does this mean to you? They have too many trailers,” he said. “They have to get back to some sort of normalized ratio. That means they won't be adding to the fleet. That's a little bit problematic.”
He said Economically Derived Demand (EDD) deals with building an understandable forecast of equipment demand by adding new demand (the number of vehicles needed to move additional freight) to replacement demand.
“New freight demand drives your business,” he said. “When you put replacement demand and new freight together, EDD is always leading trailer production. So this is a good leading indicator to what's going to happen on the production side. EDD says, ‘Here's what the economy is doing at this minute. If we were in a pure market, and if you could fill demand at this second, this is what we need.'
“In ‘96, it would say, ‘We need 250,000 trailers.' Now, the industry can't do that right away, so there's some type of lead-lag relationship. What we have done is given additional weight to the freight side of the equation and less to the replacement rate, and then make a weighted average. We say, ‘What happened last year has the highest bearing on what's going to happen this year.' All we're trying to do is get EDD to help us estimate trailer production.
“And it shows us that we are significantly overbuying equipment in 2009 and 2010. No doubt about it. Why are they overbuying? We believe there is some fundamental replacement demand that people have to meet. It may be some equipment they have to purchase at some level. It's making everybody scratch their heads. The huge question is, ‘Where is that bottom level?'
“On a quarterly basis, the concern I have is we're showing flat production over the next several quarters. But we're actually seeing that the demand side of the equation is saying it's actually moving in the other direction, down even further. That's problematic to me, because I'm sitting here going, ‘What's the pressure?' The pressure is for further declines in production. Over the next several quarters, how OEMs decide to behave is going to dictate production. It's not going to be fundamentals in the industry from a replacement and demand standpoint. It's going to be, ‘Do they want to lay off people?' It's somewhat of an unknown. It's going to the point where they can't go much lower without shutting their doors.”
Too many trailers
How should the nation's trailer fleet be right-sized?
Starks said that in 1996, there were 560 million loadings originated, rising to 660 million in 2006. This year's number is expected to be about 570 million, which he says is a “pretty tough pill to swallow.”
In 1996, there were 2.4 million trailers — a half million fewer than we have now.
“If we say that freight is going back to ‘96 levels, the math suggests we have 500,000 too many trailers in the marketplace,” he said. “Idled equipment continues to be a larger portion of the population. That's problematic. These units are going to have to be worked off before people buy more trailers.”
In comparing the freight recovery in the 1980s recession to the current recession, Starks said they looked fairly similar at the beginning, but this recession will not experience the same kind of fast uptick. And the picture is even worse in terms of equipment recovery: Class 8 retail sales during the 1980s recession increased by almost 60,000 units in a one-year period. The increase during the same one-year period of this recession is expected to be less than half of that.
In terms of trailer production, he said, “We do not see any turning point. The direction continues to be down. We have not hit the bottom. That's not a good sign. We need to start seeing some type of upward slope to make us feel like any type of recovery is starting to happen.
“On the trailer production side, we really are expecting things to flatten out the next few quarters. We'll see only a slight uptick as we go through 2010. On a total annual basis, that's 70,000 this year and then up to 89,000 next year and 144,000 by 2011. From a growth perspective, those are pretty good numbers. But we're starting at such a low base that by the time we get to 2011, we're still only talking about levels we saw in the last two recessions.
Why does the recession feel so awful this time?
“Because it is awful,” he said. “We have not seen industrial production fall at such a fast pace since the first quarter of 1975 (down 22% then, compared to down 20% by the end of 2008). We have seen a lot of pain. But what do next several months look like? I think the main part of the bleeding has stopped.”
The ISM Manufacturing Index and Chicago Fed National Activity Index have started to increase after bottoming out at the end of 2008.
“That's a positive signal,” he said.
The unemployment rate hit 8.9% in late April and will continue to go up in the next several quarters, but he said it tends to be a “lagging indicator.”
The Consumer Price Index historically is between 2% and 2.5% but has plummeted to a negative rate.
“In the near term, it's positive,” he said. “But we're concerned that in the long term, the Fed will have to react if inflation pressure gets too high and they have to start putting the brakes on the economy.”
Durable goods orders and retail sales both rebounded in the first quarter of 2009 after declining in every quarter of 2008. Ditto for housing starts, which he said “got us into this mess.”
“Mortgage rates continue to come down, and that's very helpful,” he said. “We've seen a lot of refinancing and some people picking up repossessed homes on the market. In this environment, you want to see low mortgage rates to stimulate people to go out and buy homes.”
Automobile and light-truck sales, however, have not rebounded.
“In the near term for you guys, that's a problem,” he said. “Manufacturers are saying, ‘I'm cutting back production.' Chrysler filed for bankruptcy and is talking about closing plants for the summer as the process gets transitioned over with the Fiat deal. That pulls additional freight out of the system that we hoped would be there. It's not a huge amount of freight, but any kind of freight pulled out is not going to be helpful. But they will right-size their inventory levels.”
Starks said the US GDP in the fourth quarter of 2008 was the worst since the first quarter of 1982. And 2009 will be the worst since 1946.
“Most of us were not around in 1946,” he said, “and if we were, we didn't care about it.”
He said there is a risk that we could experience a prolonged sluggish recovery and a financial crisis similar to the 1930s rather than the 1980s, with the global recession and export market being a hindrance.
He said the good news is that “we've been seeing some things that suggest there is upside potential.
“Past recessions tended to exit with a bang,” he said. “GDP in 1983 was 4.5%; in 1992, 3.3%; and in 1976, 5.3%. But the concern we have is that the reason for this recession is different than for the past few recessions. This is a financial crisis. This is a structural issue we have not seen since the late 1930s. We have to go back to the Depression to understand these fundamental problems.”