The COVID-19 economic crash and “bullwhip effect” of the rapid recovery provided plenty of challenges for trailer manufacturers, and great opportunities, leading to new challenges—but the industry can look forward to a “hellacious” 2021 and 2022, explained a panel of market experts at this year’s Truck Trailer Manufacturers Assn. convention.
Participating in the discussion were ATA Chief Economist Bob Costello, Clarendon Capital Operating Partner John Larkin, and ACT Research Principal, Industry Analysis, Jim Meil. TTMA Chairman John Cannon posed the questions.
Regarding the federal government’s growing debt, fast approaching $30 trillion, Larkin pointed to several big spending programs such as Social Security and Medicare that amount to more $100 trillion a year—"a number that's so big, it's hard to even fathom"—and then cited a couple of recent spending packages and proposals: the $2.2 trillion COVID-19 stimulus “with a lot of other things thrown in there”; and a $2 trillion infrastructure plan that, likewise, includes a lot more than highways and bridges.
“The fact of matter is that when you produce dollars like this, with no accompanying increase in output, be they goods or services, you basically are diluting everyone else's value because we got the same sized economy spread over more dollars,” Larkin said. “I don't think it's interest rates that are going to be the most immediate concern here. The bigger concern is the flooding of the economy with dollars, that basically diminishes the value of our savings and diminishes the value of everything we own.”
Meil quipped that if the government keeps spending trillions and trillions of dollars, pretty soon that will amount to “real money”—but he was quite serious about the consequences.
“Sooner or later, we're going to run into a real recession,” Meil said. “The COVID recession, as severe and as damaging as it was, was a short-lived phenomenon. We're going to run into another 2008-2009 [Great Recession]—and what tools will be in the tool chest? This is a ‘Red Bull’ rush for this year but, long term, it has problems.”
Asked how e-commerce and final mile delivery will impact the trucking industry in the year ahead, ATA’s Costello pointed out that e-commerce had been doing “very well” before the pandemic, growing at 10% or so for several years. In 2020, e-ecommerce spending grew 20%, and it’s already up 30% this year—but “that has to end.”
Essentially, for the last year and a half, Americans quit spending money on travel and ballgames and other public entertainment, and bought goods instead. Indeed, as spending on services fell 7% last year, spending on goods rose 7%, he noted.
“And so as we start traveling again, and we start going to concerts and sporting events, I would expect us to spend less on goods,” Costello said. “I'm telling my members do not panic, because inventories are so low, there's going to be plenty of retail freight coming at you for the next year or so. And I still think goods spending can grow. Americans have a trillion dollars more in savings than they did a year ago; that's a lot of spending power.”
Still, the pandemic did accelerate the shift to final mile delivery, and the trucking industry is trying to figure how to manage the transition—“but there's a lot of opportunities there,” he said.
Larkin added that consumers have become accustomed to the “convenience factor” of shopping online and won’t be returning to big box retail stores on inefficient shopping trips.
“So this is all really great for our industry,” Larkin said. “There's going to be more capital dollars spent on rolling stock, especially last mile delivery equipment.”
The downside to a booming economic recovery is inflation, however.
“Factories are sold out; warehouses are chock a block; last mile delivery is stretched; FedEx and UPS are bursting at the seams: All of this appears to be the perfect setup for inflation,” Larkin said. “So if you're sold out, and you have more demand than you have capacity, what does that mean? It means your prices are too low. Keep ramping up your prices until everything gets back into balance again.
“This should be a very hot topic right now but, for whatever reason, it's not. We keep throwing more fuel on the fire—and that's potentially very dangerous, long term.”
Between profligate federal spending and an imbalance in supply and demand, the panelists encouraged the audience to look past the current market boom.
“Whether it's 2024 or ’25, or ’26, it almost doesn't matter: The moral of the story is make hay now while you can, because it may get messy three or four, five, six years out,” Larkin said.
Meil provided a similar spin.
“You can tell there’s something wrong, but you don't know when the day of reckoning will be,” Meil said. “The trends are not our friend, long term. We're going to enjoy a hellacious 2021 and 2022 together, but this perfect storm of nastiness is brewing right now. And there's nobody saying ‘stop this’.”
In wrapping up with his market forecast, Meil noted that the year before, in his virtual presentation to TTMA members, he saw signs of recovery as early as April and he predicted “a monster rebound”—which has indeed come to pass.
While the pandemic downturn was just as severe as the 2008-2009 Great Recession, the crash was much faster and the “bullwhip” recovery took less than a year—compared to three years in the last cycle.
The bad news, however, is the effects of COVID-19 “are still out there,” along with vendor and inventory problems, and those pending concerns regard inflation and interest rates.
Still, Meil’s forecast calls for GDP growth of 6% this year—one of the strongest years in past three decades. And the manufacturing sector “will be there, shoulder to shoulder” into next year, making for a strong freight environment.
The bottom line, for TTMA members, is ACT’s trailer forecast. After U.S. production fell from 333,000 trailers in 2019 to 203,00 in 2020, this year’s total is projected to be 278,000 trailers, followed by 316,000 in 2022.
“We all know that sometimes the industry rushes to a peak, stays there for a month or two, and then starts to show signs of weakness and going down. This one, we think, is going to have legs,” Meil said. “We went through hell last year, and now we're going to see heaven. But with ‘heaven,’ I always put an asterisk: [Trailer manufacturers] will have the challenge of managing through the strength of this.
“But wouldn’t you rather have this kind of problem, with the customers busting down the door, than the kind of problem that we were faced with in March and April of last year when we didn't know how far ‘down’ could be? For sure.”
This report first appeared in the June issue of Trailer/Body BUILDERS magazine.
