EXPERT SPEAKERS laid out a bad news/good news scenario at the National Truck Equipment Association's Business and Market Planning Summit at the Embassy Suites in Rosemont, Illinois.
The bad news: Largely because of the pre-buy in advance of the Environmental Protection Agency's new emissions standards, 2007 will be a down year for the industry.
The good news: It won't last long.
“The expansion in truck equipment sales is over,” said NTEA market data and research director Stephen Latin-Kasper in the Truck Equipment Market Outlook. “2007 is not going to be a good time for this industry. But it's just that year; 2008 and 2009 look very good again.”
Latin-Kasper gave the following pros for 2007: moderate interest rates and core inflation, low unemployment, and increasing capital expenditures, trade, and state and local revenues. His forecast cons: terrorism/confidence, federal budget deficits, volatile energy prices, yield curve, and low productivity growth.
“None of these cons are long-term, especially federal budget deficits,” he said. “So there's really nothing to be worried about beyond 2007. Growth has been slowing since 2005 and we'll have a recession in this industry in 2007. But that should be it. At some point later on in 2007, the bad times should be over and we'll be looking forward to 2008 and 2009.”
He said total transportation and truck-equipment shipments accounted for $131.1 billion in 2006, up nearly $8 billion from 2005. Truck-equipment shipments accounted for $43.6 billion and grew nearly three times faster than chassis shipments, largely because Class 1-2 are in chassis shipments and include passenger vehicles.
Growth rate declining
In medium-duty trucks, the rate of growth has been steadily declining since the end of 2004 — from 42% to less than 5% in the middle of 2006.
In heavy-duty trucks, the rate of growth hit 55% early in 2005 and was running at less than 20% in the middle of 2006.
“We expected the pre-buy to be a little more significant for the heavy duty than the medium duty — and it was,” Latin-Kasper said. “But we didn't expect it to be that much more significant, because of the price of the medium-duty engines, which didn't increase that much in the first phase of the diesel-emission regulations.”
For 10 years, the graphs for trailer production and American Trucking Associations (ATA) freight shipments have nearly mirrored each other. Both peaked at the beginning of 2003 and 2005 and troughed at the beginning of 2004.
“Right now, we're not sure where the next trough is,” Latin-Kasper said. “It hasn't happened, but we're approaching it.” Both had dipped below 1% by the middle of 2006, the last time statistics were available.
Likewise, the graphs for medium truck sales and medium truck production have nearly mirrored each other, although production growth topped 40% near the end of 2004 and sales peaked nearly a year later at 30% growth.
“Sales were a bit ahead of production, so we didn't have a lot of inventory building up in medium through July,” he said. “But the reports I'm hearing are that it may have changed radically for Classes 3-5 in August and September. I suspect the gap closed in a hurry.”
In heavy duty, production was running about 10% ahead of sales at the beginning of 2006, but the gap is closing and Latin-Kasper said inventory has been sold off.
In application markets for truck equipment, construction occupied 22.6%, compared to transportation (16.7%), rental (10.6%), and government (10%).
“What we know from our survey of NTEA members is that for some products within the truck equipment industry — dump bodies — the construction industry accounts for 15% all of sales,” he said. “We have guys who are focused on particular product segments within the NTEA membership that are almost completely dependent on what's going on in the construction industry.”
Look to utilities
While production of business trucks has flattened to nearly zero growth, electric utility production was showing 7% growth in the latest statistics.
“The utilities industry is a good place to look for new sales because the build rate is going to keep going and as utilities get bigger and more and more energy in the form of electricity and natural gas gets demanded, they're going to need more trucks,” he said. “That is a very long-run trend in terms of adding capacity.”
Similarly, state and local government spending on equipment (minus computers) showed a steady increase from 2004 through 2006.
“The story here is very simple: They're about a year behind reality in terms of the business cycle,” he said. “So when the rest of the economy slows down in 2007, we slow down a lot, and one of the good places to look for new business will be state and local and municipal governments, because they're still going to be living off 2006 taxes.”
Talking about total private construction spending — which “far outweighs all public construction spending — ”he said the growth rate had declined to about 8% and figured to take at least another year to reach zero growth. And it might flatten out at 4-5% and starting coming back in '08 and '09 along with the rest of the economy.
Latin-Kasper said there is very little concern over steel prices, noting that hot rolled sheet and strip (up 14%) and carbon steel scrap (up 12.3%) were the only products that experienced a double-digit price increase in the second quarter of 2006.
“Things are really calming down,” he said.
Likewise, the Producer Price Indexes for trucks, buses, trailers, truck equipment, and selected materials were very stable in the last statistical period. Up were trucks, truck tractors, and truck chassis of 14,001 to 33,000 lb (0.5%) and 33,001 lb and over (1.8%), truck and bus bodies (1.8%), truck trailers and chassis 10,000 lb per axle and over (2.1%) and those under (2%), and hardwood plywood (0.7%). Down were trucks, truck tractors, and truck chassis 14,000 lbs and under (2.1%) and completed vehicles produced on purchased chassis (0.2%).
“The pricing environment in terms of our costs looks good,” he said. “It'll be a lot easier to control than in the past few years.”
He said that despite the rise of the Canadian dollar against the US dollar, Canada's exports to the US were expected to grow by over $400,000 in 2006.
“That tells you that trade between Canada and the US is not really dependent on the value of the Canadian dollar compared to the value of the US dollar,” he said. “Many of the companies in North America have operations so integrated that the comparison between the Canadian and US dollars doesn't affect our trade that much. Of all the trading partners in the world, I doubt that there are two others' economies that are so well integrated.”
However, he said that truck and trailer sales in 2007 to Canada and Mexico are going to decline due to the pre-buy. He encouraged attendees to tap into the overseas markets. Sales this year to Russia were up 94.7% to $203 million and to Brazil were up 90.9% to $196 million. Sales to Australia were up 42.9%, but the increase in dollars ($228 million) dwarfed the total sales in Russia and Brazil.
“If you're looking for some way to diversify, start looking now at some foreign markets,” he said.