Growth ahead for freight and truck sales

Growth ahead for freight and truck sales

LAS VEGAS. Although they differed on some of the details, four leading economists confidently predicted two to four years of slow but steady growth for both trucking and the general economy at a meeting here of top executives of truck component suppliers

LAS VEGAS. Although they differed on some of the details, four leading economists confidently predicted two to four years of slow but steady growth for both trucking and the general economy at a meeting here of top executives of truck component suppliers. Speaking at the 2011 Heavy Duty Dialog, a Chief Economist with the Federal Reserve, a well-known industry stock analyst and the presidents of two industry economic-forecasting firms all delivered welcome positive news to the group, which has weathered one of the sharpest downturns in recent memory.

While the recession technically ended in June 2009 and the economy has seen five consecutive quarters of GDP growth, “it hasn’t felt like we’ve doing all that well,” according to Bill Strauss, the chief economist for the Chicago Federal Reserve. That growth “will accelerate at a steady pace this year and next, and it will begin to feel better, too,” he said.

He also predicted that employment will improve “moderately” over the next two years and inflation will remain low. And most importantly for the freight hauling portion of trucking, manufacturing activity, which has been leading the economy out of the recession over the last year, “will continue to grow at a solid pace above GDP.”

That general economic recovery should boost freight volumes 3.5% to 5% over the next few years, which is quite strong compared to a historical average of 2% annual growth, according to Eric Starks, president of FTR and Assocs.

Fleets are currently operating at 95% utilization of available trucks and will hit 100% by the middle of this year. However with the new Federal CSA safety monitoring system in place, “fleets won’t have the drivers or incentive to buy new trucks,” Starks said. The proposed changes to hour-of-service could also drop fleet productivity by as much as 6%, “which would require 150,000 more trucks to move the same amount of freight,” he said. That will lead to a severe shortage of drivers that could be “over twice as large as the shortages seen in 2004,” according to Starks.

As a result, fleets “will not be looking to add capacity over the next year,” which should lead to tight freight capacity and rate increases in the 10% to 15% range, Starks predicted. Rates will continue “to be strong for the next several years,” he said.

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Forecasting truck sales, Starks said he expects Class 8 production for the U.S. and Canada to hit 201,000 units this year, then begin to accelerate to 258,000 in 2012 and level off at 274,000 in 2013 and 275,000 in 2014. Trailer production will follow a similar pattern in his forecast, totaling 170,000 units in 2011 and growing significantly to 220,000 in 2012, then leveling off at 225,000 in 2013 and 227,000 in 2014.

Stu MacKay, president of MacKay and Co., declared himself “bullish” on what he identifies as “truckable activity,” a broader measure of truck revenue that goes beyond freight hauling to include construction, government and other services that rely on trucks. He identified 2010 as the “recovery stage” from the recession and predicted that this year will bring a transition to “the expansion stage, which should continue through 2014.

Looking at the aftermarket for truck parts and service, MacKay said 2010 had been a strong year bringing 11.5% growth, well above the 8.3% he forecast a year ago. The growing average age of the Class 8 truck fleet and shorter engine life related to the adoption of exhaust-gas recirculation (EGR) systems in 2007 were the driving factors in that growth, he said. This year will continue to see the aftermarket grow, but at a somewhat slower 7% to 8% rate, he told the group.

Although he agreed with the other three speakers on the overall economic recovery, Donald Broughton, managing director & senior transportation analyst at Avondale Partners, painted a less rosy picture for truck fleets. While he believes freight capacity will remain tight and freight rates strong, “carriers will struggle just to keep their margins flat from 2010,” he predicted.

Between fleet failures and shrinkage at the surviving carriers, overall truck capacity dropped by more than 15% in the downturn, Broughton said. By the second quarter of this year, truckload capacity in particular “will become extraordinarily tight and pricing will be very strong,” he said. However his analysis of spot and contract pricing leads him to believe “we won’t see pricing increases at 15% to 20%, but more in the range of single digits.”

More importantly “margins will not improve as much as commonly believed,” he said, with the new HOS rules eroding fleet utilization and growing operational costs, especially fuel costs, holding margins down. Truckload rate growth will also make domestic intermodal competitive for shorter hauls that now make up the largest and most profitable segment of the TL market, Broughton said.

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