LAS VEGAS. The worst is over and the recovery is under way, according to economists and analysts here at Heavy Duty Dialogue, an industry meeting of truck and component makers sponsored by the Heavy Duty Manufacturers Assn. Fleets and their suppliers still face a number of economic hurdles that will moderate the rate of recovery, but long-term prospects point to steadily improving freight volumes and a return to healthy conditions for the truck-manufacturing industry.
“Two thousand nine is over and we’re all still here,” said Eli Lustgarten, sr. vp at Longbow Research. “A year ago, I said to you ‘Why do people buy trucks? To move freight, and people don’t move freight in a recession.’ Well now I’m here to tell the recession is over and freight will move again. And if freight moves, people will start to buy trucks again.”
Freight began to show signs of recovering in the last quarter of 2009, but low utilization and excess truck capacity will keep fleets from rushing back into the new truck market this year, Lustgarten told the conference. With utilization rates bottoming out at 73% in the middle of 2009 and now at about 75%, North American Class 8 truck production will only reach 125,000 to 150,000 units this year, he said.
In a gradual move back to more normal truck demand, Lustgarten forecast Class 8 production of 175,000 to 225,000 in 2011 and 250,000 units in 2012, which he said would mark “the new normal.”
Eric Starks, president of FTR Assocs., offered a more cautious view, predicting that some 450,000 trucks now parked by fleets will keep North American Class 8 production this year at 2009 levels, or perhaps even lower depending on the overall economic recovery.
However, based on his analysis of previous economic cycles, Starks said that the economy would see gradual but steady recovery and the industry “could reach a new peak in freight levels by 2014.”
Turning to aftermarket parts demand, Stu MacKay, president of MacKay & Co., said low utilization rates of Class 8 trucks had depressed demand with fleets cannibalizing parked equipment for parts and drawing down parts inventories to record low levels. Overall, he said, truck parts demand dropped 8.3% last year compared to 2008.
While those utilization rates “will see small gains” this year, MacKay expects parts demand to grow about 8% in 2010, in large part because fleets have exhausted sources for cannibalizing parts and will begin to rebuild inventory levels, as will parts distributors. Longer term, MacKay said he expected parts demand to peak in 2011 and then tail off “at least through 2014.”
Looking out to 2020, MacKay told the conference to expect slow growth of Class 8 trucks and trailers; a $55,000 increase in prices for Class 8 trucks; continued dominance of diesel engines as the power source for heavy trucks, and “at least partial resolution of the technician shortage.”
Looking at general economic conditions, Bill Strauss, the sr. economist for the Federal Reserve Bank of Chicago, pointed out that conditions had improved considerably since he addressed the heavy-duty group a year ago. Identifying the second quarter of 2009 as the bottom of the recession for the manufacturing sector of the economy, Strauss said GDP actually grew 2.2% in the third quarter and was expected to hit 4% growth once the fourth-quarter numbers are in.
GDP growth will continue, but at a more moderate 2.9- to 3.2% in 2010 and 2011, Strauss said. That moderation might actually be a good thing since it “limits the risk that we’ll have a bounce-back recession because the recovery will be strung out.”
Pointing out that “the downturn in manufacturing was the deepest and longest decline in 50 years,” Strauss said, “the industrial sector is now leading us out of this downturn, and at this pace will recover all that loss in just two years.”
The Federal Reserve is forecasting industrial production growth of 4.1% in 2010 and another 4.2% in 2011. “But I’m more optimistic and see in it in the fives largely because the current inventory to GDP ratio is at record low levels,” Strauss said.
The Federal Reserve economist also discounted inflation worries, projecting an inflation level at 2% through 2010, and said residential housing was finally beginning to recover after three years. “In fact the cuts in [single-family house] starts might have been overdone in my opinion, and by end of this year I see a shortage in housing,” Strauss said.
