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Dreamstime M 157029379 Recession
Dreamstime M 157029379 Recession
Dreamstime M 157029379 Recession
Dreamstime M 157029379 Recession
Dreamstime M 157029379 Recession

Trucking braces for further economic disruptions through 2020

May 7, 2020
Industry experts are projecting that demand disruption is going to create additional challenges for commercial trucking through the rest of the year and into the first half of 2021.

Truck plant closures, potential aftermarket bankruptcies, and reduced demand from fleets caused by the COVID-19 pandemic are some of the biggest ongoing concerns raised by commercial vehicle suppliers. And with the most recent Class 8 truck orders plunging to their lowest levels in the modern era, industry experts project the outlook won’t be “relatively normal” until 2021.

During its third webinar in the COVID-19 climate, the Heavy Duty Manufacturers Association (HDMA) pointed to preliminary results from its pulse survey, which is conducted every two weeks. Results from the latest survey, which focused on short- and long-term outlooks for commercial vehicle suppliers, note supplier concerns and projections moving ahead into the second half of the year.

Richard Anderson, director of market research and analysis for HDMA, said suppliers in the U.S. and Canada project their average value will be down 41% for the current quarter compared to 2019. Some are looking to see a reduction of 75% while others are looking at a reduction of only about 5%.

As for the balance of the year, suppliers are projecting reductions of 35% versus last year, Anderson said.

“The supply chain is only as strong as its weakest link. What we see in terms of inbound shipments is most suppliers are not crippled by delays,” Anderson said. “But about one in five is operating with 50% or fewer inbound shipments coming in. That’s a real and meaningful percentage in terms of how much blockage there will be within our supply chain as we move forward.”

HDMA also polled its members on labor force availability and readiness. The survey found that labor force readiness remains a concern for some members; however, about two-thirds of members have a labor force that is 75% ready, Anderson explained.

“We did have some comments from suppliers about a high level of uncertainty around shutdown mandates. And this is really driving a huge percentage of what they feel is the uncertainty overall in terms of the length of the impact of COVID on their business,” he noted. “The true shutdowns and plant closures are really the big concerns. And those really will determine for the supplier community just how the bottlenecks in the supply chain are ultimately released.”

In terms of looking specifically at the aftermarket, an increase of HDMA members and suppliers are worried about bankruptcies. But the number one concern, according to Anderson, is continued OE stoppages and no demand from fleets. HDMA members are also concerned about the health and welfare of their employees.

From a global perspective, according to Anderson, suppliers are also concerned about India’s market, and they are “very concerned” about a resumption of trade tensions with China.

“Nobody seems to know what the impact will be on future demand, and the concerns of a potential second wave of infection are real,” he explained. “There are models that show this happening and the second wave having a greater impact than the first if we are not careful.”

Eric Starks, chairman and CEO of FTR, who provided an economic outlook and commercial vehicle market conditions, explained that FTR’s expectation is for a drop of nearly 24% in gross domestic product (GDP) in the first quarter of 2020.

“This is just unprecedented. This is not anything that we have ever seen before,” Starks said, adding that it likely won’t be until the middle of 2021 that the economy gets back to the GDP levels that were seen in the later part of 2019.

Rather than a ‘V-shaped’ economic recovery, Starks is anticipating more of a ‘U-shaped’ recovery, meaning a deep drop with the expectation that things won’t return to normal right away.

“We believe there is fundamental demand disruption that has happened and that is going to create additional challenges for the industry as we move through the year into the first half of 2021,” he explained.

Starks added that industrial production is expected to be negative into Q3, suggesting there won’t be an industrial sector pickup for two quarters before there is an increase in Q4. In addition, FTR is anticipating a drop of around 15 million jobs in Q2.

“We are looking at claims for unemployment insurance,” Starks pointed out. “Typically, in a normalized environment, you are going to see this number somewhere between the high 100,000 level to maybe the 350,000 level. It might go up into the 400,000 level. We have seen these numbers up in the millions.”

“When you total the last several weeks up from the downturn, we are sitting at roughly 30 million claims for unemployment insurance,” he added. “That is huge. Now, that doesn’t mean that 30 million have been unemployed, but that 30 million went in and put a claim in.”

Add to that, crude oil prices (per barrel) at the end of April went into negative territory.

“When you have a negative price, it’s basically saying I will pay you to take the oil and to store it,” Starks explained. “Basically, they were out of facilities and had no place to store it. This type of fundamental is radically different than we have ever seen. This market right now is so different from anything else. I know a lot of people like to compare to what happened in the Great Recession and the Great Depression. But this is not comparable because this is not a traditional economic recession. This is truly a shutdown and a restart.”

Trucking freight

With partner truckstop.com, FTR analysts review the five-year average of how much freight is typically in the system at any given point in time via FTR’s COVID-19 truck freight recovery index. Before there is a true turn in the market, Starks said it will take the following three metrics to ramp back up.

The dry van sector, which continued to decline, has now turned the corner and is starting to turn up, Starks explained. “But it is still at very low levels. We’re not quite ready to say that we are truly into the restart phase,” he said.

The refrigerated, or reefer, sector saw a big surge at the end of March. Moving into April, it collapsed, but is now moving toward the restart phase, said Starks.

“Is this because of restocking of food and pharmaceutical goods? It is unclear, but this is truly the first good sign that we have seen that something fundamental has started to pick up. This is a welcome sign to see within refrigerated,” he said.

Flatbed was hit hard and has not yet turned the corner, he added. “We want to see all three of these metrics picking up and moving into the restart phase before we feel comfortable that there has a been a true turn within the market,” Starks said. “This puts some additional pressure into Q2 as we move through to understand what the demand looks like.”

Commercial vehicles

FTR reported on May 5 that preliminary North American Class 8 orders plunged for the second month in a row to an unprecedented level of 4,000 units. That’s the lowest the industry has seen in the modern era, and even lower than the industry saw during Great Recession.

“We anticipate they will stay relatively low as we move further into Q2,” Starks explained. “Ultimately, the next two quarters are going to be very difficult for orders.”

The industry also experienced excessive inventories heading into the first part of 2020—a backlog of roughly two and a half months. Now, there is buildup of roughly four months of inventory, according to FTR data.

“That was already moving higher in the first half of the year before the pandemic hit,” Starks said. “Not only do we have a shutdown that is a result of the pandemic, we are fighting with inventory levels that were too high at the beginning of the year.”

FTR also noted that trailer orders are collapsing, and analysts are anticipating bleak reports for April. Starks explained, however, that when it comes to trailer orders, the industry has not yet seen the numbers dropping to Great Recession—2009—levels.

“They are continuing to hold relatively well all things considered,” he said. “The concern is if things last longer and we continue to be suppressed in underlying demand, this gets elongated in the latter part of 2020 and early part of 2021.”

“We are definitely concerned about a resurgence of the coronavirus as we move into Q3,” Starks added. “It is highly likely that we will see hotspots all over the country. When we try to understand what this means for demand, this is going to be a big issue for us.” 

About the Author

Cristina Commendatore

Cristina Commendatore is the Editor in Chief of FleetOwner magazine. She has reported on the transportation industry since 2015, covering topics such as business operational challenges, driver and technician shortages, truck safety, and new vehicle technologies. She holds a master’s degree in journalism from Quinnipiac University in Hamden, Connecticut.

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