The conventional wisdom for months has been that heavy-truck sales would drive right off a cliff at the beginning of 2007. Supposedly, anyone who wants a new truck in the next two years will have ordered it in time to take delivery by December 31, 2006. That way, they don't have to endure the higher cost of buying, maintaining, and fueling a 2007 model with its new engine, aftertreatment, and thirst for untested ultra-low-sulfur diesel (ULSD) fuel.
The flip side of this calculation is that truck makers, eager to keep production lines open, would offer significant incentives to anyone bold enough to buy an '07. Those incentives could have offset the added upfront cost, and perhaps some of the fuel cost differential. That could have made an '07 a good buy.
Now it may be time to say goodbye to that line of thought, however. Truck orders are holding up well enough that manufacturers may not have to worry about cobwebs forming on the assembly lines. Most manufacturers appear to have sold out their '06 production capacity months ago, yet they're still booking orders for trucks that won't be built until well into '07.
The credit goes to a very strong economy. Real (net of inflation) GDP — the tally of all goods and services produced in the U.S. and thus a good measure of demand for trucking — rose at a seasonally adjusted annual rate of more than 5% in the first quarter of this year. That was the fastest growth since 2003.
Part of the jump was attributable to a rebound from the hurricane-depressed fourth quarter of 2005. But it mainly reflected continuing low inflation, unemployment, and long-term interest rates. That's a combination that encourages higher consumer spending and business investment. In addition, unexpectedly robust federal, state, and local tax receipts enabled all levels of government to boost their purchases.
While it looks as though housing sales and homebuilding will no longer post year-over-year gains, other sectors still have momentum. In fact, spending on nonresidential construction and investment in all types of energy production are accelerating. Thus, there will still be plenty of demand for trucking in 2007.
That vigorous demand is the key to the second reason that '07 trucks may not be a bargain: the cost of producing them will be even higher than truck makers had reckoned. Demand for raw materials, parts and components, and (ironically) freight costs, are making trucks more expensive to build and deliver, quite apart from any fancy new equipment under the hood.
A few examples: from April 2005 to April 2006, the producer price index (PPI) for nonferrous wire and cable, such as the copper wire used throughout trucks, soared 26%. The PPI for aluminum mill shapes, the basis for truck and trailer bodies and parts, climbed 10%. Synthetic rubber, found in tires and hoses, was 7% higher. And diesel fuel, needed to deliver everything to the parts and vehicle makers as well as to the dealer, shot up more than 30%.
In each case, the explanation for the price hikes is strong demand from a variety of customers, both in the U.S. and many other parts of the world.
Yet these increases, many of which have continued since April, have not yet been fully passed through in the price of trucks. The PPI for heavy trucks was only 3% higher over the same span.
The bottom line is that the bottom line on a new-truck invoice is now much less likely to decline in 2007 than many bargain-hunters had assumed. The silver lining is that the top line — carrier revenue — will also hold up well next year.