High rates to tighten ’07 truck sales

June 5, 2006
The economy is trending toward scenario where 2007 will be a very rough year for truck buyers that are counting on cheap financing

The economy is trending toward scenario where 2007 will be a very rough year for truck buyers that are counting on cheap financing.

OEMs have long predicted ’07 will be a slower sales year, since ’06 sales are inflated due to carriers pre-buying current models to avoid the more-expensive sticker prices related to the emissions control technology mandated for ’07 models. The sales slowdown will be aggravated by prohibitively high financing rates, as well as a decelerating economy, said Steve Latin-Kasper, NTEA market data and research director.

Both consumers and businesses were able to take advantage of cheap credit during the past year, which was among the top reasons U.S. economic growth had been particularly robust. In the first quarter of 2006, economic growth accelerated to a 5.3% annual rate, compared with 3.5% for all of 2005.

But amid recent inflation concerns, mainly driven by the high price of energy, the Federal Reserve has raised fund rates from 1% in early 2004 to 5% in this May. According to Latin-Kasper, this is currently the highest rate among industrialized countries.

“If the [annual] inflation rate stays at 4% or higher, then the Federal Reserve would have to choke things in the economy because it’s the only way to keep a lid on inflation,” he told FleetOwner. “But the Fed is also wary of keeping rates so high that it hurts the economy in general.”

For the three months ending in April, inflation was increasing at an annual rate of 4.1%. Consequently, interest rates will stay firm--if not go up higher--in the foreseeable future, Latin-Kasper said.

Since the bulk of commercial vehicles today are acquired via financing, the rise in interest rates will make those vehicles even more expensive. Combined with a sticker-price premium on ’07 medium and heavy-duty diesels, prospects are looking particularly bad for OEMs and suppliers next year.

“[2007] won’t be a very good year for [OEMs and its suppliers], regardless of how the rest of the economy goes,” Latin-Kasper said. “I think we’re coming up to the end of the capital equipment cycle. The last two years, people who wanted new equipment had been buying like crazy. And naturally when capital equipment spending slows, spending on trucks slows along with it.”

Manufacturing likely to decelerate further

Another symptom of higher interest rates would be a stronger dollar, which would present a hurdle to exporters. And manufacturing is the sector that the trucking industry most directly relies on for freight.

“A strong dollar won’t cause anybody to go bankrupt in of itself, but will make it more difficult for companies counting on exports,” Latin-Kasper said.

The most recent indicators in the manufacturing sector reflect a decelerating growth trend, with many companies concerned about the degree to which energy prices are eating into the bottom line.

For a related article, go to Trucking catches another tailwind.

About the Author

Terrence Nguyen

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