End-use market review

Jan. 1, 2007
LUSTGARTEN said the truck boom of 2004-2006 was driven by normal cyclical economic recovery, assuming sustained 3% domestic GDP growth. It was exacerbated

LUSTGARTEN said the truck boom of 2004-2006 was driven by normal cyclical economic recovery, assuming sustained 3% domestic GDP growth.

“It was exacerbated by the fear of 2007 emissions, causing rational truck owners to dramatically reduce fleet age as much as possible by January 1, 2007,” he said. “2007 engines are 2002 engines with added filtration. The engines that fleets hate in 2007 will be loved in 2008 and 2009. 2010 emissions standards are very stringent and difficult, causing material engine and truck re-design.”

He said demand for Class 8 trucks and tractors will range between 283,000-360,000 for 2006 and will return to normal levels for 2007: 187,000-205,000. Medium truck production also will fall from an estimated 262,000 in 2006 to 200,000 in 2007.

He predicted that the US economy will continue to grow, saying that real gross domestic product (GDP) growth remains strong, capital spending continues to strengthen, manufacturing output is improving, inflation remains under control, and corporate profits are strong.

“The industrial sector will still be a good place to be in 2006 and likely 2007,” said Lustgarten. “This year will become that mid-cycle year where top-line growth falls from above normal, double-digit levels to mid-single digits. Meeting the goal of most industrial business models of 8%-10% top-line growth likely requires enhancement to normal volume leverage, either through additive acquisitions, and/or margin improvement from better pricing and lower input costs, and/or new products, and/or market-share gains.

“The economy's slowing at the close of 2006 is typical of a mid-business cycle pause (as in 1966, 1986, and 1995). The 2006 global economic conditions are likely to be average — and average is good!”

He said there's no need to worry about the economy in the short term because: the consumer sector is resilient; job recovery remains inconsistent; consumers can handle gasoline at $2.50 to $3 a gallon, and are buying more, not less; strong productivity helped unit labor costs to rise only 1.3% in 2005, following a more than 3% gain in 2004 after three years of being almost flat.

He said a slowing of the domestic economy was inevitable. First-quarter GDP growth of 5.6% in 2006 made the US one of the fastest-growing advanced economies (second behind Greece), but was not sustainable. It benefited from a smaller US trade deficit (higher exports and lower oil imports). Business inventories were slowly being rebuilt. Job creation has waned. And higher energy costs and rising interest rates will take a toll.

“Construction activity will slow, particularly home building,” he said. “There are higher interest rates. The inventory of single-family homes was at 6.5 months in July, the highest level since 1995. And 37% of construction equipment rental companies are currently building inventory. Their fleet refurbishment as measured by the average age of equipment appears to be almost completed.”

He said the industrial sector kept rolling through 2006. He said most investors and companies underestimated the strength of the industrial sector in the first half of 2006.

“Business conditions in most markets remain very solid, with strong positive momentum, particularly in the construction equipment and fluid power sectors,” he said. “Capacity utilization in manufacturing has moved up to 81% since June, or a rate more than 1% above its 1972-2005 average of 79.8%. Right now, with inventory not totally out of whack and money readily available, you don't have the conditions for a recession. That's why most of us are optimistic that this is a slowdown, not a recession.”

Sponsored Recommendations

Reducing CSA Violations & Increasing Safety With Advanced Trailer Telematics

Keep the roads safer with advanced trailer telematics. In this whitepaper, see how you can gain insights that lead to increased safety and reduced roadside incidents—keeping drivers...

80% Fewer Towable Accidents - 10 Key Strategies

After installing grille guards on all of their Class 8 trucks, a major Midwest fleet reported they had reduced their number of towable accidents by 80% post installation – including...

Proactive Fleet Safety: A Guide to Improved Efficiency and Profitability

Each year, carriers lose around 32.6 billion vehicle hours as a result of weather-related congestion. Discover how to shift from reactive to proactive, improve efficiency, and...

Tackling the Tech Shortage: Lessons in Recruiting Talent and Reducing Turnover

Discover innovative strategies for recruiting and retaining tech talent in the trucking industry at our April 16th webinar, where experts will share insights on competitive pay...

Voice your opinion!

To join the conversation, and become an exclusive member of FleetOwner, create an account today!