Truck industry market forecast

Jan. 1, 2007
KREMAR predicts a rough road ahead for 2007, with the US truck market seeing a payback for the 2006 pre-buy, deteriorating economic and end-use market

KREMAR predicts a rough road ahead for 2007, with the US truck market seeing a payback for the 2006 pre-buy, deteriorating economic and end-use market conditions, and continuing high diesel and gasoline prices.

“We're not going to use the ‘R’ word,” he said, “but we'll have a bit more pronounced of a slowdown. We've already seen the weakness.

“There will be a payback. You always have to pay the piper. Buying was distorted in 2006. That has to be a payback for that pre-buy. How much? It's going to be significant.

“The worst may be over (regarding fuel prices) but we're not going back to a situation where we're going to see cheap gas or diesel fuel — or cheap energy prices in general.”

Retail sales of Class 1-3 commercial trucks declined 15.2% in the first half of 2006, compared with the same period in 2005. Class 4-7 saw a 5.1% increase, while the pre-buy boosted Class 8 by 14.4%.

“Next year's going to look pretty ugly (for Class 8),” he said.

He said the US economy has slowed, with GDP growth likely to average just over 2% over the next four quarters after being between 3% and 4% for three straight years — “and that ripples through to the markets that buy trucks and truck equipment,” he said.

He said the keys to the slowdown are a downturn in the housing market and a more cautious consumer. Oil prices slipped below $70 a barrel, but “we are skeptical that they will remain there.”

“We expect capital spending and exports to support growth, but they will not fully offset the consumer and housing slowdowns,” he said. “The Fed paused in August. Our forecast assumes one more hike in the federal funds rate to 5.5%, followed by rate cuts in 2007.”

The Purchasing Managers Index for Manufacturing & Nonmanufacturing peaked at 64% in 2004, but has been steadily declining and appears headed below 50% — which would mean the markets are not expanding. The same thing has happened in wholesale and retail trade, with Kremar adding that “the consumer is beginning to pull in his horns and become much more cautious in 2007.”

In truckload carrier performance, loads are down 1%, revenue is up 7%, mileage is down 2%, revenue per mile is up 8%, and rates are up 4%.

“In volume terms, the weakness is mainly in the truckload sector,” he said. “There's a driver shortage, and that's not going away soon.”

The picture is better in Less-than-Truckload (LTL) carrier performance, with shipments up 4%, tonnage 5%, revenue 10%, revenue per ton 5%, and rates 7%.

Kremar said economic conditions point to a sluggish traffic performance in 2007, but better days are ahead.

“The movement from 2006 to 2007 would seem to suggest 2007 is not going to be a gangbuster year,” he said. “And after spending the kind of money they're spending this year for new equipment, it's not likely they're going to be aggressive in 2007. It just seems to lend credence that big trucking is going to be conservative in 2007.”

The Index of Small Business Optimism fell to 96 after peaking at 109 in 2004, prompting Kremar to conclude: “It's unlikely they'll become happy campers anytime soon. They'll be cautious in capital spending for the next year at least. The opportunity to sell trucks and truck equipment into small markets is going to be constrained by the general conditions we're facing.”

He said activity in key truck-buying markets will be slower or experience outright declines in 11 of 12 outlets, with only oil and gas exploration increasing (3%).

Looking ahead, Kremar predicted that economic and end-use market conditions would improve in 2008-2009 and that energy prices would ease. He also said that the pre-buy caused by 2010 Environmental Protection Agency (EPA) diesel engine regulations would provide added support in 2009 and that favorable conditions should lift sales in 2011.

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