Friday, June 20, 2014

The Trailer Market Doesn’t Trail - It Leads

I had just started trying to forecast trailer market demand many years ago, when my boss hastily entered my office.  He was out of breath from running up the stairs, so I knew something important was up.

“I just came out of the staff meeting. We were discussing the trailer market and came up with a great idea.  All we have to do is find the leading indicator for the trailer market and we then we can forecast it,” he enthusiastically proclaimed.

Of course I wondered how much time it took and how much sheer brain power had been exerted to come up with this seemingly brilliant conclusion.

My boss stood there wide-eyed with an exuberant expression that implied there was something more to this and somehow I was involved.

“What did you tell them?” I asked, as I sensed where this might be leading.

“I told them you would find it!” he announced with a smile.

And then he spun around and left my office as quickly as he appeared, before I could utter one word of protest.

As daunting as the task was, I embarked on it. After all, the executive staff wanted it done and my boss actually thought I could do it.

I looked at all the standard economic data and reports, and none of those worked.  I then tried some other factors more focused on trucking and freight, no luck.  I even tried some obscure indicators that had no logical basis, nada.

No matter what I tried, I could not find anything that proceeded the commercial trailer industry in the economic order of things. And then, of course, there was that magic moment of revelation:  if there is no indicator leading the trailer industry, then the trailer industry must be a leading indicator.  My search was the equivalent of looking for the Holy Grail while sipping wine from this fancy chalice that I found.

Based on that premise, I have compared the trailer market to other respected “early” leading indicators.  Many people believe that the cardboard box market is the best leading indicator around.  It is so well respected that you can buy the monthly cardboard box industry data from a trade organization.  The theory is that before you can ship products, you will need the boxes to ship them in. Increases in box production would precede shipments, which would precede economic growth.

Good theory, but how are those filled cardboard boxes transported?  That would usually be a on a trailer. And what is the lead time for a trailer, from spec’ing, to ordering, to producing, to delivery?  It’s much longer than just making standard cardboard boxes.  In addition, cardboard boxes are used primarily to move consumer goods, which provides an indication of the direction of the consumer market.  Trailers are used to move all types of goods, for a wide variety of sectors.  Therefore, trailers as a leading economic indicator provide a much wider scope than cardboard boxes. 

I have tracked the trailer industry as a leading economic indicator for years, and have found it to be fairly reliable.  It is a better indicator than Class 8 trucks because that market gets too much influence from federal regulations and improved technology.  The trailer market has become a less reliable leading economic indicator as this “stalled economy” has stumbled on.  However, many other respected economic indicators have failed during this time.  For example, the ECRI (Economic Cycle Research Institute) Leading Index, one of the most respected leading indicators, has been less dependable the last few years. 

If you are in the transportation industry but are not involved in the trailer segment, it is still important to track it for all the reasons listed previously.  In addition, the trailer market is literally tied to the truck market, so trailer demand can confirm truck demand and provide clues to where the Class 8 market is headed.  The two markets may diverge in the short-term, but not in the long-term.

And what is happening in the trailer market now? Good things, many good things.  Orders are up 40% year-to-date, backlog is up 30% versus a year ago. 2014 build is forecast to be 8% higher than last year and could go higher based on some of the OEM build plans.  An analysis of trailer market segments indicate that consumer spending will be strong the next 12 months, and disposable income is growing.  Road and other infrastructure spending is expanding at a healthy clip, while housing starts are still moderate.

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

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