Will This Boom Be Followed By A Bust?

Class 8 truck orders were the second highest ever in October (45,639 N.A.) and trailer orders (46,267 U.S.) set a record, shattering the old mark by thousands. Class 8 orders for November are 40,608 and 39,356 for trailers. While these numbers are huge, they are significantly inflated due to sales strategies recently employed by some of the OEMs.                                         

Equipment orders are booming!

Order Inflation

Trailer OEMs and at least one truck OEM have motivated the larger fleets to place orders for most of their anticipated equipment requirements through the second quarter of next year. In other words, they pulled purchase orders forward into October and November which would have normally been received in December 2014 through April 2015. So, although the order numbers are record setting, they are not truly reflective of the current equipment market.

What are the Real Order Numbers?

It is estimated (using previous market share data and statistical software) that approximately 22,000 truck orders and 22,000 trailer orders were “pulled ahead” in October and November.  This means the market is still strong, but not as strong as the raw numbers imply.

Why Did the Fleets Place the Big Orders Now?

Production capacity is very tight in both the truck and trailer markets.  In trucks, capacity was reduced due to plant closures due to the Great Recession.  Those plants will not reopen.  And both the truck and trailer markets, OEMs have been reluctant to invest to increase capacity.

Hot or Not?

Even though the humongous orders and flat-out production give the impression of an over-heated Class 8 market, it really isn’t. Even after the tremendous October and November orders, there were still some build slots open in the short-term. November retail sales were down 2% versus October on a per day basis. This means fleets are not rushing to put new units into service. While this market appears smoking hot overall, it is currently functioning fairly normal for a growing market.

What Now?

The Great Recession devastated the heavy-duty equipment market. When the recovery began it was so weak that everyone was very cautious and minimizing risk was the prominent strategy. This created significant pent-up demand and now that a real recovery is happening, the industry is playing catch-up.

The heavy-duty truck and trailer market is a good example of the impact the Great Recession had on industrial manufacturing in the United States.  The trucking industry was walloped during the downturn.  After the smoke cleared, the recovery was slow and measured.  Industry was overly cautious and risk averse, not knowing if the economy would plunge into another recession.  This created the pent-up demand and when a real recovery started, many businesses were not prepared for it.

What is happening in the trucking industry also shows that the economy is functioning far from normally.  The numbers that the industry typically relies on are now very skewed due to unusual market factors.  In the general economy, the some of the usually reliable economic indicators are still broken.

Now the economy is playing catch-up and this is leading to a boom cycle.  Unfortunately boom cycles are often followed by busts.  This means that by being too cautious at the beginning of the recovery cycle, we may have created bigger problems at the end of it.

What Is Really Driving This Economy?

Since the Great Recession officially ended in mid-2009, there have been many questions about the speed, strength, and consistency of the economic recovery. Such as:

-        Why has the recovery been so slow?

-        Why has the recovery been so weak?

-        Why doesn’t it look like previous recoveries?

-        How can the economy recover if housing and consumer spending remain weak?

-        Is this even really an economic recovery?

Economists have debated and analyzed these issues over the past five years, but now there may be an answer. A growing number of experts now believe that this is an “industrial-based” economic recovery the likes of which we have not seen in over 50 years.

Transportation industry analyst Donald Broughton of Avondale Partners said in a recent interview, “We are all confused because we are witnessing the first industrial led recovery in the U.S. since 1961.” He added that, unfortunately, no one is still around who remembers what that recovery was like.

I agree with this line of thinking. At FTR (Freight Transportation Research), our data has indicated the industrial, freight-generating, portion of the economy has been out-performing the other sectors for almost two years. We recognized this was an odd occurrence and couldn’t offer a logical explanation. We didn’t think this situation would last very long and expected the industrial sector to weaken at some point. It really hasn’t, although our 2015 forecast is for the industrial sector to slow down a little while the consumer sector picks up. Mix it together and you get a much more balanced economy growing at a more typical 3% rate.

Does this mean things have returned to normal? Possibly, but if so, there is still much damage from the

Great Recession left over because we never had a Great Recovery to fix it. The labor markets are still broken, with the real unemployment rate too high, wages stagnant, and a low participation rate. The financial markets are still messed up. Credit availability is inconsistent, and society, especially the stock market, is hooked on 0% interest rates which have lasted oh so long and will be bitterly painful to let go of.

Many economists expected the housing market to lead us out of recession as it usually does. Analysts panicked when housing sputtered. This caused some people to erroneously claim that no recovery was taking place. The housing bubble burst so violently that it will take a few more years before the market returns to “normal.” Or course normal would be the early ‘90s before easier mortgages began inflating the bubble.

No, this recovery could not wait for housing to lead, so heavy industry took the lead. This is the reason freight growth has been so steady and one reason new orders for Class 8 trucks and trailers have been so high.

We can see how this plays out in the real world, by examining the flatbed (platform) trailer market. Flatbed trailers are usually the last segment to recover after a recession. Trucking fleets tend to run these trailers for more miles at the start of a recovery and delay replacing them. This creates pent-up demand and, at some point, flatbed trailer demand becomes very strong. However, flatbed trailers carry most of the materials involved in house construction, so traditionally the housing market is a significant river of flatbed trailer demand.

With housing expected to be slow in 2014, my initial Flatbed Trailer forecast was for no growth this year. The current forecast has 2014 growth coming in at 10%, and this was after a very slow Q1 due to the bad weather. How is this possible with housing starts still sluggish? Because flatbeds carry products connected to the industrial sector, and this industrial sector is running strong and leading this recovery. Can you imagine what would be happening if housing was growing at a faster clip? GDP growth could be at 5%, flatbed trailer production would be up 20%, and it would be the big, snap-back

recovery that we were told to hope for, but never materialized.

The industrial sector was so strong that flatbed freight was the strongest freight segment for most of this year. However, flatbed freight growth peaked in the summer and has dipped noticeably since then. This is not a good sign for an economy being driven by industrial markets. Is this the canary in the economic coal mine? Too soon to tell, but we need to watch this bird carefully.

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.)