Monday, December 29, 2014

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.

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