The economy continues to send mixed signals. You look at some indicators and things look good. However, other important indicators signal doom is right around the corner. It is a mixed-bag; it is mumbo-jumbo; it is a dog’s breakfast of economic proportions.
But how does this uncertainty play out in real industries? What problems is it causing? How can companies plan under these circumstances? Have the extended, long-lasting, low interest rates created any bubbles?
The commercial vehicle market displays some of these peculiarities. Even though the economy has not experienced its typical cycles since 2011, this industry has been performing in a somewhat typical cycle for the past few years. This market is approaching the peak and should get there late this year. So as the economy stalls, business is still booming, but for how long?
Here is an analysis of the current state of the commercial vehicle market:
Order rates in both Class 8 and Commercial Trailer markets have started to weaken after achieving sky-high levels at the end of 2014. Backlogs have peaked for this upcycle and started their decent. The big question now: when does production start to fall? It is a very interesting question, because production is increasing at the same time orders are falling.
However, there are significant economic factors to be concerned about. The economy has temporarily stalled out and is expected to show almost no growth for the first half of the year. No big “snap back” is expected in the second half of the year either. The slowdown in the industrial sectors of the economy impacts freight growth, of course, and the forecast for truck freight has been lowered for the year.
Weakening freight demand and declining orders would almost always result in lower equipment forecasts, but the situation is complicated by the huge backlogs. OEMs have many orders booked for Q3 and Q4, the result of the deluge of orders received from September 2014 through January 2015. Backlogs are strong enough to support the production forecasts even if orders fall to traditional low levels this summer. The current forecast assumes that production will remain near current levels for the rest of the year.
The key question now is: how solid are these backlogs? This is important because most of the orders for delivery in Q3 and Q4 were placed 8-12 months in advance to reserve scarce build slots at the OEMs. The OEMs had “right-sized” after the Great Recession meaning there was less industry capacity to handle the peak of the current upcycle.
Fleets were anticipating a continued strong, growing economy when they placed these orders; however, based on the current economic reports, things may be much different. Two months ago, OEMs were very confident that the orders were “real,” “solid,” and would be built. Now they are hoping that this will be the case.
|What happens this time after you reach the peak?|
OEMs made rational decisions to “lock up” future build slots with these so-called “place-holder” orders, since there is no penalty for future cancellations. However, based on the current economic forecasts, these orders become more tenuous every day. There is the possibility that all the new equipment being put into service over the next few months will create enough extra capacity that all those units on order may not be needed. Unfortunately, the industry has experienced this situation before during economic downturns.
It is expected the great majority of these orders will, in fact, be produced. However, the possibility exists that some of these orders could be cancelled, or, more likely, moved out for delivery in 2016. It is an uncertain backlog, in an uncertain economy. It will be interesting to see how this mixed bag falls out.
I know other industries have to be experiencing unique situations, even six years after the Great Recession. It is my contention that the recession continues to impact business and consumers significantly, in ways it will take economists maybe decades to understand.
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.)