Note: This content
first appeared in Global Trailer Magazine and was written for a foreign
audience. However, it does give a broad overview of the factors that have
influenced commercial vehicle sales this year.
The unexpected election of Donald
Trump has caused a great deal of political turmoil in the United States.
However, the area of Trump’s biggest success has been the business sector,
where a rejuvenated economy has boosted freight growth and commercial vehicle
sales.
Although there have been few new laws
passed, President Trump has been able to influence the economy in other ways.
His impact, which is partially symbolic on the economy, trucking, and equipment
purchases has been significant.
The Economy
A Shot of Confidence
Following the election, consumer and
business confidence indexes spiked. Many of these measurements hit levels not
achieved in many years, a couple reached all-time highs. Executives and
citizens clearly expected a “businessman president” to be able to improve the
economy.
However, business confidence surveys
have been traditionally poor economic indicators because they measure attitude,
not action (actually spending money). For this reason, many economists
dismissed the indexes as a short-term emotional response. However, one of the
factors stifling the U.S. economic recovery was fear. Many businesses barely
survived the Great Recession and watched competitors go bankrupt. This caused
companies to be extremely cautious about investing even years after the
recession ended. Therefore, this increase is confidence factor did matter, but
it took over half a year to have an impact. Although down from peak levels,
most of the confidence indexes remain at elevated levels.
Regulations
The previous administration enacted
and proposed numerous regulations upon business entities and industries,
including trucking. It was perceived as an anti-business environment. Trump
campaigned strongly against “over-regulation” and, in the first six months as
president, cut or delayed over 800 regulations.
Gridlock
The U.S. Government is in a highly
dysfunctional state. Although the Republicans hold the Senate, the House of
Representatives, and the Presidency, they have not been able to pass any
important legislation. This “government gridlock” has traditionally created a
favorable business environment. U.S. companies desire the stable environment
conditions when the government is idle. This leads to increased business
investment, which creates jobs and economic growth.
Manufacturing
U.S. manufacturing growth also
accelerated around mid-year. This was not primarily because of Trump, but of
this business cycle. Manufacturing activity slumped late in 2016, impacting the
freight and commercial equipment markets. It started to cycle back up early in
2017, but was boosted by the spike of confidence and regulatory rollback
discussed previously.
Consumers
The consumer sector also has been
growing all year. The unemployment rate is currently 4.1% (full employment is
considered 4.0% due to transition factors). Although there are factors skewing
this measurement, there are many more people working than several years ago.
Wages have not risen as fast as expected and healthcare continues to eat up a
chunk of disposable income, but consumers are spending at a healthy rate.
The Results
The U.S. economy grew at a 3.1% clip
in Q2 and is expected to come in at around 3.0% for Q3. This is higher than
most economists expected. It appears the spike in confidence after the election
had an impact, but it took months before consumers and businesses actually
opened their pocketbooks and began spending money. Of course, there are other
factors in play, most notably the reemergence of the U.S. oil industry as the
price of crude rises.
Interestingly, the biggest hindrance
to future growth is lack of available workers. The reasons include:
- Structural Unemployment: Some
available workers do not have the skills and training needed for the jobs being
created.
- Cultural: Many younger workers prefer not to work in factories or in manual labor-type jobs.
- The Opioid Epidemic: A significant number of potential workers are addicted to pain medication (opioids) or cannot pass an employment drug test.
- Increased Safety Net: After the Great Recession, there were increased social welfare payments, then expanded health insurance benefits. This acts as a disincentive for some potential workers.
- Immigration Enforcement: Some undocumented workers left the country due to immigration laws being enforced.
- Demographics: The “Baby Boom” generation is retiring, and more workers are needed to replace them.
- Cultural: Many younger workers prefer not to work in factories or in manual labor-type jobs.
- The Opioid Epidemic: A significant number of potential workers are addicted to pain medication (opioids) or cannot pass an employment drug test.
- Increased Safety Net: After the Great Recession, there were increased social welfare payments, then expanded health insurance benefits. This acts as a disincentive for some potential workers.
- Immigration Enforcement: Some undocumented workers left the country due to immigration laws being enforced.
- Demographics: The “Baby Boom” generation is retiring, and more workers are needed to replace them.
The Trucking Industry
A Much-Improved Business Climate
In March, just two months after
Trump’s inauguration, the president of the American Trucking Association, ten
leading industry executives, and twelve truck drivers were Trump’s guests at
The White House. They discussed issues affecting trucking. They also brought
along a high-tech truck/trailer combination in which the president was
photographed sitting in the driver’s seat. This was a clear signal of a much
friendlier business climate for the industry. The previous administration was
perceived to view trucks as something that polluted the air and endangered the
highways, and thus heavily regulated the industry.
Freight Growth Accelerates
Naturally, the improved U.S. economy,
and especially manufacturing, generated significantly more freight. Freight
growth was 2.9% in Q1 and has steadily accelerated throughout the year. Growth
is forecast at an impressive 4.6% in Q4, which would bring the total year to 3.6%
Trucking Capacity
After years of slower, manageable
growth, fleets struggled to increase capacity. FTR (Freight Transportation
Research) estimates Class 8 truck utilization at 95%, much higher than the
historical average (88%). Capacity utilization is expected to tighten over the
next year, reaching as high as 97%. This has caused problems for shippers who
are having problems finding trucks to make on-time deliveries.
Freight Rates
Freight rates have steadily risen as
capacity has tightened. Loads and rates in the “spot market” (non-contract)
have spiked as shippers seek carriers outside their normal channels to prevent
late deliveries. Contract freight rates have not increased very much, but will
when the new contracts are negotiated.
Regulations
The Trump administration did not
revoke the requirement for Electronic Log Devices (ELDs), which becomes
effective in December. This is because ELDs are a safety measure which ensures
drivers follow the already established Hours-of-Service regulations. There has
been an extension of when the ELD mandate will be enforced, however.
Most large fleets have already been
using ELDs, however many small fleets are waiting until December to implement.
History has shown ELD implementation can reduce a fleets productivity up to 10%
in the short-term and then around 2-4% after that.
The regulations on trailers regarding
the mandated use of glider equipment (tails and skirts) to improve fuel
efficiency has been put on hold and is expected to be repealed. Other proposed
regulations on trucking have been put under review. However, some
safety-related ones may survive.
Driver Shortages
The increase in freight, the loss of
productivity, and the retirement of aging drivers has created a high demand for
new truck drivers. However, the tight labor market, discussed previously, and
the undesirous nature of the job threatens to push the driver shortage to
crisis levels. Some fleets already have brand-new trucks parked because they
can’t find drivers for them.
Crunch Time
Combine the strong freight growth,
productivity loss due to ELDs and a severe driver shortage, and the potential
exists for an industry crisis early in 2018. It is difficult to predict the
impact or the industry response to this unprecedented circumstance, but
shipping disruptions will occur.
Commercial Equipment Markets
Class 8 Trucks
Class 8 truck sales weakened at the
end of 2016, and some forecasters, though not FTR, expected the market to
suffer a serious correction. However, after the uncertainty over the
presidential elections faded and the surge in economic confidence occurred,
sales came out of their tailspin and began a steady, moderate recovery.
Overall, 2017 production will be decent (248,000 North America) with the second
half build much higher than the first. The 2018 forecast is for 300,000, as the
2017 momentum is expected to roll into 2018, based on the factors listed
previously.
Commercial Trailers
The North American commercial trailer
market had another fantastic year. Production for 2017 is expected to come in
at 315,000, a 2% increase from 2016. The trailer market has been
uncharacteristically running ahead of the Class 8 market since the third
quarter of 2016. This is because fleets were behind in their replacement cycles
after the Great Recession. Many dry vans were parked for an extended period as
the slow economic recovery continued. This disrupted trade cycles well into
2017.
Fleets are also buying more dry vans
to compensate for reduced productivity due to regulations and the driver
shortage. The use of drop-and-hook, dropping off one trailer and hooking up a
different trailer, has become commonplace. Refrigerated vans and flatbeds also
are increasingly doing this.
Refrigerated vans have benefited from
a large increase of “temperature-controlled” freight such as pharmaceuticals,
medicines, and chemical-sensitive products, etc. Consumer preferences for both
fresh and frozen foods have also created more freight moves.
Flatbed (platform) trailers started a
strong comeback in 2017. The growth of the industrial sector and the
regeneration in the energy markets is creating more flatbed demand.
2018 Outlook
Next year should be more of the same
for the North American commercial vehicle market. GDP is forecast at 2.9%. This
could go even higher if tax reform is accomplished. Freight will continue to
grow, just not at the robust pace of the last two quarters.
This should keep equipment demand
vibrant next year. The North American Class 8 build is forecast to come in at
300,000 units, with trailers at 312,000 (down slightly from 2017).
The big concern is capacity
constraints. Freight growth and reduced productivity mean more trucks and
trailers will be needed. Where the drivers come from to operate the additional
trucks is unknown. This does have the potential to crimp equipment purchases in
the short-run. It will be interesting to see how this problem gets resolved.
