The current
state of the Class 8 truck market has fleets carefully evaluating their truck
needs for the next few months and placing orders for delivery within that
timeframe. OEMs can easily schedule production to deliver on time and suppliers
are having few problems keeping pace. The Class 8 market is currently operating as a
normal industry, with demand and supply in close balance.
However,
this situation is also highly abnormal, since Class 8 trucks are one of the
most cyclical industries in the entire economy. When the freight market is
growing, fleets must forecast how many trucks they will need in the future,
sometimes as far as a year ahead, and order accordingly. When the freight
market is receding, fleets must decide how many older units they can afford to
replace, based on declining revenues, and reduce orders accordingly.
There have
been a few years where production has been near replacement demand levels,
estimated at around 240,000 units. Weak GDP and freight growth are typical
during those years. But there is still
some cycling, as shipments start below replacement demand levels at the
beginning of the year and then rise above them at the end. So the market still
cycles, and doesn’t remain right at replacement levels for very long. Also,
orders in these years tend to follow traditional trends as well, higher in Q4
and lower in Q3.
How We
Got Here
Class 8 orders
set a record at an astounding 497,000 units in 2018. Freight growth surged in 2017 and kept on
going in 2018. Fleets did not expect the jump in business and there was a
shortage in trucking capacity. The ELD mandate reduced overall productivity,
exacerbating an already bad situation. Rates spiked as service levels tanked.
Carriers desperately needed more trucks, but OEMs and suppliers ran out of
manufacturing capacity, intensifying the shortages. As freight continued to
grow, the big fleets began ordering for 2019 deliveries in the summer of 2018. Just
under 53,000 orders were placed in July 2018, traditionally the weakest month
of the year. This was followed by a record 53,300 orders placed in August.
OEMs were
able to find enough workers to ramp up build rates and suppliers resolved most
of their issues, leading to production of over 340,000 trucks in 2019, a record
for a year not impacted by an emissions mandate pre-buy.
Orders
slowed significantly in 2019 because most of the orders for delivery in that
year were placed between July and December (estimated at 225,000). Orders in January – September 2019 averaged a
paltry 13,300 units a month; volumes more likely seen during a recession even
though economic growth continued.
But you can’t evaluate 2019 orders without taking the record set in 2018 into
account. You need to look at 2018-2019 together. Orders averaged 28,000 units a
month over the two-year period. For 24 months orders were 40% over replacement
demand level (20,000 units a month), fueling two terrific production years for
Class 8 trucks. Freight growth stalled in 2019, but production remained robust
for much longer than expected because total hauling capacity just caught up
with freight volume.
The Great
Reset Is Here
Fleets
traditionally begin ordering for the following year in October. Under normal conditions,
orders in the fourth quarter are the highest quarter by far. Large fleets
evaluate their equipment needs for the following year in the summer and send
their quantities and specifications out to the OEMs for pricing. They then
place their requirement orders in Q4, often issuing orders out in a 12-month
window. Medium-sized and smaller fleets often order in quantities based on what
the big fleets do.
However,
conditions this year are much different. The big fleets are determining what
older trucks they are going to replace in Q1 and just placing orders for those.
The rest of the market is following their lead and placing smaller orders for
shorter delivery times. Q4 monthly
orders were 22,000, 17,600, and 20,000, for an average of just under 20,000, which
is equal to replacement demand. As mentioned before, this is consistent with
many other industries in a low-growth environment, but what has caused this
abrupt change in typical ordering patterns for Class 8 trucks?
Caution
Reigns Supreme
This is not
a poor business environment. Freight levels are high after a couple of years of
vibrant growth. Rates took a hit from the high prices in 2018 but have started
to recover some. There is plenty of freight to haul, so well-managed fleets
will be profitable, as poor-manage fleets go bankrupt due to the slowing of
freight growth. The economy keeps growing and a recession is unlikely in 2020.
However, it is a highly uncertain environment, with much downside risk.
The key risk
factors are:
-
The
economy has slowed from its strong performance over the last couple of years. FTR
forecasts GDP growth at 1.7% for 2020, down from 2.3% in 2019.
-
The
industrial sector of the economy is weak. The ISM manufacturing index is at
46.8%, indicating manufacturing is contracting. The index is at its lowest
level in ten years.
-
Class
8 truck loadings are expected to be basically flat in 2020, at a 0.9% growth
rate.
-
There
are continuing tariffs and trade wars. Yes, it does look like some conflicts
are calming down, but one tweet can change everything in a moment.
-
Business
investment in most sectors of the economy has pulled back due to this same
uncertain environment.
-
There
is a caustic political environment and there is an impeachment trial.
20K in
2020?
Under this
highly uncertain environment, there is no speculative ordering of Class 8
trucks. This is like a mountain climber on shaky terrain. One careful step at a
time. Orders are for only what is needed – out for one quarter at a time.
Usually,
when the market hits equilibrium, where supply and demand are balanced, it
doesn’t remain there for long, because demand is almost always cycling up or
down. But this time is different. Uncertainty may even increase before it
decreases because the upcoming election could be between candidates with
starkly different business and economic philosophies. Throw in the possible
conflict with Iran and the ledge gets even shakier.
Flat freight
growth means fleets do not need to expand. A growing economy and high freight
volumes enables them to replace old units with minimal risk. So, we are left
with only replacement demand, estimated to be around 20,000 units a month.
Therefore,
the Class 8 market is in a holding pattern. Orders and build rates may stay
locked in this range for a while. That means ironically, we are stuck in the
20,000-truck a month range in the year 2020. It could be the most stable Class
8 year ever.
