Some have been asking: Can this go on forever? Of course, we are talking about the massive growth in the transportation sector. Industry pundits wonder if we are at risk of a cool down in trucking. With the economy showing continued strength, the answer to that is likely not. Just look at some of the fundamental indicators.
Strength in Freight
The American Trucking Associations (ATA) has released a new edition of its Freight Forecast, which is a document that takes a close look at the transportation sector economy and provides some predictions about the future of freight. For 2018, the freight increase projection came in at 4.2%. Expected tonnage for the transportation industry overall is set to hit 16 billion tons by year’s end.
Over the five-year period from 2019-2024, truck volumes are expected to expand by nearly 2.5% per year. Yet, that doesn’t mean there are no headwinds on the horizon. From 2018 to 2029, expected changes in demand for certain commodities will decrease tucking’s overall share of the total tonnage delivered. As a result, it is important the industry act on potential changes now before they blindside the industry and cause an unfortunate contraction.
ATA predicts that these gains will only grow over time and potentially hit a whopping 35.6% increase over today’s numbers by 2029, or 21.7 billion tons. The freight forecast is designed to provide a window into the future of the freight economy. How will it grow? With the movement of goods being a critical component of our nation’s economy, this reflection of strength bodes well for the health of the transportation sector.
Employment Remains a Concern
The ATA also looked at how the ongoing employment squeeze is impacting tonnage. Their fore-hire truck tonnage index rose nearly 2% in July after registering a half-percent drop in June. Compared with 2017, however, the seasonally adjusted index saw in increase of 8.6%. Year-to-date tonnage readings increased 8% and far outpaced the annual gain registered in 2017, which was only a few hairs short of 4%.
The fact is, even when accounting for seasonality, trucking freight demand remained strong over the summer. Month-to-month and year-over-year gains showed continued strength, with gains in manufacturing, retail sales, and overall construction activity. Still, the biggest problem facing the trucking industry remains recruiting and retaining experienced and qualified truck drivers.
Without truck drivers to handle the increased demand in tonnage, one can only wonder what the landscape will look like as we move into the new decade? How will fleets fare in attracting sorely needed truck drivers to haul freight? Right now, that question remains open-ended.
Truck Orders Remain Strong
Navistar, one of the leading players in transportation sector manufacturing, reported recent growth showing no signs of slowing in Class 8 orders. In fact, Navistar’s share of Class 8 vehicle orders rose over the previous year, while its share of 13-liter heavy engine sales more than doubled.
Higher revenues across the OEM space has led to increased optimism among manufacturers and providers of freight materials, accessories, and more. According to Navistar’s predictions, Class 8 truck sales across the industry could equal nearly 280,000 by the end of 2018. It is expected that 2019 may see similar numbers. Compare that to 2017, when there were only 207,000 Class 8 truck sales and you can see where the dramatic increase is happening. For medium-duty Class 6 and 7 vehicles, Navistar projects sales of 95,000 for this year, a rise from 2017’s number of 86,000.
The reason for all these gains can be seen in the rosy economic indicators coming out from Washington. With GDP expansion coming in at 4.1% for the year so far, its strongest reading in nearly five years, many industry insiders are expecting the rise in trucking fortunes to only continue over time. With economic conditions continuing to show strength, fleet utilization will continue to grow, along with freight rates and motor carrier profits.
Across the industry, truck orders are hitting new records. Still, there are skeptics that wonder how long the good times will last. Among some outstanding questions include those regarding whether placeholder orders for fleets will actually be built or fulfilled if there is an unexpected contraction in the market. Furthermore, how much will dealers stock for future orders if there is instability on the horizon?
For now, it appears that the majority of new orders being logged with Navistar and other OEMs are for replacement trucks. With new models getting much better fuel economy over the tractors they are replacing, fleets are capitalizing on the improved revenue situation to add new models to their fleets. Higher GDP growth reflects fleet expansion and a shift towards more dedicated transport options. As a result, more trucks are required to drive that growth.
Many are saying this is the best equipment-buying environment they have seen in decades. Indeed, with the economy seeming to show no slowing down, these numbers may simply continue to improve over time. Will a rising tide lift all boats? Likely, yes.
In solidarity with OEM projections, transportation analysts are also predicting another record-breaking month for Class 8 truck orders. FTR and ACT Research have pointed out that August is typically a weak month for truck orders, yet it is likely we will see extremely high numbers once September reporting hits the newswires.
It is important to consider that six of the best 12 truck order months occurred in the first eight months of 2018. It isn’t hard for everyone to see how a strong economy is fueling increased freight growth across the sector. While there had been some concerns about supplier bottlenecks (which we will get into in the next section), there seems to be plenty of market confidence for the future of truck orders.
Still, the supply chain remains tight and fleets and dealers are doing their best to lock down slots for the 2019 buying season. With industry growth expected to continue at a breakneck pace, expect to see OEMs, buyers, sellers, suppliers, and everyone else with a stake in the trucking industry to be battening down the hatches for another year of heady times.
Production Constraints as the Headwinds
If there were to be problems with future growth, where might it come from? One way to find out is to look at production during the third quarter. With supplier constraints hampering growth, many within the trucking industry are wondering how much of a backlog they may be faced with. As build rates increase, OEMs need to partner very closely with vendor support to prevent a capacity crunch.
Whether it be to work with different suppliers, improve productivity, or take efforts in-house, to keep the supply lines moving, OEMs will need to get creative. The main problem stems from the fact that the industry is currently running without any cushion. If a plant suffers a power outage or breakdown, it could create a ripple effect all the way down the supply chain.
OEMs are also facing motor carriers that are looking for every way to save money down the line. The result has been a sharp spike in warranty claims. With pre-existing claims rising, it is putting pressure on OEMs to step up their game, which isn’t easy when you are facing big backlogs in your supply chain.
Still, even with headwinds on the horizon, the dramatically improved freight situation calls for optimism within the sector. There will be little that can derail – pun intended – the freight train of commercial motor vehicle order growth.
Used Trucks Stay Flat
Meanwhile, in the used truck sector, growth remained relatively flat in July. Still, if you compare July numbers with the same readings from a year ago, used truck sales are still hovering at favorable levels. Digging deeper, the average price of a used Class 8 commercial motor vehicle was down 1% from June to July.
Still, dealer volumes for used trucks rose 12% year-over-year, with the average age of a used tractor declining 5% over the same period a year before. Many are scratching their heads in light of the fact that dealer volumes fell 7%, with July being the weakest sales month of the year for used equipment. This decline includes numbers being reported from retail and auction markets, while sales through wholesale channels saw healthy growth.
Looking 12 months out, projections are that retail and wholesale markets will rise by 18% and 3%, respectively. Conversely, the auction channel should see a decline. Overall, however, if you look at the market holistically, dealers are having a hard time finding used trucks to sell, which keeps used equipment prices buoyed. This environment has also been a boon to finance companies who help fleets secure financing for used vehicles.