2015 Outlook: Commercial trucks on the rise

Several painful years have created the biggest opportunities for truck producers since at least 1981.

February 18, 2015

How good is the heavy commercial vehicle market at the end of 2014? The short answer is, “As good as it gets.” As proof, after a strong summer, October 2014 saw orders for heavy Class 8 trucks and tractors rise to their second highest level on record, while at the back end of the tandem, trailer orders in October reached a new record high.

Orders in November, while below October’s pace, remained in the top-10 best months ever. Obviously, record-type demand does not occur in a vacuum, which raises that most difficult of questions, “Why?”

Freight shipments increase

Heavy commercial vehicles are purchased to move goods, and with the economy accelerating to more than a 3% rate of growth, more goods need to be moved. Granted, in 2013 and 2014 full-year gross domestic product (GDP) figures were just above 2%, but underlying strength has been masked by several one-time events, including the increase in payroll taxes, the government shutdown in 2013, and the brutal weather at the start of 2014.

During the past five quarters, including the economy contracting at a 2.1% rate in Q1 2014, the rate of GDP growth has averaged 2.9%. In Q2 to Q3 2014, the economy expanded 4.2%. Our expectation for economic activity for the next six to eight quarters is for GDP to grow in the 3% to 3.5% range.

Not entirely factored into the outlook, the sharp fall in oil prices puts upwards pressure on those expectations as discretionary dollars are diverted from petroleum to non-energy goods (even more freight). Barring an asterisk-inducing event, the freight environment should remain positive.

Best market ever

However, freight alone does not drive the purchase decision. While freight is an important part of the equation, truckers tend not to order equipment at record levels without a clear line-of-sight on profitability. To that end, events leading into 2015 have arguably laid the groundwork for the greatest opportunity for trucker profitability in the post-deregulation era (1981). The caveats, of course, are that the macro situation plays out as expected, and truckers are able to execute in an always difficult business. By extension, what is good for truckers bodes well for equipment manufacturers.

This “best market ever” environment did not happen overnight but represents the cumulative effect of industry management responses to regulations (safety and environmental) that raised equipment and operating costs, the slow economic growth and high shipping productivity environment that limited profitability in the recovery, and the corrosive effect of time on hard-working assets.

Add in the upside of falling energy prices for the energy-intense truck transportation business, and it reinforces the robust growth story.

Driver shortage

Regarding the shortage of drivers – a decade of weak industry profitability that caused wages to stagnate has caused a meaningful bind in the industry’s ability to attract drivers. In today’s capacity-constrained market, driver wages are a pass-through, and history shows a tight driver supply is good for carrier profitability.

For a quick summary on a complex issue, the more you hear about the driver shortage, the more profits trucking companies are likely to make. And again, the more truckers are making, the more equipment they are buying. For all the benefits accrued with a younger fleet, attracting drivers is high on the list.

2015 and beyond

The underlying framework of demand drivers suggests that North American Class 8 unit volumes should rise into 2015 and then remain at high levels through the medium term. After rising sharply in 2014, Class 8 production is projected to rise into a cycle-peak in 2015 that should still have legs into early 2016. After the production of 245,500 Class 8 units in North America in 2013, full-year production in 2014 is projected at 298,500 units, and 340,200 units in 2015. It seems to us the most important questions are not those pertaining to demand, but rather the industry’s ability to produce. To that end, the forecast risk is to the upside.

Medium-duty trucks

That the comments about the medium-duty Classes 5-7 vehicle market are brief and squeezed into the end of the article are perhaps the most eloquent summary of the state of medium-duty demand. Progress continues to be made, but in incremental fashion. Even as the heavy-duty vehicle market is at full boil, demand in the medium-duty space can best be described as warming as key demand drivers – housing starts and state and local government budgets – remain constrained.

Owing to the number of vocation touches in new home construction, the key required to cause an inflection in medium-duty vehicle demand is housing starts. A lot of medium-duty trucks are involved in turning a vacant lot into a house and even more are required to turn a house into a home. The flattening in new home builds through 2014 has been mirrored by a flattening in the flow of new medium-duty orders. It is not only trucks that benefit from new housing. A rising tax base and broader footprint support the school bus market, and rising valuations support RV purchases.

ACT’s medium-duty forecast is that Classes 5-7 production will rise from 201,000 units in 2013 to 219,000 units in 2014 and 220,000 units in 2015. Any production increase higher than that forecast is contingent on a stronger housing market.

ACT Research Co.


About the author: Kenny Vieth is the president of ACT Research Co. and can be reached at kwvieth@actresearch.net.