North American Truck Production to Grow 11.5% Despite Softness in Orders, Analyst Predicts

This story appears in the Sept. 17 print edition of Transport Topics.

COLUMBUS, Ind. — North American heavy-duty truck production should rise to 284,700 vehicles this year, an 11.5% gain from 2011, despite a continuing decline in orders, ACT Research Co. said.

ACT President Kenny Vieth said the drop in orders is a “soft patch” in demand, not a collapse, and that the U.S. economy is still growing — albeit slowly. He also told clients at ACT’s seminar here Sept. 12 that production growth in 2013 will probably increase only 1.4% to about 288,700 trucks.

Also at the ACT seminar, trucking executives told an audience of manufacturers and investment analysts that, while freight volumes and rates remain in decent shape, they face a large number of challenges.

“We’re in a soft patch now, but it’s also the middle of an up cycle, so orders and demand will return,” Vieth said. Although he acknowledged worries about the economy as a whole and trucking in particular, he said that wasn’t sufficient reason to change ACT’s forecast.

ACT said orders fell 23.4% to 16,200 in August from a year earlier. Although that was the eighth straight decline, analysis said the total represented a solid pace (9-10, p. 1).

“The Class 8 market is healthy now and will be for a while . . . There are a lot of things that could go wrong, but we don’t know yet that they will go wrong,” Vieth said.

One of the most serious worries is the year-end change in federal budgetary policies, often called the “fiscal cliff.” If Congress does not act, existing tax cuts will expire and spending would be cut substantially or “sequestered.” Many economic analysts have said these changes could turn an anemic recovery into a recession.

Overseas, Vieth said, the European economy is in a highly precarious situation while there remains political unrest and tension in the Middle East.

Vieth said that he expects U.S. gross domestic product to expand by a rate of 1.5% to 2.5% over the next year. That, in turn, should lead to more steady year-over-year growth in freight.

“There is no substitute transportation mode to heavy trucks and tractor-trailers, none,” Vieth said.

U.S. car and light truck sales have been growing steadily since late 2009 and are now on an annual rate of 14 million units, or approaching the natural replacement rate. In addition, housing starts are starting to grow, but from a very low level. Housing and autos traditionally have been strong users of trucking services.

As for the specifics of the truck market, Vieth noted two statistical anomalies: While orders for new North American trucks have fallen this year, cancellations remain low — between 1% and 2%. During the recent recession, cancellations twice got as high as 8% a month and were often above 4%.

Vieth said the lack of cancellations means fleets are worried, but not panicking.

The other oddity involves the backlog-to-build ratio, which measures how long it would take truck makers to assemble all the trucks that have been ordered but not yet built.

“The ratio has fallen to 3.2 months and that is hugely unsustainable,” Vieth said. “It’s about as lean as you can get.”

During periods of strong orders and production, build-to-backlog has ranged between six and eight months.

Charles “Shorty” Whittington, president of Grammer Industries, and Steve Phillips, senior vice president of operations of Werner Enterprises, said fleet managers are struggling with an inability to retain the drivers they need.

Whittington, the 2008-2009 chairman of American Trucking Associations, said freight has a long-term growth trend and trucking’s share is large and steady. However, the federal Compliance, Safety, Accountability safety program “is the biggest change to trucking since deregulation,” he said.

Whittington, Phillips and Thom Albrecht of BB&T Capital Markets said in separate presentations that CSA, the driver shortage, the hours-of-service rule and aspects of electronic logging are combining to make operating difficult.

Phillips said CSA has forced unsafe drivers out of the industry, “which needed to happen,” but with turnover increasing, the timing is bad. CSA also has been used by plaintiffs’ lawyers in legal actions against carriers and their shippers, he said.

Whittington said he welcomes mandatory electronic logging because if a carrier and its drivers obey the HOS rules, it is difficult to compete against those who don’t.

The new HOS rule, which is being challenged again in court, drew criticism for lessening driver productivity just as drivers are becoming more difficult to find. Whittington said technical aspects of the 34-hour restart provision could lead to massive Monday morning traffic jams throughout the nation.

The fleet executives, Vieth and Albrecht also said that much of the driver shortage is a pay shortage. Werner’s Phillips bemoaned the fact that in 1981 the average driver earned 4.1 times as much as a food preparation worker, but by 2010 that ratio had fallen to just 1.9 times as much.