Truck Production on Pace to Match 2012, But Could Jump Some 15% in ’14, ACT Says

This story appears in the March 25 print edition of Transport Topics.

COLUMBUS, Ind. — North American truck production in 2013 is on course to virtually match last year and will spike almost 15% in 2014 on stronger economic growth, ACT Research Co. President Kenny Vieth predicted.

Vieth gauged this year’s U.S., Canadian and Mexican total at 247,500 units, a modest dip from 249,400 in 2012. ACT’s expectations were scaled back last year as fleets delayed investment decisions during the “fiscal cliff” debate in Washington.

Vieth also said the sales pace will remain flat this year because economic uncertainty remains, but sales should reach 282,500 next year. Growth in housing, manufacturing and consumer spending will take time to translate into truck production, he said.

“About this time last year, we thought 2013 would be the peak of the cycle,” he said at the ACT Research seminar here. “Now it looks like 2014.”

Vieth said inconsistent freight levels and still-inadequate fleet profits are creating risks that dampen investment.

“That makes for a challenging environment,” he said. “It’s hard to hold onto optimism when you don’t know what’s for lunch next month.”

Vieth said “limited visibility” into the uncertain economy during early 2013 prompted fleets to delay orders. As a result, 36% of January orders will be built this quarter, well above the 25% figure for the 2012 month. That is far shorter than a typical order-to-build interval of five months.

ACT pegs production at 57,000 units in the first quarter, with a building pace as the economy improves during the year. It built the forecast on expectations that the U.S. economy will grow at a 2% to 2.5% rate this year, similar to the first three quarters of 2012, before building to 3% in 2014 (see story, p. 28).

“In the midst of real [gross domestic product] growth stabilizing near 2%, we were most interested in the ‘resetting’ of forward expectations for medium- and heavy-duty commercial vehicle demand,” David Leiker, an analyst for Robert W. Baird & Co., said in a report.

Leiker termed the ACT outlook “more pragmatic” than in prior years and noted that the forecast included “a minor release of pent-up demand” that could add 10,000 to 20,000 trucks to the fleet over and above replacements produced this year.

Replacement demand is driven by the need to supplant the 679,000 trucks built between 2004 and 2006, Vieth said.

Looking ahead, he identified several bright spots.

“The housing market is going to come back particularly strong,” Vieth said, because the inventory of existing homes for sale stands at a 13-year low, pushing up sale prices.

He also cited improved productivity through better packaging, which has boosted trailer capacity and resulted in a sharp drop in empty miles by private truckers.

In 2006, 30% of private truck miles were empty, but by last year, that figure had shrunk to 22%, effectively adding two percentage points of capacity without increasing the overall fleet size. That added capacity, Vieth said, has helped to keep freight supply and demand in balance into early 2013.

However, he said he expects that rising second-half demand will tip that balance in fleets’ favor, helping to buoy rates.

Another reason for hesitancy, Vieth said, is that truckload fleets are not yet making enough profit to justify reinvestment. Based on earnings reports, he gauged profit levels at around 5%, or one to one and a half percentage points short of justifying reinvestment.

“We are going to see that trucker profitability rise,” he said. “Then we will see people have the same brilliant idea at the same time — it’s time to buy a truck.”

Fleets also will gain because they soon should be able to “spec a truck that gets 8 or 8.5 miles per gallon.”

This ability broadens the gap between new models and the 6 mpg or less that older models achieve. The improved efficiency, Vieth said, for a tractor run 100,000 miles would be an operating saving of $16,000 or more annually, making a new truck purchase more attractive.

He noted that one factor reducing Class 8 production is continued domestic intermodal growth, which stood at about 7 million shipments last year. Each 1 million new intermodal shipments means the longhaul truck population can shrink by 10,000 units.

But he said with just 8% of freight available for intermodal moves because it travels more than 500 miles, the overall effect of rail/truck freight growth will be small.