COLUMBUS, Indiana. Even with an economy that appears to be on solid footing, new Class 8 truck orders have started falling from 2018’s historical highs, and declines in freight volumes and rates as well as challenges facing the driver market will continue to hamper orders in the near term. But it is not all bad news. As with most data these days, it depends on what data you look at.
Navistar’s (NYSE: NAV) Steve Gilligan, vice president of product marketing, said the 2019 outlook for trucks remains strong as tonnage (3.6 percent year-over-year in February) and loads per truck (6.7 percent year-to-date, year-over-year) remain above the long-run trend, and the job market remains tight. While the construction and housing markets are showing slow growth, manufacturing conditions remain good with industrial production up 3.5 percent in February and manufacturing output up 1.2 percent, he said.
Navistar is forecasting between 395,000 and 425,000 new Class 6-8 truck retail deliveries in 2019. There were 410,000 in 2018, Gilligan said.
ACT Research is still forecasting 335,000 Class 8 truck orders in 2019, but that falls off to 243,000 in 2020. Retail sales are forecasted for 259,000 this year.
The truck forecast was part of the presentations during ACT’s 60th seminar, held on March 26, 2019, at the Commons in Columbus, Indiana.
Kenny Vieth, president & senior analyst for ACT Research, said that the supply-demand imbalance between capacity and freight fell rapidly at the end of 2018 and it is now not a question of if, but when “peak level” production fell. Gilligan said the peak likely occurred in late 2018.
“The important thing to remember with Class 8 vehicles is that cycles happen,” Vieth said, pointing to 2004 and 2009 and noting that ACT is anticipating a pre-buy of vehicles before the next round of greenhouse gas regulations take effect in 2021.
In 2018, profits rose and Class 8 tractor production jumped close to 30,000 units as a result. As 2019 begins, freight profits are dropping, so Vieth believes tractor production will follow.
Among the 15 data points ACT tracks, three are showing positive signs (IMS-PMI Index, Consumer spending – goods only, and DAT Transcore Loads to Truck ratio), three are flat while nine are showing negative trends. The result is that February is the fifth straight month ACT’s USC8Tr (U.S. Class 8 tractor) Leading Indicator Dashboard was negative at a minus 6. In February 2018, the index was plus 9.
Vieth noted that DAT’s Load to Truck ratio was revised downward on Monday to about 2 from a previously reported 6.3. Spot rates are down to $1.69 per mile as of January, although that is still 13 percent higher than January 2017.
“We are seeing many negative signals,” he said. “And more often than not, the dashboard provides very clear signals on the direction of the industry.”
Vieth also said that the wide rate spread on DAT’s Trendlines, currently at 29 cents between spot rates (with fuel surcharges) and contract rates (with fuel surcharges), suggests contract rates will be declining.
“This gives us a future [prediction] of rate pressure analysis,” Vieth said. “What this is saying is about a 6-cent decline in contract rates [five months out], or about 3 percent.”
Vieth cautioned, though, that spot rates are down about 14% and there is usually a 2:1 correlation between spot and contract, suggesting contract rates could decline about 7 percent.
Driver wages also remain a concern. Last year saw a large run-up in freight rates due in part to driver wage increases. As a result, shippers will turn to productivity measures to regain some rate ground, including new package designs, improved routing and using data to more effectively improve truck utilization. Railroads, which are adopting precision railroading, are also becoming tougher competition in high-density lanes, all of which puts added pressure on fleets’ bottom lines.
The impending overall workforce shortage is also concerning, Vieth said, as baby boomers retire and not enough of the younger generations are entering the workforce.
“While it’s never good, the [driver] demographics are becoming more challenging,” Vieth said.
Last week, the Bureau of Labor Statistics (BLS) put out a report that said the driver shortage is a myth. Vieth is not ready to go that far, but he did post a slide during his presentation that quoted a 1914 article from Traffic World that made the same arguments about a driver shortage being made today.
“Practically every truck manufacturer and nearly all employers complain of the great difficulty of securing drivers who are competent and who will work handling freight aside from those who drive horses,” Traffic World wrote. “They are agreed that the profit or loss from truck transportation is largely dependent upon the drivers, and yet a majority of truck owners will hire the men who will work cheapest, entrusting valuable property in their keeping…)”
“[The driver shortage] is not a myth because you do have those inflection points,” Vieth said. “If you have 100 drivers to haul 100 loads and freight loads increase 4 percent, you now need [4 percent] more drivers and you have a shortage.”
One indicator that can skew freight demand is the way the government compiles economic data. Because of that, ACT has created the Freight Composite index, which weighs the different areas of the economy by removing sectors that do not contribute to freight. That index is predicting a 3.3 year-over-year reading in 2019, down from 2018’s 4.1, but much higher than the 1.8 predicted for 2020.
How this will all play out in vehicle orders, though, remains to be seen. Vieth said the industry still faces a significant backlog, with as many as 9,000 units unable to be built in a given month. OEMS continue to build more than 1,400 Class 8 trucks per day and that will continue into the third quarter, Vieth said, when it drops to about 1,200 units a day.
“If we don’t get that softening in Q2 and Q3, we could get to 352,000 units this year,” Vieth said.
The tractors being produced today are more fuel efficient than ever. Nearly 27 percent of Class 8 tractors from 2017 to 2019 are achieving at least 8 miles per gallon. Conversely, prior to EPA 2010 regulations, 27.8 percent were achieving under 6 miles per gallon.
In 2018, according to ACT data, Freightliner sold the most Class 8 trucks at retail with 90,900 units. Kenworth was second (37,400) followed by Peterbilt (37,000), International (34,300), Volvo (26,800), Mack (18,400), Western Star (5,800) and all others with 5,100 total.
Vieth thinks orders will average 15,000 per month for the next six months.
Robust new truck orders continue to have a positive impact on used truck sales as well, with Class 8 used truck sales totaling approximately 280,000 units in 2018, up 4 percent from 2017. Year-over-year pricing increased 10 percent, Steve Tam, vice president of ACT Research said, with only a subtle increase in mileage in the second half of the year. Four- to five-year-old trucks saw the greatest gain of over 20 percent. The average Class 8 used truck sold for $44,600 in 2018.
“We believe that new truck sales (Class 6-8) this year will exceed new truck sales in 2018, not by much, but by a little,” Bryan Howard, director of sales & distribution, Daimler Trucks Remarketing, said. “Many fleets are good at planning, but if you are one of those fleets out there that buys new trucks when freight is good, you can’t do that right now because there are no build slots, so that would push you to a used truck purchase, or potentially keeping your truck longer.”
The average used truck sold in 2018 was 82 months old and had 452,300 miles on it. That trend is starting to turn, though, as the average year-over-year age in February was up 1 percent, and it is up 5 percent year-to-date.
There are fewer used trucks on the market as customers turned to the secondary market due to long lead times for new equipment. The inventory is likely to start growing by the middle of this year, Tam said. Howard also said supply should build this year.
Tam is forecasting a declining used market due to slower freight growth, the overall refreshing of the nation’s used fleet, and a lack of inventory in the early part of the year. Prices will likely remain flat, he said. Total sales are forecast for 225,000 units in 2019.