Carrier profitability and Class 8 demand are heading toward tougher business conditions in 2020, according to ACT Research’s recently released Transportation Digest.
Because of a slowing economy, forecasts for Class 5-7 markets are “awash in a sea of red ink in October, although moderate growth persists in build expectations,” the digest states.
“After peak sales and build in 2019, significant declines are ahead in 2020 as heavy-duty sales and build follow the net orders trend down. But if our forecast of ongoing, but slower, economic expansion holds in 2020, the drop will be a correction along the lines of 2015 and 2016, not a devasting recession as in 2008 and 2009,” says Kenny Vieth, ACT president and senior analyst.
Regarding the medium-duty market, Vieth says, “Given its traditional status as the strongest medium-duty order month of the year, October’s disappointment suggests further softening of customer demand. Following September’s bow shot, the downward trajectory of the seasonally adjusted annual rates in the past two months suggests the slowing of build rates the past two months are looking more like a new paradigm, rather than a pause that refreshes.”
In its Commercial Vehicle Dealer Digest, ACT points out three factors at work in the weak outlook for heavy commercial vehicles in the coming two years: demand, supply and timing.
While the oversupply of equipment has been on the radar for a long time, a growing weakness in manufacturing and the broader economy have come on slowly over several months, according to the digest.
“The speed at which the economy is progressing — or not, in the case of the manufacturing sector — is insufficient to absorb the capacity overhang that was built in 2019. If railroad and port activity are any indication, the freight slowdown is accelerating into year’s end and is as broad-based as it is disconcerting,” says Vieth. “ACT estimates that truckers purchased around 4ppts to 5ppts of capacity above the economically prescribed rate in 2019, leaving the industry awash in excess equipment, most of which was added by private fleets.”
In regard to timing, Vieth says, “Add to the existing supply and demand imbalance the lack of a visible spark that will propel the U.S. economy to higher growth levels. This has to occur in time to drive heavy-duty market improvement into 2021. The process for this goes something like: Rising freight absorbs capacity, spot rates improve, contract rates recover, orders accelerate and backlog growth ensues, and then with comfort in new demand levels, supply chain are ramped. That connect-the-dots process will unlikely be finished in time to materially improve activity into 2021.”
