Inside the Numbers

Weathering a choppy recovery

 

Slipping truck orders, softer indicators are worrisome

 

Avery Untitled 11By Avery Vise

avise@randallreilly.com

 

 

 

Class 8 truck orders have dropped month-to-month in six of seven months this year and are at their lowest levels in two years. Diesel prices are up. And despite 8.3 percent national unemployment, fleets can’t get and keep enough drivers.

Is the recovery in trucking stalling?

Possibly, but it’s too early to declare these warning signs to be the beginning of a long-term downward trend for fleets. Moreover, there are some positive signs for the future.

Here’s what’s happening:

Manufacturing indicators are weak. In June and July, the Institute for Supply Management’s closely watched PMI showed a very slight contraction in the manufacturing sector, breaking a three-year expansion. The component index for new orders also has indicated slight contraction in the past couple of months.

And even the good headline news isn’t so reassuring when you dig deeper. For example, new orders for durable goods were up a healthy 4.2 percent in July, but if you strip out orders for transportation equipment, that figure falls to a 0.4 percent decrease. That’s good news for carriers tied to the automotive and commercial aircraft industries, but the benefits aren’t broad-based.

Inventories throughout the economy aren’t quite so lean. One of the best indicators of near-term trucking activity is the ratio of inventories to sales. Smaller ratios mean normal or even accelerated ordering and shipping cycles. Larger ratios lead businesses to cancel orders and delay new ones. The latter happened in late 2008, and the result was a horrible year for freight volume as manufacturers, wholesalers and retailers worked off inventories they suddenly realized were too high.

Over the past couple of years, the inventories-to-sales ratio had been flirting with record lows, and that correlated with the recovery in trucking. But the ratio has grown from 1.26 in April to 1.29 in June. It’s premature to fret over this preliminary figure until we see numbers for July and August, but it’s certainly cause for concern.

The rest of the world is slowing. With much of America’s raw materials, machinery, parts, components and finished goods destined for foreign customers, the U.S. manufacturing and mining sectors are exposed to global forces. And the rest of the world isn’t looking good. Most of Europe is in a recession that could grow far worse. China’s growth is slowing — even by the government’s own official estimates, which likely are inflated. Speaking at last month’s Commercial Vehicle Outlook Conference in Dallas, James Meil, chief economist for Eaton Corp., said that Eaton’s own estimate of the year-over-year rate of industrial production growth in China is less than half the official estimate.

A long-time negative is turning positive.

Housing seems to be recovering. All principal indicators regarding the housing market — starts, permits, new-home sales and existing-home sales — have been consistently higher year over year in recent months. True, those gains are off a very low base, but consider also that U.S. employment and population are gradually growing and that very few houses have been built in the past four years. According to Census Bureau estimates, there was only 4.6 months’ inventory of new homes available for sale in July at the current sales rate. You have to go back to the overheated home-buying days of 2005 to find inventories so tight.

Customers that haul lumber and shingles as well as carpeting, furniture and appliances should benefit from a housing recovery. But the effects would ripple across the whole industry because home builders and trucking companies tend to recruit from the same labor pool.

Fleets already are having trouble getting qualified drivers, and the extra competition could stifle growth even more. The downward pressure on fleet growth might not be ideal, but the benefits of a housing rebound clearly would outweigh that downside.

All of these trends might not translate into higher truck orders, but at least we should see solid utilization of existing equipment. So we aren’t looking at another 2009. It’s probably just going to be a little more interesting.

 

Avery Vise is executive director, trucking research and analysis for Randall-Reilly Business Media and Information.

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