At this time last year, the primary forecast issue was expectations. U.S./Mexico commercial truck chassis sales did slow in 2014, but the rate of growth started accelerating in Q2/14, and continued accelerating in Q3/14. Sales growth slowed substantially in October and November; however, in December, some segments of the commercial truck industry reached record-setting sales levels for this cyclical expansion. That great month wasn’t enough to maintain acceleration of the quarterly rate of growth, which fell to 1.5% in Q4/14.

In 2015, the pattern of quarterly growth reversed. The year began with a bang: 18.8% growth in Q1/15. That was higher than the best quarterly growth rate of 2014, (15.4% in Q3/14) and created some high expectations, which came crashing back down to earth in Q2/15 when the industry registered a growth rate of 4.6%. Expectations for Q4/15 sales were mixed. In the heavy-duty segment, expectations clearly remained high, although that was truer for tractors than for straight trucks. In the medium-duty segment, expectations remained positive, but not as high.

Through June, U.S./Mexico sales growth rates for commercial (box-off) truck chassis by weight classes 2 through 8, and tractors were 0.8%, 4.9%, 24.7%, 6.7%, 7.5%, 12.5%, 22.3% and 24.1%, respectively. The growth rates stepped up by weight class with only class 4 breaking the pattern. Class 2 sales were essentially flat compared to H1/14. Class 3 sales grew about 5%. Class 4 through 7 sales increased about 12%, and class 8 (straights and tractors) grew at a rate of about 23%. Part of the difference in growth rates through the first half of the year had to do with differences in application market growth rates. Some of the weight class growth divergence was due to production bottlenecks.

Oil Industry Effects

One application market on which to focus particularly is the oil industry. At this time last year, a barrel of oil was still selling for more than $100. Between August and December 2014, the price fell from about $101 per barrel to roughly $50. Many U.S. drilling sites dependent on fracking technology became unprofitable at about $60 per barrel, but they didn’t shut down right away. Some held out hope that the price would rise in the short-run. That didn’t happen, and rig activity fell substantially from Q1/15 to Q2/15. Demand for trucks fell with it since fracking sites used large numbers of dump trucks and tank trucks, which illustrates why the rate of growth fell in practically every weight class segment during the same time frame. Only classes 2 and 6 registered growth rate increases in Q2/15 compared to Q1/15.

Additional contributors to slower growth rates in Q2/15 included model year changeovers and limited production resources. The model year changeovers were a short-run problem, and the stretched lead times to which they contributed were no longer an issue in Q3/15. However, as of Q4/15, some production issues remain since some OEMs do not have the capacity to devote to commercial truck production due to continued support of high demand levels for pickups. That is a growth-associated problem, and serves as a reminder that the rate of growth may have slowed in Q2/15, but the industry was still growing.

North American Sales Forecast

There are good reasons to expect North American sales of commercial trucks to continue growing throughout 2015 and 2016. The most important reason is the expected growth of the U.S. and Mexican economies. In the U.S., growth will likely remain below historic trends. The current forecast for GDP growth is in the range of 2.5% to 3%. That is primarily the result of slower than expected global growth. The situation is different in Canada, since low oil prices affect its economy more substantially. However, through June, commercial truck sales were growing faster in Canada than in the U.S.

As of Q4/15, we know that growth is slowing in China, while Russia and Brazil are in recession. This continues to cause jitters in stock markets around the world. The stock markets may go in the other direction if the U.S. and EU report better than expected economic growth for Q3/15 to go along with continued growth in India. However, as far as truck sales are concerned, the majority of trucks built in North America are sold in North America. As a result, U.S. events likely to happen in 2016 are far more important to the forecast for truck sales than events in the global economy.

Healthy U.S. Economy

In the U.S., the Federal Reserve clearly believes the economy will be fine without further support from an expansionary monetary policy. Interest rates will rise. The question is when. The consensus economic forecast panels are indicating it will most likely happen in December, but stock market turmoil and concerns about the global financial impact of emerging market debt may stay the Fed’s hand until Q1/16.

The Fed is indicating, due to an unemployment rate of 5.1% and an inflation rate of about 1.5% which are well within the Fed’s target ranges, the U.S. economy is healthy enough to continue growing when interest rates start to rise. Additionally, retail sales are at high levels, the residential segment of the construction industry is growing again and government spending is increasing at state and local levels.

Most importantly, the U.S. labor market is finally relatively healthy again. Wage growth remains an issue though. Despite the fact that consumer confidence has increased significantly in the past three years, the rate of consumer expenditures growth has remained historically low. In previous economic expansions, consumer expenditures increased much more. It is apparent that the depth and breadth of the recent recession negatively affected consumer attitudes. Another aspect is the fact that average family incomes have barely kept up with inflation since the 1980s.

As we approach the end of 2015, the American consumer remains wary. Stock market gyrations this August didn’t help. But the forecast for 2016 is essentially dependent on what is likely to happen with consumer expenditures. That is difficult to forecast in any cycle, because it is so dependent on emotional factors, but it is more difficult in this expansion since many leading indicators became more difficult to interpret as a result of the financial debacle of 2008 distorting the historical relationship between economic variables. However, one indicator known as the COLAG seems to be getting back in synch with the rest of the economy as the financial and labor sectors of the economy return to normalcy.

The COLAG is the ratio of the coincident and lag-ging indicators of the U.S. economy. As can be seen in the accompanying graph, the COLAG accurately signaled continuing problems in the financial and labor markets in 2012 and 2013, but it was no longer acting as a leading indicator of commercial truck industry activity, as it had in the past. As of Q3/15, it is once again signaling growth, which is consistent with housing starts (see COLAG exhibit above).

As wages and incomes begin to outpace inflation for the first time since the early 1980s, we may yet witness a revitalized American consumer. If that comes to pass, U.S. economic growth may finally reach a historic trend. The pieces are in place. The housing market is reviving. State and local governments are mostly out of debt. Businesses are sitting on piles of cash waiting to see what consumers do. Last year at this time, the consensus was that 2015 was likely to be the year when the rate of growth peaked in this business cycle expansion, but, as noted, the case can be made for an acceleration of growth in 2016.

Continued growth in the U.S. economy is one reason to think that commercial truck sales will continue to grow in 2016, but the forecast comes down to what is expected to happen in a handful of application markets. Sales to the oil industry will almost certainly be down in 2016, but that industry accounts for only about 5% of truck sales historically. Two application markets that are much more important to total truck sales are construction (25% of total sales), and state and local government (10% to 15% of total sales).

Construction Sector Impact

The construction sector of the U.S. economy is doing well because growth in the residential segment has been strong enough to outweigh a decline in the nonresidential segment. As of September, housing starts were expected to reach 1.1 million units by year end. That is a 10% increase from 2014. The current forecast for 2016 is that housing starts will likely increase by 200,000 units, which will have a substantial impact on truck sales if correct.

In the building stage, trucks will be needed to deliver building materials and equipment. In many cases those trucks, such as high-roof commercial vans, will also be work areas for contractors. And once the structures are built, more trucks will be needed to deliver furniture and appliances. Historically, increase in housing starts has positively impacted all weight classes from 2 to 6.

The 2016 forecast for public construction is also positive. It is highly unlikely that expenditures on transportation infrastructure will fall in an election year. State and local plans for highway, street and bridge construction and maintenance will remain on track, which bodes well for truck sales in most weight classes, including heavy-duty.

Other significant application markets for commercial trucks are also expected to do well in 2016, including gas and electric utilities, the telecommunications industry, truck rental and leasing, as well as the manufacturing, retail and wholesale sectors. None of these markets are expected to grow as fast as the residential construction segment, but all will likely contribute to continued growth in the commercial truck and truck equipment industry.

In 2016, the tractor segment is the only commercial truck and truck equipment industry segment expected to register a decline in sales, for two primary reasons. First, the segment grew faster than most of the industry for the past two years, and freight forwarding fleets are not expected to continue replacing existing tractors at the same rate. The labor shortage is the second reason. Freight forwarders are unlikely to buy tractors if they cannot find drivers.

Even if the U.S. economy doesn’t grow faster in 2016 than in 2015, the commercial truck and truck equipment industry can look forward to more growth.