U.S. Commercial Truck Sales: Slow Growth Expected in 2017

by Steve Latin-Kasper November/December 2016

Steve Latin-Kasper of the National Truck Equipment Association provides an overview of the U.S. commercial truck market. Although the effects of other markets, low interest rates and the slow growth of the U.S. economy have affected the market, Latin-Kasper expects the slow growth to continue at a rate under 10% in 2017.

Steve Latin-Kasper,
Director of Market Data and Research,
National Truck Equipment Association

At this time last year, it was pretty clear U.S. commercial truck chassis and equipment sales would keep rising through the end of 2015 and into 2016. However, there was some debate surrounding the anticipated growth rate. After commercial truck chassis sales increased 18.8% in Q1/15, the rate slowed to 4.6% and 2.3% in the second and third quarters, respectively. It accelerated again in Q4/15 to 10.7%, triggering positive 2016 forecasts.

At this point in 2016, the industry seems to be repeating the quarterly growth rate pattern established in 2015. Sales grew at a rate of 10.3% in the first quarter but less than 5% in the second. Second quarter deceleration persisted into Q3/16.

Looking at total chassis sales obscures some interesting market segment variation. While total chassis sales growth may have decelerated, this was primarily due to declines in Classes 2 and 8 and no growth in Class 3. The story is much different in Classes 4–7. Through June, this segment was up about 16%. In other words, sales growth in the medium-duty commercial chassis market segment was still accelerating.

This year, much of the weight class variation was caused by differences in truck application market growth rates. For example, since Q1/15, the reduction in oil and gas market activity has had a greater impact on Class 8 than light- and medium-duty sales. The rise of residential construction sector activity has more positively affected medium-duty sales than other industry segments in the same timeframe.

Effects of Other Markets

Since the beginning of 2015, other types of market activity have had a significant influence on commercial truck chassis and equipment sales. The light-duty segment has been hurt by the large increase in pickup truck sales. As light-duty commercial truck chassis utilize the same production lines, high pickup sales translate into fewer commercial truck chassis builds, effectively reducing the number available for sale.

In addition, the labor market has had a large impact on the work truck industry since Q1/15. As already noted, it’s difficult to increase sales without boosting production. To some extent, the entire U.S. economy is currently limited by a tight labor market. Fleets won’t buy more tractors when they know they can’t hire drivers. Likewise, truck body manufacturers won’t elevate production plans if they can’t hire welders.

Labor shortages can be mitigated with an uptick in factory automation, but the factories manufacturing equipment needed to automate other factories are limited by a shortage of skilled labor — namely engineers. Rising salaries will attract more college students to engineering programs, but this won’t help in the short-run. In-house training programs can prove beneficial, but this isn’t a quick fix either.

As 2017 approaches, employers willing to pay more and fully engage their employees will likely attract laborers with underemployed skills. The markets will eventually work this out, but it will take time. Although labor market imbalances are being resolved, economic growth will remain slower than it would have been otherwise.

Capacity Utilization

Beyond labor market constraints, many industries are encountering plant size limitations. With 2016 marking the seventh consecutive year of economic expansion, capacity utilization has clearly become an issue. According to the Federal Reserve, the total capacity utilization rate as of June was 75.4% for U.S. manufacturers and 83.4% for the automotive sector. Only the electrical equipment industry registered a higher rate.

Whether or not companies in the work truck industry should enlarge current facilities or build new ones is an important consideration. With capacity utilization at 83.4%, the answer seems obvious apart from the inaccessibility of needed labor and equipment. Capacity expansion is highly anticipated at this point, but the process will be slow.

Low Interest Rates

Fed officials recognize all of the previously mentioned growth limitations and are similarly concerned about global economic issues. As a result, interest rates have stayed lower than expected after the initial uptick last December. Recent comments from several Fed officials indicate rates will probably increase just once this year — comparable to 2015.

Some economists, though, think the Fed needs to increase rates more frequently for many reasons. First of all, the current cyclical expansion is getting old. The next recession is not likely to occur in 2017 or even 2018, but it will happen. When the time comes, the Fed needs to have rates high enough so the federal funds and discount rates will be effective monetary policy tools. In addition, with rates having been near zero for so long, stock and bond market valuations have been distorted, and businesses and consumers have developed unrealistic expectations. Many business owners and consumers think it still makes sense to hold off on taking loans, assuming the historically low rates will remain indefinitely.

Throughout this current economic expansion, growth has been slower than normal despite low rates, and the Fed’s repeated cash injections have had little to no impact. An economist would call this a liquidity trap — a term used to describe a situation where a boosted money supply doesn’t lead to higher consumer spending. In this particular business cycle expansion, increasing the money supply didn’t even cause inflation because consumers simply did not spend.

Consistent, periodic interest rate increases will likely have a greater influence on consumer spending than expanding the money supply as higher rates will change expectations. Once consumers see the Fed is intent on systematically raising rates, demand for money will probably increase. The logic is simple — if you don’t expect the price of money (interest rates) to go up, you can wait to take a loan. If you anticipate higher prices, you get the loan now. In other words, raising rates will likely lead to more consumer spending and boost economic growth.

Slow Growth Economy

This is important because the U.S. economy will probably not grow at the historic norm of about 3% unless consumption expenditures (comprising about 65% of the U.S. economy) increase faster than they have in the current cyclical expansion. As noted, expectations that the price of money will remain low (engendered by near-zero interest rates since 2009) contributed to slow growth, but other economic forces also played a role.

Between 1984 and 2014, the average U.S. wage rate was essentially stagnant. Wages finally started rising as the labor market tightened in 2015, improving average family income. However, wage growth remains slow and is just starting to affect consumer confidence. At this point, wages will probably grow more quickly in 2017 than in 2016. Higher wages combined with more people in the workforce means greater national income, which usually translates to consumer expenditure growth.

As 2016 ends, continued gains in consumer spending are affecting capital expenditures. As of the fourth quarter, the widespread inventory correction, which began in the second half of 2015 and hindered U.S. economic growth, has apparently come to an end. Capital expenditures will probably increase in 2017 in response to rising consumer expenditures. However, as always, some industries will fare better than others will.
Application markets likely to provide growth opportunities in 2017 for truck and truck equipment companies include: construction, rental and lease, couriers, state and local government as well as retail.

As shown in the chart above, housing starts are still rising. Through July, they were up roughly 42,000 units as compared to 2015 — a growth rate of about 7%. The December 2015 forecast shared by the National Association for Business Economics (NABE) predicted housing starts would rise approximately 12%. This forecast could still prove accurate if August and September exceeded predicted levels. Housing starts will likely grow faster in 2017 as more millennials begin forming new families. Nonresidential construction should increase as capacity becomes a bigger issue for more industries.

State and local governments are expected to spend more on trucks and truck equipment in 2017 as populations and budgets grow. Municipalities are still behind in reducing the average age of trucks in their fleets. Other application markets, such as telecoms and utilities, will likely stay flat compared to 2016. Additionally, large fleet activity in all application markets, which increased substantially from 2010 to 2012, should start building again in 2017 as these fleets tend to purchase trucks on a six- to seven-year cycle.

In summary, truck and truck equipment sales are expected to keep growing in 2017 at a pace below 10%. The medium-duty market segment (Classes 3–7) will probably not increase as much in 2017 as in 2016. In the heavy-duty sector (Class 8), the current forecast calls for gradual gains in 2017 after a substantial slide this year. Slow growth is also anticipated for light-duty (Class 2) chassis sales in 2017.

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