The work truck industry managed to continue growing in 2016, as measured by sales of truck chassis and truck equipment. However, the rate of growth was 0.5%. In Q1/17, chassis sales fell from the same-quarter, previous-year, at a rate of -2.2% before turning around in the second quarter with growth of 4.7%. Through the first half of the year, commercial truck chassis sales were up 1.3%. As forecasted, the rate of growth accelerated in the third quarter.
One reason for the recent improvement in the commercial truck chassis market was the long downturn in capital expenditures on equipment troughed in the first quarter. The growth rate of capital expenditures decelerated sharply in Q2/15 and became negative in Q1/16. The year-to-year growth rate of capital expenditures then remained negative through Q2/17.
Sales of Class 2-8 truck chassis are highly correlated with capital expenditures, so it is not surprising that Class 2-8 chassis sales declined on a year-to-year basis from Q3/16 through Q1/17. They started rising again in the second quarter along with capital expenditures.
Market segmentation reveals that the decline from the second half of 2015 to Q1/17 was more about conventional cab chassis than other segments of the work truck industry. Nonconventional cab chassis (strip, cutaway and low-cab-over-engine) sales grew in 2016 and the first half of this year. Conventional cab chassis sales fell 3.8% in 2016, and another 0.3% in the first half of 2017. In 2016 and 2017, the largest percentage declines occurred in Classes 2 and 8. Sales were also down in Classes 6 and 7 in the first half. However, gains in Classes 3-5 balanced the declines. Since nonconventional sales grew, total chassis sales were up 1.3% through June.
Inhibited Growth
While there are good reasons to be positive, economic factors may hinder growth. Primarily, a labor shortage is affecting most U.S. industries. Unemployment stood at 4.2% in September, and the labor participation rate was growing. But a large imbalance remains between the skills companies want to hire and the skills available for hire. According to the Department of Labor, as of September there were about six million unfilled job openings. This trend has contributed to the economy’s inability to perform at its potential, and while economic growth is expected at least through 2018, the rate of growth will likely remain about 2.5%.
This slow growth trend will also be exacerbated by demographic shifts. As baby boomers continue to retire, their spending will slow. College debt is one of the chief factors holding back personal consumption expenditures. Although millennials outnumber baby boomers, they are carrying a college debt load that consumes a much higher percentage of their income than their parents paid at the same age. Consumption expenditures account for about 65% of the U.S. economy. If the growth of consumer expenditures doesn’t accelerate, it is unlikely that U.S. economic growth will accelerate.
Wages are also a factor. While wages have been growing since 2012, they have not outpaced inflation. This has been true since the 1970s when inflation outpaced wage growth substantially. The inflation-adjusted average U.S. hourly wage peaked in January 1973. It fell in the 1980s and early 1990s before climbing again in the second half of the 90s. After the recession of 2001, it fell before stabilizing prior to the Great Recession. It started growing again in 2012 and approached the January 1973 level this summer. That helps explain why, in every recession after 1982, the rate of growth in consumption expenditures in the following cyclical expansion was lower than in the previous cycle — not exactly a prescription for a high growth rate economy.
The Federal Reserve Board of Governors was well aware of the labor market problems as the economy emerged from recession and kept interest rates near zero for seven years in response. At this
point, monetary policy has become more conservative, and interest rates will likely rise slowly but surely until the next recession. As of September, interest rates remain historically low and are unlikely to have a negative effect on truck sales in 2017 or 2018. It remains unlikely that the Fed will raise rates more than 0.5 percentage points in 2017 as long as inflation remains below 2%. Interest rates will likely rise faster in 2018, but expectations of rising rates should cause potential customers to buy sooner rather than later, which should boost capital expenditures in 2018.
Markets Affecting Growth Rate
To get a better feel for growth prospects, think about the markets for commercial trucks. The largest markets for commercial trucks and truck equipment are the construction and state/local government sectors of the economy, which are expected to do well in 2018. That is also true for utilities, rental/lease, transportation/warehousing, distribution and manufacturing. The only truck application markets with low 2018 expectations are agriculture, retail and mining (includes oil/gas).
Growth in the construction sector will likely affect the growth rate of commercial truck and truck equipment sales the most. The same labor shortage negatively affecting truck production is hitting the construction industries. You can’t erect buildings without work crews. In December 2015, the consensus forecast for housing starts called for growth of 10%, while actual growth was about 5%. In December 2016, the consensus forecast for housing starts was around 10% again. At the moment, actual growth is expected to be about 5%.
Forecasters have accordingly ramped down expectations for 2018, with good reasons. Millennials are in the mood to buy as they start to form families, but contractors can’t build new houses fast enough. That’s why the prices of existing homes are going up so fast around most of the U.S. Unfortunately, that led to a higher than historic average cost of housing as a percentage of income, which exacerbated the student loan problem. The bottom line is millennials have less to spend on everything than their parents did, and that has a negative impact on the growth rate of consumer expenditures.
Another problem in the construction sector is the uncertainty Congress creates for state and local governments. The Fixing America’s Surface Transportation (FAST) act, passed in 2015, included increased expenditures from the Highway Trust Fund for infrastructure that would be funded starting in 2017, causing state/local governments to start planning projects. But in December 2016, a continuing resolution was passed requiring expenditures to be no greater this year than they were in 2016. Projects were halted or delayed as a result. Whether this will be fixed in 2018 is difficult to predict.
Despite a decline in state/local government expenditures on construction in 2016 and 2017, expenditures on equipment continued rising. However, as of Q2/17, the equipment expenditures rate of
growth began to decelerate. Although expected to continue growing through the first half of 2018, the decline in construction expenditures will eventually lead to a decline in expenditures on equipment related to construction, such as trucks and truck equipment.
Cyclical Expansion Continues
Despite these limits to growth, forecasts for truck sales and U.S. economic growth are higher for 2018 than they were for 2017. More employed people means more consumer expenditures. Wages aren’t rising fast, but they are rising, and wage growth is expected to accelerate in 2018. Capital expenditures are likely to increase as well.
In sum, we are well into a long cyclical expansion that is not yet over. Labor market imbalances will continue to affect the U.S. economy in 2018. However, consumers and businesses are likely
to spend more in 2018 than they did in 2017. The rate of growth is expected to accelerate slightly.
Commercial truck sales are expected to grow between 5% and 10% in 2018. The heavy-duty segment of the market is expected to outpace the rest of the industry after two years of declines. The medium-duty segment of the market is expected to continue growing, but at a slow rate. The light-duty segment of the market is expected to grow at a rate of about 6%.
