Keep on Trucking: The North American Commercial Truck Industry Forecast

by By Steve Latin-Kasper Nov/Dec 2019 2020

Though the trucking industry has seen its fair share of volatility recently, Steve Latin-Kasper views 2020 with some optimism, expecting truck sales to the e-commerce and municipal segments will likely to rise.

Through September 2019, U.S./Mexico commercial truck chassis sales rose about 5% — slightly better than forecasted last year. In the fourth quarter, total chassis sales are expected to decline relative to fourth-quarter 2018 since Class 8 sales expectations are low going forward and continued declines in Class 3 are expected to be greater than the sum of other weight class gains.

The situation is essentially the same in Canada. Through September, chassis sales were up about 2.5%. Expectations there for Class 8 are also low going forward. The difference in Canada in 2019 was the pace of change from month-to-month was much more volatile. It’s not unusual for markets to be more volatile than normal toward the end of an economic expansion, though, which indicates the North American commercial truck industry is near a cyclical peak.

The U.S. economy tends to cycle in the same timeframe as the work truck industry. The industry has been decelerating since the beginning of 2018, along with most of its application markets. Truck chassis sales are expected to decline in 2020. For the U.S. economy, if we do have a recession towards the end of 2020, it will likely not last that long.

Consensus forecasts for 2020 have been slowly revised downward throughout 2019. At the beginning of the year, most economists were calling for 2.5% growth in 2020. As we approach the end of the year, the average forecast is closer to 2.0%. A minority of economists in the consensus panels are forecasting less than 2% growth, and an even smaller number are predicting an actual recession.

 

High Employment Retards Recession

Something like a normal recession could happen toward the end of 2020 or beginning of 2021. However, it will be difficult to have a recession if the U.S. unemployment rate remains near 4% at the end of 2020, which is expected. In fact, in its most recently published quarterly Outlook, the National Association for Business Economics average forecast for end-of-year 2020 unemployment was 3.8%.

This means most people who want a job will have one. Therefore, most people will still be spending money, and since consumption accounts for about 70% of U.S. gross domestic product (GDP), the implication is that recession is unlikely. However, it is important to ask why most economists think the rate of unemployment will likely remain below 4% throughout 2020.

The reason is, the U.S. labor market is unprecedentedly tight. According to Bureau of Labor Statistics, there were more than 6 million unfilled jobs in the U.S. economy as of September 2019. The labor market isn’t just tight; it’s unbalanced. The most desired skillsets on the demand side of the market are in short supply. In many industries, the situation looks more like a labor shortage. While it’s difficult to have a recession when unemployment is so low, it’s also difficult to continue growing when the low unemployment rate is caused by a scarcity of labor in the market.

Labor Market Will Get Tighter

The bad news is, the already tight labor market will probably get even tighter between now and 2030 due to demographic imbalance. There simply weren’t enough people born from 2000 to 2010 to replace the number who will be retiring between 2025 and 2035, assuming an average age of 25 for first-time entrants into the workforce.

Obviously, there is some wiggle room on the dates. Some members of Gen Z will skip college and start their careers at age 18. Some Boomers won’t retire until they are 75. However, moving the numbers three or four years either way doesn’t change the trend.

All of the issues mentioned will affect the work truck industry, but there are other economic factors that will have more of an impact. Most commercial trucks are sold to companies with thousands of trucks in their fleets. Those large fleets are in many application markets, such as construction, freight forwarding, rental and lease, food manufacturing, municipal government, utilities and telecommunications. Because those fleets account for such a large percentage of total commercial truck sales, the timing of their purchasing cycles is of great importance.

Historically, because they are spread throughout the U.S. economy, they generally don’t cycle in the same timeframe. However, their cycles tend to synchronize when the economy experiences a long, deep decline such as the recession of 2007 to 2009. Commercial truck chassis sales fell 60% in that period.

 

Truck Sales Expected to Fall

On average, large fleets have a seven-year replacement cycle, so most of the trucks purchased from 2010 to 2012 as economic growth resumed were replaced between 2017 and 2019. This means we’re at or very close to the end of the most recent buying cycle, which is why commercial truck sales are expected to fall about 5% in 2020.

Some industry segments will feel less pain than others because some truck application markets are expected to continue growing in 2020. This is primarily due to the ongoing impact of e-commerce, technological changes and, in the case of municipal governments, the fact that their cycles lag behind turns in the national economy.

In e-commerce, Amazon has been on a truck-buying binge, as have most similar companies. Many of the trucks purchased are commercial vans (Classes 1 to 3). They are particularly interested in high roof-height vans. In the third quarter, sales of those vans rose almost 60%. Not all companies generating demand for delivery services have their own fleets, which has resulted in a spillover effect. Some are renting/leasing, which is benefiting that industry, and others are using freight forwarders (UPS, FedEx). The rate of growth in e-commerce may decelerate a bit in 2020, but it’s unlikely it will decline.

Electric vehicles are examples of new technology that makes a difference. As these vehicles become more prevalent on the road, more charging stations will be needed. More electricity will be used in homes, which requires more electricity generation plants. The utility industry will likely expand its truck fleet as a result, leading to a spillover effect for natural gas producers, the preferred fuel for most of the plants.

Last, but not least, as house prices continue to rise along with incomes, local and state property taxes and income tax revenues will increase. Tax revenues always lag behind turns in the economy, so even if there is a recession toward the end of 2020, tax revenues will still be up in 2021. That means that it’s highly likely state/local governments will be fully funding their fleet budgets for at least the next two years.

In summary, 2020 is likely to be a down year for truck chassis sales. Class 8 will probably fall further than the light- and medium-duty segments. Industry segments that are more closely connected to e-commerce and state/local government could very well see sales increase into 2021.

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