The U.S. commercial truck and truck equipment industry grew at a rate of about 7.5% in 2012 and about 5% in 2013, according to NTEA estimates based on NTEA and federal government sources. The decline in the rate of growth was only 2.5 percentage points from year to year, and may not seem to be a cause for concern. However, in percent change terms, the rate of growth declined by 33%. The deceleration is what you perceive, not the absolute difference.

This perception issue is similar to what appears to happen when turning on a three-way light-bulb. The jump from 50 watts to 100 watts is equal to the jump from 100 watts to 150 watts, but most people perceive the brightness to have increased more as the wattage moved from 50 to 100. That is because the amount of light increased by 100%. The next step up is an increase of only 50%. In other words, we perceive the change in the rate of change. Expectations of future sales around the industry in 2013 were probably lower than warranted.

Caution remained in the commercial truck industry in the first half of 2014 for a number of reasons, primarily the perception of change in growth rates. The rate of growth in U.S. gross domestic product (GDP) fell from 4.1% in Q3/13 to 2.6% in the fourth quarter. In Q1/14, growth was actually negative, not just lower than the previous quarter. The low level of economic activity was attributed to bad weather; nonetheless, it affected expectations going forward. In the chassis segment of the commercial truck industry, sales of Class 2 through Class 8 box-off truck chassis increased 9.3% in Q3/13, jumped 17.5% in Q4/13 and then fell back to 9.6% in Q1/14.

The first quarter decline in the commercial truck sales rate of growth, coupled with an absolute decline in GDP, kept lingering doubts alive. However, second quarter truck chassis sales increased at a rate of 12.5%, and the annual growth rate from Q2/13 to the Q2/14 was 12.6%, a healthy rate of growth that will likely be sustained through the second half of 2014. In addition, U.S. GDP grew 4.6% in the second quarter. The good news is second quarter commercial truck sales, and economic activity in general, will likely have a positive impact on commercial truck sales expectations for the rest of 2014 and into 2015.

In addition to good numbers posted in the second quarter, there are other compelling reasons that U.S. commercial truck sales expectations will likely improve in the second half of 2014. Primary among them are positive forecasts for global and U.S. economic growth. Based on a number of economist consensus surveys, the global economy is expected to grow 3.1%, 3.7% and 3.9% in 2014, 2015 and 2016, respectively. The forecasts for U.S. economic growth are 2%, 3% and 3% for the same time period. Clearly, there are high expectations regarding an increased rate of growth in 2015.

In North America, there are two end-use markets for trucks that are expected to grow faster than the rest of the economy: oil/natural gas and construction. The oil/natural gas industry has been booming for several years, and shows no sign of slowing down. The development of new technologies has made increased oil/natural gas production possible. One technology made mining the tar sands in Canada profitable, and the other — hydraulic fracturing — made closed wells viable again, along with new wells that would not have been profitable without this technology. A large number of trucks are used to support both production processes.

Housing Market

The construction industry in the U.S. lagged well behind the rest of the economy coming out of the 2007-2009 recession. It didn’t start growing again until 2011, and the inventory of residential and nonresidential buildings that had accumulated wasn’t cleared until 2012. The industry’s rate of growth slowed a bit in 2013, and then slowed even more in the Q1/14 due to a hard winter; however, growth resumed in the second quarter at a rapid pace in the residential and nonresidential segments. As of July, housing starts are back on track to reach nearly one million units by year-end. For 2015 more than one million housing starts are expected in the U.S.

The Federal Reserve will likely continue to make housing affordable by keeping interest rates low until Q4/15. Low rates should also have a positive impact on truck sales (many of which are financed) and all other capital expenditures. As of late 2013, the Fed began tapering its purchases of securities because the U.S. economy appeared to be doing well enough to continue growing at a reasonable pace without further help from an expansionary monetary policy. After the announcement that U.S. GDP grew 4.6% in the second quarter, the Fed will likely begin tapering its asset purchases even faster.

Post-Recession Labor Market

This doesn’t mean that the Fed will revise its plans to keep rates low — at least, not a major revision. Following its September meeting, the Fed indicated that it will keep rates low until the labor market is once again functioning normally, which isn’t expected to happen until the second half of 2015. On the other hand, the U.S. unemployment rate fell to 5.9% in September. The Fed made it clear that other data indicates the labor market is not yet healthy, but since the U.S. economy is outperforming forecasts at this point, it is reasonable to believe that interest rates will start to rise sooner rather than later.

The bottom line is that even if the Fed starts raising rates in Q1/15, the high end of the forecast range for the federal funds rate at the end of 2015 is about 2%, which translates to an average prime of about 5%. In historical terms, that is still quite low. The Fed may start pushing rates up by Q1/15, but that doesn’t mean borrowing will become expensive.

The labor market merits some additional discussion. While it may be difficult to disagree with the Fed’s pessimistic assessment of the health of the U.S. labor market, it is worth pointing out the labor market has become healthy enough that there will likely be upward pressure on the price of labor (wage rates) in 2015. There are two major factors that influence the supply of labor, which are in the midst of significant change. One is the labor force participation rate, which has been declining and is expected to continue to do so. The other is the retirement of the Baby Boomers. Both are putting downward pressure on supply. The labor force will continue growing along with U.S. population, but at the forecasted rate of growth, demand will likely outpace supply. The result will likely be an end to the wage stagnation that has existed for the past three decades. Wage rates are expected to increase in 2015, but at a slow pace.

Materials Segments

In addition to fast-growing end-use markets and a favorable financial environment, there will also likely be a favorable pricing environment in materials markets. Slower-than-expected growth in China and the European Union has helped keep prices stable in the metals markets since the end of the recession. As the first half of 2014 came to a close, however, steel and aluminum prices had reached a trough and they started to rise in the third quarter. Steel prices are rising slowly and forecasts call for the rate of increase to remain low through at least the first half of 2015.

The aluminum market will likely be different due to some large smelters being temporarily shut down. In addition, surprisingly strong economic growth in the U.S. and India in Q2/14 has led to increased demand. Industry experts now believe that aluminum supply will lag behind demand until 2017, resulting in rising prices. As is the case in the steel market, aluminum prices may rise slowly, but the probability of a rapid increase is much higher in the aluminum market.

State & Local Governments

Lastly, it looks as if U.S. state and local governments, a large market for trucks and truck equipment, will have mostly healthy budgets again in 2015. The unexpected length and depth of the recession exacerbated most state and local government budget deficits. While tax revenues had already started increasing in 2011, state laws mandated that all revenues in excess of budgeted spending be used to eliminate debt. State and municipal government fleet managers had difficult jobs as a result. As of this year, state and municipal governments were generally in a normal financial environment for the first time since 2008, and could write budgets for 2015 that provide funding for things like the replacement of 10-year-old-plus trucks that have exceeded their optimal life-cycle.

Conclusion

This year is shaping up to be a positive perfect storm for the commercial truck and truck equipment industry. Good financial and pricing environments, growing end-use markets and increases in state and municipal government spending will likely lead to a large increase in sales of commercial trucks and truck equipment in 2015, and the industry is expected to continue growing in 2016.

Steve Latin-Kasper is the market data and research director for the National Truck Equipment Association. He joined the NTEA in 1999 and provides research and analysis on markets and economic indicators relating to the work truck and truck equipment industry.