The current state of the Class 8 truck market has fleets carefully evaluating their truck needs for the next few months and placing orders for delivery within that timeframe. OEMs can easily schedule production to deliver on time and suppliers are having few problems keeping pace. The Class 8 market is currently operating as a normal industry, with demand and supply in close balance.
However, this situation is also highly abnormal, since Class 8 trucks are one of the most cyclical industries in the entire economy. When the freight market is growing, fleets must forecast how many trucks they will need in the future, sometimes as far as a year ahead, and order accordingly. When the freight market is receding, fleets must decide how many older units they can afford to replace, based on declining revenues, and reduce orders accordingly.
There have been a few years where production has been near replacement demand levels, estimated at around 240,000 units. Weak GDP and freight growth are typical during those years. But there is still some cycling, as shipments start below replacement demand levels at the beginning of the year and then rise above them at the end. So the market still cycles, and doesn’t remain right at replacement levels for very long. Also, orders in these years tend to follow traditional trends as well, higher in Q4 and lower in Q3.
How We Got Here
Class 8 orders set a record at an astounding 497,000 units in 2018. Freight growth surged in 2017 and kept on going in 2018. Fleets did not expect the jump in business and there was a shortage in trucking capacity. The ELD mandate reduced overall productivity, exacerbating an already bad situation. Rates spiked as service levels tanked. Carriers desperately needed more trucks, but OEMs and suppliers ran out of manufacturing capacity, intensifying the shortages. As freight continued to grow, the big fleets began ordering for 2019 deliveries in the summer of 2018. Just under 53,000 orders were placed in July 2018, traditionally the weakest month of the year. This was followed by a record 53,300 orders placed in August.
OEMs were able to find enough workers to ramp up build rates and suppliers resolved most of their issues, leading to production of over 340,000 trucks in 2019, a record for a year not impacted by an emissions mandate pre-buy.
Orders slowed significantly in 2019 because most of the orders for delivery in that year were placed between July and December (estimated at 225,000). Orders in January – September 2019 averaged a paltry 13,300 units a month; volumes more likely seen during a recession even though economic growth continued. But you can’t evaluate 2019 orders without taking the record set in 2018 into account. You need to look at 2018-2019 together. Orders averaged 28,000 units a month over the two-year period. For 24 months orders were 40% over replacement demand level (20,000 units a month), fueling two terrific production years for Class 8 trucks. Freight growth stalled in 2019, but production remained robust for much longer than expected because total hauling capacity just caught up with freight volume.
The Great Reset Is Here
Fleets traditionally begin ordering for the following year in October. Under normal conditions, orders in the fourth quarter are the highest quarter by far. Large fleets evaluate their equipment needs for the following year in the summer and send their quantities and specifications out to the OEMs for pricing. They then place their requirement orders in Q4, often issuing orders out in a 12-month window. Medium-sized and smaller fleets often order in quantities based on what the big fleets do.
However, conditions this year are much different. The big fleets are determining what older trucks they are going to replace in Q1 and just placing orders for those. The rest of the market is following their lead and placing smaller orders for shorter delivery times. Q4 monthly orders were 22,000, 17,600, and 20,000, for an average of just under 20,000, which is equal to replacement demand. As mentioned before, this is consistent with many other industries in a low-growth environment, but what has caused this abrupt change in typical ordering patterns for Class 8 trucks?
Caution Reigns Supreme
This is not a poor business environment. Freight levels are high after a couple of years of vibrant growth. Rates took a hit from the high prices in 2018 but have started to recover some. There is plenty of freight to haul, so well-managed fleets will be profitable, as poor-manage fleets go bankrupt due to the slowing of freight growth. The economy keeps growing and a recession is unlikely in 2020. However, it is a highly uncertain environment, with much downside risk.
The key risk factors are:
– The economy has slowed from its strong performance over the last couple of years. FTR forecasts GDP growth at 1.7% for 2020, down from 2.3% in 2019.
– The industrial sector of the economy is weak. The ISM manufacturing index is at 46.8%, indicating manufacturing is contracting. The index is at its lowest level in ten years.
– Class 8 truck loadings are expected to be basically flat in 2020, at a 0.9% growth rate.
– There are continuing tariffs and trade wars. Yes, it does look like some conflicts are calming down, but one tweet can change everything in a moment.
– Business investment in most sectors of the economy has pulled back due to this same uncertain environment.
– There is a caustic political environment and there is an impending impeachment trial.
20K in 2020 ?
Under this highly uncertain environment, there is no speculative ordering of Class 8 trucks. This is like a mountain climber on shaky terrain. One careful step at a time. Orders are for only what is needed – out for one quarter at a time.
Usually, when the market hits equilibrium, where supply and demand are balanced, it doesn’t remain there for long, because demand is almost always cycling up or down. But this time is different. Uncertainty may even increase before it decreases because the upcoming election could be between candidates with starkly different business and economic philosophies. Throw in the possible conflict with Iran and the ledge gets even shakier.
Flat freight growth means fleets do not need to expand. A growing economy and high freight volumes enables them to replace old units with minimal risk. So, we are left with only replacement demand, estimated to be around 20,000 units a month. Therefore, the Class 8 market is in a holding pattern. Orders and build rates may stay locked in this range for a while. That means ironically, we are stuck in the 20,000-truck a month range in the year 2020. It could be the most stable Class 8 year ever.