Ake’s Take: The 2019 Class 8 Market Was A Thriller

By | December 5, 2019

 

You could make a movie out of the dramatic Class 8 market in 2019. But it would be a terrible movie. And a movie we have watched before.

It Was the Best of Times

The movie begins with great joy in the industry. The freight surge in 2018 creates unprecedented demand for trucks (not counting the emissions pre-buy of 2006). OEMs are cranking out trucks as fast as possible. Suppliers are keeping up after disruptions in 2018. Dealers are finally getting stocks, and they are flying out the door. Fleets are putting the trucks into service, and profits rise. Factory workers, truck drivers, investors, and every industry stakeholder are happy, happy, happy.

But Then Things Change

By the end of the year, freight growth stalls. Fleets have enough trucks to handle the available freight. Production at the OEMs slows. There are layoffs at both the OEMs and suppliers. Trucker wages, especially owner-operators, fall. The weaker performing fleets go bankrupt. Fleets pull back on orders for next year due to the high degree of economic, trade, and political uncertainty. The industry people are all sad, and nervous about the future as the movie comes to a close at the end of December.

And We’ve Seen This Movie Before

The Class 8 truck market is one of the most cyclical industries in the entire economy. And while this downturn is similar to previous ones, it does have some unique features. The 2019 FTR forecast was for a robust first half of the year, a stepdown in Q3, and a further erosion in Q4.

The build in the first half of 2019 was even higher than our lofty numbers. I realized at the FTR June forecast meeting in mid-May, that something was amiss. We had the market softening in Q3, but there were no signs that production was slowing down much at all, a short six weeks prior to July. And Q3 did ease, a mere 3%, but at almost 93,000 units, it is still one of the top quarters in history.

But the inklings about a Q4 drop started in July. Fleet confidence started to fade as freight growth slowed. Spot rates dipped, as well as profits. OEM backlogs were plummeting due to lower orders and elevated cancellations, as fleets pulled orders out that they had placed many months ago. Supply of trucks was finally catching up with demand, which always happens, but this time it was more sudden. There was talk that OEMs were considering drastic Q4 cuts, even as Q3 production remained robust. I wondered aloud during an August meeting, “What are the OEMs going to do? Build like crazy for nine months and then just shut the whole thing down?” It sounded crazy when I said it, but it doesn’t sound crazy right now.

The Roller Coaster Was Wild This Time

We’ve experienced wild demand swings in the industry before, but nothing like this time. For example, in the last 12 months (December 2018 – November 2019) Class 8 orders have equaled 180,400. In the previous 12- month period (December 2017 – November 2018) orders were 513,500. And of course, the economic shock, the extreme outside factor, the black swan which cause this precipitous crater was, was, …. Oh yeah, there wasn’t one. This is just the cyclical nature of the Class 8 market.

Production is expected to drop around 30% from Q3 to Q4. Once again, the big economic hit is …… none. Although there are enough economic and environmental pressures present to increase uncertainty entering 2020:

          GDP growth falling to 0.9% in Q1.

          Freight growth of only around 0.5% for most of 2020

          Manufacturing growth in decline for four straight months, probably headed for a “manufacturing recession” (six months or more under 50 ISM), similar to 2015-16.

          Uncertainty due to trade wars, tariffs, USMCA, etc.

          Political turmoil in the news daily.

          The upcoming 2020 election which will slow business investment as the day approaches. The expected contrast in business philosophy between the candidates will amplify this effect.

Recession Talk?

Several months ago, there were many economists raising the possibility of a recession in 2020. There wasn’t much support for these forecasts and that talk died down quickly, with the general consensus being no recession is imminent.

However, I think there is a better recession argument to be made now based on the factors listed above. Also, the Class 8 market is a leading indicator, and the order numbers for October and November do signal possible trouble. I don’t think a recession is coming in 2020, but the conditions are similar to 2016 when economic growth nearly stalled out. It would not take much of a bigger dip or an outside force to push the economy under water for a short period.

Based on October and November orders, it appears Q1 production will start off weak. If manufacturing begins to recover in February, it will stabilize the Class 8 market and orders will improve. Hopefully, the 2020 version of the movie is not a horror film.

 

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About Don Ake

Don has more than 20 years of experience in the transportation industry, including 16 years with industry supplier Hendrickson International. Don has a very strong forecasting and market analysis background. While at Hendrickson Don developed forecasting models, methods and processes to accurately forecast Truck and Trailer builds and product demand. Don wrote an industry economic newsletter and gained a reputation as a top industry analyst. His industry supplier background provides a "customer perspective" now that he is with FTR.