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Heavy Duty Truck & Trailer Executive Summary

The Economy continued its slow improvement in December. Both the PMI manufacturing and non manufacturing indexes showed expansion. The manufacturing index ended at 55.9 up 2.3 points from November. The major contributors were new orders up 8% from the prior month, production up 2 points and the average work week
exceeding 40 hours for the first time in over a year. The improvement of the PMI non-manufacturing index to 50.1 was mostly driven by inventory growth. Of concern were new orders which were down over 3 percentage points. Any number above 50 shows expansion in either or both sectors.

The Conference Board’s composite of economic indicators improved again in December. The leading economic indicators have increased 4.7% through the six months ending November. Most of this improvement was driven by the average work week, stock market gains and the money supply. Consumer confidence and an economy continuing to shed jobs remain a major drag on more rapid economic improvement. The coincident indicators turned positive in
November also indicating continuing growth in the economy. Lagging indicators continued to decline.

Although we continue to see economic improvement there is nothing that indicates a rapid rate of growth. The economy continued to shed jobs with a loss of over 100,000 jobs in December in the U.S. and Canada. The outlook from most economists is that there will be some job growth in 2010 but it will be modest with the year ending with an unemployment level of 8.5%-9.0%.

Housing continues to struggle. Although existing home sales in November annualized at almost 6.5 million units, prices continued to fall. Much of the increase in sales has been attributed to federally sponsored buyer’s incentives which had to be closed by November 30th. Average prices fell from $187,000 to $172,000 putting further stress on home equity and bank mortgage reserves. New home sales fell to 355,000 units annually down 11% from October and well below the million units in a healthy economy. New homes have a 7.9 months supply and existing homes are at 7.2. New housing stars and permits improved to 574,000 starts and 584,000 permits. These would both exceed 1,000,000 in a healthy economy. New home completions annualized at 810,000 continuing to add to the glut of new homes. The state of housing is a major drag on the economy. It will have to see a major turnaround if the economy is to improve.

Other key indicators of more rapid improvement are auto sales and consumer confidence. Auto sales though improving in December ended the year at 10.4 million units. A healthy economy would see sales exceed 14 million units. The 2010 outlook is for sales to exceed 11.5 million vehicles still well below a normal market. Consumer confidence still remains low. An index reading in a normal growing economy would be 90 plus. Currently the index is at 52.9, up slightly from November. The major factor impacting the index is consumer assessment of the current situation. It is the lowest in 26 years. LIBOR remains stable at .23. Any reading below 75 basis points indicates lending money between banks stimulating credit is strong. Unfortunately credit remains difficult in almost every sector of the economy as credit standards and rates remain very high.

The outlook for trucking in general remains a slow and erratic return to normalcy. Freight improved for trucking in November by about 2.5%. This just about covered the equivalent decline in October. The good news is that the trend line for freight improvement is up after a nearly a 12% decline in 2009. Recently all modes of transportation including trucking have been able to improve pricing in the 1% to 2% range. Truck operators remain cautious expecting another round of bankruptcies as permits, taxes and licenses come due in April. Truck builders continue a pessimistic outlook. After a pick up of orders in October to buy up the last of the pre 2010 emission engines, orders dropped back to approximately 10,000 units annualizing at a 120,000 to 125,000 order rate. Most OEM’s are projecting the class 8 build to be in the range of 110,000 to 140,000 most of this loaded into the second half of 2010. Several factors support this outlook for OEM build. Fleets report that they have nearly 10% of their trucks parked. Used truck values remain depressed and new truck prices with the new 2010 emission engines is expected to increase $6,000 to $10,000. Given these issues and the economic outlook discussed earlier we see nothing that would suggest a stronger truck market in 2010. Our overall outlook is that the economy is very slowly improving but that 2010 in the trucking industry will be only marginally better that 2009.

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