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Heavy Duty Truck & Trailer Executive Summary

The Economy in the U.S. and Canada continued to contract in January with unemployment reaching 7.6% in the U.S. Layoffs occurred all across the economy accept in healthcare and food production. These segments continued to show strength. The ISM Purchasing Managerís Index for manufacturing improved over December by 2.7 percentage points. At 35.6 it still shows a significant contraction with an index of 50 being normal. The non-manufacturing index improved to 42.9 a 2.8 percent improvement over December. This also shows a contracting economy with 50 being normal.

The Conference Boardís index of Leading Economic Indicators (LEI) actually turned positive in January. This is a false improvement as almost all the improvement is due to the excess liquidity that the Federal Reserve and the U.S. Treasury dumped into the economy. The coincident indicators and lagging indicators remain significantly negative.
The major negative factors that continue to impact the economy are consumer confidence, currently at a record low, and credit. Although the Fed and Treasury have basically strengthened bank liquidity, lenders remain ultraconservative. Additionally, high quality borrowers to whom the banks would normally lend are not borrowing. The savings rate in the country has nearly doubled over the last six months as consumers have become increasingly conservative.

The trucking industry has followed the decline in the economy. OEM truck production is off nearly 70% since the peak in 2006. OEMís have adjusted accordingly to demand. Paccar has basically shuttered the Kenworth Renton plant, greatly curtailed Kenworth Mexico and the Kenworth Chillicothe facility. This week they announced the continued closing of Peterbilt Madison, which is on strike, until 2010. Peterbilt Denton will pick up the slack but has also been significantly reduced in build rate. Freightliner has also taken aggressive action. Mt. Holly and Portland operations are all but idled and Cleveland N.C. has been reduced from 2700 employees to 700. Freightliner is in the process of moving all West Coast production to Mexico. Volvo has reduced production at their main Virginia production plant to 50 units per day from 70. International is weighing its options. It recently announced production cuts at its Chatham, Ont. and Springfield Ohio plants.

The truck supply base reflects the actions of the OEMís with most reporting production off 50% or more since 2007. The large suppliers remain healthy but many in the molded plastic and metal stamping and fabrication areaís are in financial distress.
Larger fleets and LTL carriers remain strong as many have significantly reduced their fleet size to reflect demand. Only YRC of the major LTL carriers reports financial problems. Reduced fuel costs and driver turnover have greatly benefitted truck operators.

The outlook for 2009 remains unclear. Key indicators like the LIBOR/federal fund rate spread remains near 20 basis points. Anything below 75 basis points reflects a healthy lending environment. Oil remains below $50 per barrel. This results in low energy costs which help the consumer. Housing starts remain at an all time low and auto sales are currently at a rate of less than 10 million units annually. Housing starts need to be at 1.4 million annualized and existing and new home sales need to exceed 4.5 million annually. Currently home sales are annualizing at 4.0 million units and housing starts are at 1,000,000 annualized. Auto sales need to exceed 15 million units annually to result in a healthy market. The key to the economy turning rests with the stimulus package currently moving through Congress. A real impact will not be felt until 6 months after this package is implemented. Our best estimate is that their will be no real improvement until the 4th Quarter of 2009.


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