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Heavy Duty Truck & Trailer Executive Summary

Even though somewhat curtailed by weather in the U.S. and Canada, the economies of both countries continued their climb out of recession. The Institute of Supply Managementís Purchasing Managers Manufacturing and Non-Manufacturing indexes both continued to indicate both general economic and sector expansion. The manufacturing index was reported at 56.5 down 1.9% from January. This still represents the second highest index since May 2006. Of the sixteen reporting industries 11 showed growth. The positive contributors were strong new orders, production and for the first time since the downturn began employment. The non-manufacturing index moved into solid expansion with an index of 53.0 up from 50.5. The contributors were business activity up 2.6%, new orders and employment. Of the seventeen industries reporting nine showed growth.

The Conference Board Composite Economic indicators continued to increase in January. This represents the ninth consecutive month of growth for leading indicators and the first time that the coincident indicators have exceeded 100 since May of 2009. The lagging indicators continued to decline. The main drivers in both leading and coincident indicators have been manufacturing driven with increase in factory utilization, industrial production and the increased length of the work week up to 40.3 hours. The major drag continues to be unemployment- the economy shed 35,000-50,000 jobs in February, and consumer confidence. The consumer confidence index which had been improving dipped to 46 from 54. The major concern affecting consumers is jobs or lack of them and a government frozen in the healthcare debate; seemingly doing nothing to help improve the economy. A healthy growing economy would see a confidence index of near 100.
The major factors which will lead the economy out of recession are continuing to show very slow or no improvement. Lending remains difficult as banks continue to set tight credit limits and borrowers continue to reduce their requests for loans. Interest rates remain good as LIBOR remained stable at 23 basis points. Auto sales continue to improve but remain at less than 70% of what they would be in a normal economy. February sales annualized at 10.4 million units which is up from 9.1 million in February 2009. This is still well below the 14 million annualized in a healthy economy. The full year outlook remains for new car sales to annualize at 11.5 million.

New and existing home sales collapsed in February. New home sales annualized at 309,000 down 8% from January and nearly 25% below where they were last August and September. New Home Inventory increased to 9.1 months up from the high seven month range in January. Existing home sales also suffered annualizing at 4.5 million down from 6.3 million in November. Some of this decline is due to weather and some due to reduced government incentives. Existing home inventory rose to 9.4 months up from 7.2 months in the autumn. Of great concern is the continuing decline of the median price of a new or existing home. In a
normal market an existing home median price would exceed $200,000. A new home median price would exceed $250,000. February median price for existing homes was $170,000 and new homes at $234,000. These declining values make bank reserves more difficult and loans harder to obtain. Looking forward housing permits are continuing to trend up with January coming in at 621,000 compared to permits in the 575,000 range in the autumn. New housing starts annualized at 591,000 up from the 550,000 range in the autumn of 2009. Housing completions annualized at 659,000 down from 751,000 in December showing
the new inventory is coming in line with starts and permits and ending the glut of new unsold homes.

Trucking activity continued to improve in January with the ATA tonnage index increasing 3.1%. Spot freight also increased significantly over January 2009. The influential Cass Freight Index, a significant index for reading future growth or decline, indicates February and March freight could even be stronger than January. NAFTA volumes between the U.S., Canada and Mexico continue to show strength. This is positive news for carrier profitability but does little to indicate an upturn for new truck sales or OEM production. There is still excess capacity to be absorbed either from parked trucks at strong fleets and failing carriers who continue to operate. This will take most of 2010 to settle out. We expect a significant increase in bankruptcies in March and April as financially distressed carriers must license their trucks and pay taxes. Banks are also becoming more aggressive forcing bankruptcies with the strengthening used truck market. Our outlook for trucking is continued gradual improvement in freight but no real turnaround in new class 8 sales until the fourth quarter of 2010. There are just too many 2006-2007 used trucks coming available at good prices. Additionally the $8,500-$10,000 January price increase in a new class 8 truck for emission changed engines will delay purchases until fleets desperately need new equipment.

Overall the economy continues to improve but slowly. It is our belief that the worst is over but there will be no rapid turnaround. The lack of focus on the economy in Washington D.C., the deep rooted financial issues in housing and automotive, and lack of consumer confidence will continue to be major drags on the economy. We do believe that now is the time to implement actions to take advantage of the economic conditions expected in 2011 and 2012.


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