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Heavy Duty Truck & Trailer Executive Summary

The U.S. and Canadian economies continued to improve in March. Both the manufacturing and non-manufacturing sectors showed growth. The manufacturing sector showed growth for the eleventh consecutive month reaching a level of 59.6. This is a 3.1 point improvement over February and the highest level since 2004. The non-manufacturing economy grew for the third straight month reaching 55.4 up 2.4 points over February levels. The major factors driving both indexes were new orders, business activity and order backlog.

Employment improvement also contributed but not significantly. Positive signs included businesses’ willingness to increase inventories and fill open positions. The good news of these growing indexes does not suggest a rapidly improving economy. Although it appears that the economy added 125,000 new jobs, analysis shows that only 30,000 were permanent. Nearly 95,000 were jobs associated with taking the census and temporary workers. Companies are adding few full time permanent positions and unemployment remains at 9.7%.

The other major factors needed to drive the economy, housing and auto sales, continue to be stimulus and incentive driven showing little sustainability. New home sales continue to fall. February sales annualized at 308,000 down slightly from January but down almost 13% from the same period in 2009. The median price of a new home sold was $212,000 well below the $250,000 of a normal market. At current inventory levels there is a 9.2 month supply. Existing home sales continued to stay strong annualizing at 5.2 million units. Sales are being driven by Government incentives and the high availability of financially distressed homes. Nearly 35% of all home sales continue to be short sale or foreclosed housing. The median price of an existing home came in at $165,000 well below the $200,000 in a normal market. At current inventory levels there is an 8.6 month supply. Government agencies estimate there may be more than 5,000,000 homes still to go through foreclosure or short sale. This presupposes any short term turnaround for housing. New home permits and starts annualized at 612,000 and 575,000 respectively. At 700,000 units annualized, home completions continued to show that new home starts and completions are coming into balance. All of these numbers would annualize at 1,000,000 units in a normal economy.

The Conference Boards’ leading and coincident indicators continued to improve but at less than half the rate of the 4th quarter of 2009. Improving manufacturing production, inventories, backlogs and the high money supply continue to drive the improvement. Major drags remain consumer confidence, the lending environment and unemployment. Consumer confidence improved 4% to an index of 50. This is still well below the index level of 90 that is evident in a strong economy. Consumers continue to believe that the economy is bad and may worsen. Unemployment is still at 9.7% and shows little sign of being less than 9.0% by the end of the year. Most importantly the non-manufacturing sector continues to shed employees but at slower pace. The lending environment remains difficult. LIBOR remains below 30 basis points, but only major corporations can get reasonably priced debt either through the bond market or direct borrowing from lenders.

The North American trucking industry continues to show improvement on the freight side. Both the ATA and the Cass index showed freight growth in February of 2.5% to 3.0%. Some shippers have begun to see problems moving freight in the broker market, especially in the flat bed carriage sector. Many fleets begin to believe that freight rates may begin to move up in the second half. Capacity is rapidly moving in line with demand as trucks parked are moving “off the fence” and returning to service after repair. Some fleets are bidding higher prices for high quality used trucks. Although demand is increasing most fleets continue to predict that they will buy few if any new trucks this year. OEM’s and fleets estimate that the market for new built trucks will be between 120,000 to 130,000 units. OEM’s report monthly orders were approximately 10,000 vehicles in the first quarter. Many report they are adjusting build rates down now that they have built all of their pre-2010 emission change trucks. Most report a strong pick up in parts and service sales, some more than 20%. OEM’s overall outlook is for build rates in North America to aggregate at 10,000 units per month through December.

Overall the North American economy is showing improvement. The changes are positive but slow. Housing, autos and lending must all see significant improvement before we will see real job creation and consumer confidence improvement. Both of these elements need to improve before we will see a strong outlook and sustained economic growth.


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