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Heavy Duty Truck & Trailer Executive Summary

The Economy continued to show positive growth across several areas in May. Both the manufacturing and non manufacturing sectors continued to show strong expansion. The overall economy grew for the 13th consecutive month. The Purchasing Manager’s Manufacturing index ended at 59.7 and the Non Manufacturing index at 55.4. Any index above 50 indicates sector expansion. Of significant positive news for the first time since the recession began the Non Manufacturing Index showed positive employment growth. This is significant because 80% of employment is in the nonmanufacturing sector. Manufacturing continued to be driven by new orders, exports and inventory rebuilding. Non manufacturing was driven by business activity, inventories and order backlog. Overall GDP for the first quarter was 3.0% down from 5.6% for the 4th Quarter of 2009.

Major factors driving the economy remain mixed. Sales of new and existing homes rose in April to 6.2 million units annualized. This is significantly above the five million homes in a normal economy. Median price of an existing home sold was $173,000 well below the $200,000 price range in a normal economy. Months’ supply of existing homes was 8.5 months. Median price of a new home sold was $198,400 well below the $250,000 median price in a normal market. Months of inventory on hand fell to 5 months. Thirty-three percent of all homes sold were distressed sales. New home permits fell 11% to 606,000 while new home start were annualizing at 679,000. Both numbers would approach 1,000,000 in a normal economy. New home completions approached 769,000 annualized. This continued to add to the glut of
unsold homes. Early results from home sales for May show a 42% decline from April. This is primarily due to the end of Federal subsidies in April. Infrastructure and commercial real estate construction remains depressed and is off nearly $200 billion from the same period in 2009. The major reasons include an overbuilt commercial real estate industry and lack of state funding for infrastructural development. Construction overall remains a major drag on the economy.

Auto sales remained a bright spot annualizing at 11.7 million units in May. This is up 22% from the same period in 2009. This improvement had greatly helped NAFTA trade and freight with Canada and Mexico. Vehicle sales growth has continued for 8 months but is still well below the 14,000,000 units annualized in a normal market.

LIBOR even with the credit crisis in Europe remains stable at 35 basis points. This is well below the 75 basis points of a tightening credit market. Business borrowing has shown signs of improvement the last few months. Residential mortgage market credit requirements for home loans have also improved. Banks are approving loans with slightly riskier credit scores and at rates as low as 4.75% for a 30yr fixed mortgage.

Overall the economy in North America continues to improve but the pace is slowing. For the first time in nearly a year the Conference Board’s index of leading economic indicators declined led by a downturn in building permits and unemployment. Both the lagging and coincident continued to improve driven by industrial production and an improved lending environment. The balances between these indicators suggest continued economic improvement but a moderate pace. The major drags on the North American economy remains unemployment, the housing downturn, consumer
confidence, the European economic crisis and the political crises in the Middle East and the Korean Peninsula.

Trucking’s recovery is exceeding the rate of the overall economy and is again proving to be a leading indicator of improvement. Ton miles have improved 6% over the last six months. Equally important the number of shipments have improved over 9% according to the Cass Index. Fleets, especially full truckload, have reported generally improving conditions and the ability to gain some rate increases. To supplement their capacity fleets continue to in-service the last of their parked units and buy low mileage used trucks. They are continuing to avoid the purchase of new trucks as long as possible.

Net orders for new trucks have shown signs of improvement. Annualized order rates for new class 8 trucks reached 155,000 through May. This demonstrates that fleets may selectively begin ordering some new units. Previous annualized order rates were in the 130,000 to 140,000 range.

OEM’s are also reporting cautious improvement. First quarter parts sales were up 25% over the prior year. Dealers are reporting significantly improved used truck sales and prices. They are currently reporting a shortage of low mileage used units. All trends are leading to a stronger fourth quarter class 8 build and sales. It is our belief if current trends continue the full year build could exceed 150,000 units with strong 4th quarter production.

Overall our belief remains that the North American economy is improving but a moderate pace. The depth of the overall economic dislocation leads us to predict that full recovery may not occur before 2012-2013.

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