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Heavy Duty Truck & Trailer Executive Summary

The Economy showed an increased rate of recovery in January. Fourth quarter GDP improved to 5.7%. Much of this was due to inventory replenishment. After adjustment real growth averaged 2.2%. Additionally in December manufacturing in the U.S. and Canada began to add jobs. For the first time in 2009 the average work week exceeded 40 hours. Overall the job situation worsened as the public sector and the non manufacturing economy shed 20,000 more jobs than manufacturing added. The Purchasing Managers index’s for both manufacturing and non manufacturing reflected overall sector expansion. The manufacturing PMI increased 3.5 points to 58.4 from December’s 54.9. This is the highest index since August 2004. The improvement was driven by new orders, up nearly 2%, production up nearly 10%, and employment up almost 6%. Thirteen of the 18 industries reporting showed growth indicating that expansion is widespread. The non manufactures index also indicated expansion with a slight improvement of .4 points to 50.5. The major drag on the index was a decline in business activity, which was down one point. Positive contributors were production up 5% and employment up 2% but still contracting.

The Conference Board’s index of economic indicators increased strongly in December. The leading economic indicators improved 1.5 points to 106.4. The major contributors were the interest rate spread and new housing permits accompanied by to a lesser extent, consumer confidence and stock prices. Eight of the ten indicators in the LEI showed improvement. The coincident indicators remained steady at 99.9 supported mostly by industrial production. The major negative remains unemployment. The lagging indicators continued to decline. The Conference Board consumer’s confidence index improved from 53.6 to 55.9. A reading in a normal economy would be 90. A major contributor is the consumer opinion of the present situation. The index rose from 20.2 to 25.0. Still many more remain pessimistic than optimistic especially about job market improvement. Housing remained in the doldrums with the sale of existing homes declining nearly 20% from November. This is due primarily to the end of the government tax credit for first time home buyers. Sales still annualized at over 5.5 million far exceeding the 4.5 million in a normal market. The average home selling price was $178,300 well below the $200,000 average in a healthy economy. There is a 7.2 month supply of existing homes for sale. New home sales declined 10.9% from November to 342,000 units. This is well below the 1,000,000 new home sales in a healthy economy. Average selling prices of $290,000 is well above the $250,000 in a healthy economy. Days supply increased from 7.8 to 8.4 months. The most positive news for housing was an increase of 11.1% for new home permits to 653,000. This may be the first time that home builders may be starting to increase production. Housing starts in December annualized at 557,000 or down 4% form November. This was mostly holiday and weather related. Completions were 768,000 down 11% from November showing a trend of attempting to dry up new inventory.

Other indicators either remained positive or indicated growth all be it from a low level. January auto sales improved nearly 6% over the prior year annualizing at a seasonally adjusted 11,500.000 units. This is still well below the 14,000.000 units in a normal market. LIBOR remained steady at 23 basis points indicating good credit flow between banks although the lending environment remains difficult.

Trucking recovery will remain at a very low level. OEM’s are predicting another down year with the class 8 build ranging between 110,000 and 140,000 units. There has been a short term increase in build rates to build out the last of the 2010 pre-emission change engines. This should end by March and no real pick up in production is expected before the fourth calendar quarter. This is supported by the decline in new truck order rates in January to 6212 units. This is the lowest order level since July 2002 when the pre-buy ended prior to the 2002 engine emission change. Fleets continue to struggle as most reported a decline in earnings or increased losses for 2009. Indications are that bankruptcies increased in the fourth quarter 2009 and are accelerating in the first quarter. Banks are forcing foreclosure because there is now a used truck market for failed fleet trucks. Additionally many struggling fleets will not be able to come up with license, tax and insurance required by April of this year. Even though freight has improved in November and December it still ended the year down 8% from 2008. That year was down 12% from 2007. Fleets still have 3% to 5% of their trucks parked as excess capacity and many have changed their replacement cycle from 3 to 4 years to 4 to 6 years. With the ready availability of 2 to 3 year old used trucks and a trend toward rebuilding and reconditioning older units, most major fleets will buy very few new units this year.

Our outlook for the economy remains positive. The improvement, however, will be very slow. There is no single or small group of factors existent that will lead a fast economic improvement that occurred in past cycles. The 92-94 upturn was lead by new technology and the “dot.com” bubble. The recovery after 9/11 was lead by housing. All of the shocks to our economy have not been fully realized. We are yet to see or understand the full effect of the commercial real estate failure, weakened European and Asian economies or our own greatly accelerating national debt. It is our opinion that we will not see significant recovery before 2011-2012.

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