The Economy
showed significant strength in August with a return to
positive GNP in the first two months of the third quarter.
GNP annualized at 6% run rate for the month. Several factors
drove this improvement lead by the improvement in the ISM
Purchasing Manager’s Index for Manufacturing. The index
improved to 52.9 from 48.9 indicating a rapidly
strengthening GNP
and an expanding manufacturing sector, the first expansion
in this area in 18 months. The Conference Board’s composite
of economic indicators rose for the third month lead by
consumer confidence, new factory orders, and a growth in
manufacturer’s inventories. Consumer confidence rose to 54.1
from 47.1 in July. Although a significant improvement, it is
far from a normal index. An index of 90 is needed to reflect
a healthy economy. Both leading indicators (LEI) and
Coincident indicators (CEI) showed real strength. Lagging
indicators continued to show decline, indicating the climb
out will be long and difficult. A real recovery will not
occur until the economy quits shedding jobs. Unemployment
climbed to 9.7% and weekly unemployment claims continued to
average in the 540,000 range. Normal turnover in a healthy
economy is an average of 275,000.
The North American trucking environment remains unchanged.
Year to date freight remains off over 14% from the prior
year. Although there was a slight pick up in July it did not
offset the freight decline in June. OEM’s continue to
forecast class 8 builds in the range of 93,000-95,000 units
with only Navistar forecasting any build improvement and all
others forecasting a build decline. New truck sales are
projected in the range of 102,000-105,000 units showing
dealers continue to reduce inventory with no plans for
rebuilding with new truck orders. Overall new orders
exceeded 10,000 units but were offset with existing order
board cancellations.
Fleets continue to report excess capacity with trucks
parked. They also report that with extremely low prices
there is no market for their used trucks. Even though OEM’s
introduced the new models with their lower emission engines
and an $8,000-$12,000 price increase fleets state that they
will not buy ahead to beat the price increase. They state
that lack of freight demand, low used truck values and
difficult financing are affecting their interest in new
units.
The outlook for the truck aftermarket also remains unusually
soft. Business in this sector is off 10% year over year.
This is partially driven by fleet financial condition, lack
of operating miles, excess units that can be cannibalized
and overall reduced maintenance cycles. The aftermarket
along with new and used trucks will not pick up until
freight demand improves.
Our outlook for the next several months through mid year
2010 remains a slow but steady recovery. We expect improved
freight to drive class 8 production and sales into the
125,000 to 140,000 range with much of this improvement in
the second half of 2010. Our beliefs are driven by several
factors.
1. LIBOR.
Spreads remain in the .23 to .27 range showing credit
availability but the actual lending environment for trucking
is difficult. Used trucks require as much as 50% down
payment and banks and others are not willing to finance new
trucks leaving this financing to OEM captive finance.
2. New and existing home sales.
Although there has been much optimism about improvements
with a 7% improvement in July much of this is suspect. When
sales of Northeast condo’s are backed out of the numbers,
there was no improvement nationally. Existing home sales
annualized at 5.24 million, up 7% from June and above the
4.5 million of a healthy market. Average home sales prices
remained near $200,000 indicating most sales were in the
lower home price range. Average home prices in a healthy
market would exceed $250,000. Months supply remains at
nearly 9 months. New home completions, including condo’s,
annualized at 918,000 against annualized demand for 550,000
new homes. Permits and starts remain in balance at
approximately 580,000. These would be at 1,000,000 units in
a healthy market. Finally, significant demand has been
driven at the low price end by the Federal program of an
$8,000 tax credit for first time buyers. This program ends
in October as all sales must be closed by the end of
November.
3. Automobiles.
Sales annualized at a rate of 14.2 million units in August.
This would indicate a healthy market. Annualized sales
improved from 9.6 to 11.2 to 14.2 million over the last
three months. Almost all of this improvement is credited to
the Federal “cash for clunkers” program. Early September
numbers indicate that sales have dropped off significantly.
4.
Non-manufacturing economy.
Although the manufacturing sector has shown to be expanding
the non-manufacturing sector continues to contract. New
orders and employment continue to decline all be it at a
slower pace. Over 80% of all jobs are in this sector and it
will take a large improvement in consumer confidence and
continued growth in the manufacturing sector to turn this
economy around. Over 70% of all tuck volume is driven by
housing, autos and the non-manufacturing economy.
Overall it is our estimate that the recession is ending. It
is too early to declare victory as many things remain
fragile. Stimulus’s have helped but may be temporary. We
continue believe that the recovery will be long and slow.
