A new year is finally upon us - a time for renewed vigor and optimism. Economic growth has returned, and the Great Recession has finally been squelched. Financial calamity was averted, and the once-frozen capital markets have begun the slow process of thawing out, according to FTR Associates (for the full article, see the January/February issue of Work Truck).
So, optimism abounds in the fleet managers' office, right? Probably not. The list of issues in front of you is an ever-growing concern, and the medium-duty new-vehicle markets are highlighting adaptability and can give us an indication of tomorrow's conditions.
The markets are a juxtaposition of the good, the bad, and the ugly - and will remain so throughout most of 2010. The good news: a strong sales recovery will eventually arrive. The bad news: a weak economic recovery is taking hold. The ugly: 2010 sales will barely be better than the dismal 2009.
The Good: The Difference a Year Makes
What a difference a year makes. This time last year, we were all busy trying to make heads or tails of the whirlwind happening around us. While recent economic activity might not be particularly robust, it is significantly better than what we experienced at the end of 2008 and beginning of 2009. Establishing a firm footing is the basis for any economic recovery to take hold, and economic growth creates the ability to finally begin the process of updating fleets and growing operations.
Housing, a strong market for medium-duty vehicles, has hit bottom and finally begun growing again. It is at a much smaller level than the historical average (about 1.5 million housing starts annually), but growth will suffice as good news right now.
In September 2009, housing starts were at 0.6 million units annualized, up 24 percent from its trough earlier that May, and had risen in four of the previous five months. Housing starts were expected to rise to nearly 0.9 million units by the end of 2009. Housing is likely to be on a bumpy ride through 2010, but all indications are for slow and steady growth to persist.
The best news is the medium-duty market may approach the peak levels seen during the last upturn within the next five years. It took nearly 20 years to rebound that strongly after the collapse of the medium-duty (MD) market during the 1970s and 1980s. Pent-up demand and a shift in buying decisions will help fuel a strong recovery.
A strong engine for growth is looking to be the lighter range of vehicles - Classes 4 and 5 GVWR vehicles. This market experienced more growth than the heavier Classes 6 and 7 vehicles after the 2001 recession (nearly 35-percent stronger) and has seen a slightly smaller decline during the ensuing 2009 downturn. This market is much more attuned to the needs of a fuel-conscious consumer. Fuel costs have come down significantly over the past year, but the focus of many fleets has not waivered in mitigating its impact.
The Bad: Sales Lowest in 20 Years
Even though the economy seems on the mend, the list of bad news remains lengthy and is only very slowly dissipating: truck sales at historic lows, unemployment still rising, municipalities in near-dire straits, emissions requirements tightening up.
After peaking in late 2006 (just prior to the last diesel emission mandate), truck sales have been on a long and steep downward path - down to just a quarter of peak sales by the middle of 2009. The only good news seems the declines have finally stopped, hardly a cheering moment. Sales haven't been this low in nearly 20 years, since the 1991 recession.
The heavier Classes 6 and 7 vehicles have taken the brunt of the attack, falling from a peak level of nearly 13,000 monthly sales in late 2006 to just over 2,500 sales in May 2009. At the same time, this market lost nearly 20 percentage points of market share - dropping from nearly 70 percent of MD truck sales in 2000 to basically 50 percent today. The lighter Classes 4 and 5 trucks have also been hit hard, but they achieved a strong level of market share during the middle and latter portions of this decade, which they have not given up.
Though there are hundreds of different vehicle types and thousands of different applications, the main economic drivers of MD truck purchases come down to just a few key components: business investment, construction, and government.
A very strong relationship exists between what occurs in the business investment arena and the outlook for MD sales. Specifically, we look at business investment in "other equipment." This view does not count investments in buildings and computers, so we are just looking at all the other "stuff" purchased to run a business. This approach makes sense because part of that "other stuff" is fleet costs: both new-vehicle purchases and maintenance costs.
Unfortunately, the outlook in this arena is not particularly bright for the next few years. After a drop of nearly 30 percent in 2009, we look for investment to remain relatively flat in 2010 and to grow only 10 percent in 2011. This is a rather timid rebound from its steep decline over the last two years.
As noted earlier, the housing market is finally on the mend. Too bad this isn't playing out on the commercial side of the construction industry. While we anticipate a slow-growing housing market, we likewise are expecting declining investment in business construction - too many vacant buildings will exert a drag on this market through most of 2010. A rebound should take hold in 2011, but a modest one at that.
The one area that doesn't look as if any type of improvement is in the cards is the state and local budget scene. After strong surpluses during the 1990s, many states have been operating in the red for much of the past decade. With revenues down significantly and unemployment continuing to rise, one wouldn't expect to see municipal fleets heavy into the new-vehicle markets until well after 2010, perhaps staying away for most of 2011 as well.
While many companies went into the recession with a significant amount of retained earnings, this was not the case for many operators of MD fleets, specifically in the housing and construction markets. The two-year decline that preceded the steep downturn in 2008 effectively wiped out most of that surplus. This makes it hard to come up with the financing needed simply to maintain aging fleets, let alone work on replacement cycles or fleet growth.
Another item helping muddy any manager's outlook is the loss of a significant producer in the marketplace - GM's shutdown of its TopKick and Kodiak lines last July. Even if you weren't a purchaser of the GM or Isuzu trucks produced at the Flint Assembly plant, a reduction of more than 10 percent of the vehicle production capacity has an impact throughout the marketplace. Luckily, the low production outlook through 2011 provides enough time for former GM purchasers to get a good handle on their options going forward.
Another market factor is the 2010 diesel emission requirements, the consequences of which are more hardware, more software, and more expense.
The Ugly: Sidelined & Underutilized Units Big Factors
FTR Associates estimates nearly one in four vehicles is either parked on the sideline or severely underutilized. This reality has numerous impacts on the marketplace. First is the huge hit to resale values. Used-vehicle prices are way down and unlikely to rebound strongly during 2010. This puts a big dent into the need for new vehicles in the near-term - we have a huge supply of cheap, late-model trucks.
Second is the fact that since vehicles are underutilized and budgets are taking a hit, replacement cycles are being uniformly lengthened.
With a glut of used vehicles and a longer replacement cycle, the outlook for new-vehicle sales is looking near dismal for 2010. After falling to somewhere near 85,000 unit sales in 2009, we expect 2010 will see only a small rebound to 95,000. Keep in mind the last downturn in 2001-2002 didn't have a single year that went below 150,000 unit sales. Even the strong growth we expect in 2011, to 150,000 unit sales, just gets us back to those levels.
While the outlook for 2011 and beyond is for a stronger rebound to finally take shape, some very dark clouds remain on the horizon. First and foremost is the tepid recovery in business investment. Unless businesses start feeling confident in a consumer rebound by early 2011, the prognosis for improvement in vehicle demand quickly diminishes - it could reduce our 2013 outlook by nearly 50,000 units.
When it comes to the consumer, the biggest worry remains the extremely high unemployment rate, topping 10 percent in October 2009 for the first time in nearly 30 years. Accompanying the unemployment rate is the fact worker hours have fallen more during this recession than any other since 1973, down 8.1 percent during the first 17 months of the recession versus the 1981 recession in which hours declined only 6.0 percent. Worker hours must rise first before job gains can start to make any headwind into the high unemployment rate.
Market Outlook
A simple equation highlights our thoughts:
Excess Capacity + Weak Economic
Recovery = Slow Sales Recovery
Through 2011.
Additionally: A new year is finally upon us — a time for renewed vigor and optimism. Economic growth has returned, and the Great Recession has finally been squelched. Financial calamity was averted, and the once-frozen capital markets have begun the slow process of thawing out.
So, optimism abounds in the fleet managers’ office, right? Probably not. The list of issues in front of you is an ever-growing concern, and the medium-duty new-vehicle markets are highlighting adaptability and can give us an indication of tomorrow’s conditions.
The markets are a juxtaposition of the good, the bad, and the ugly — and will remain so throughout most of 2010. The good news: a strong sales recovery will eventually arrive. The bad news: a weak economic recovery is taking hold. The ugly: 2010 sales will barely be better than the dismal 2009.
The Good: The Difference a Year Makes
What a difference a year makes. This time last year, we were all busy trying to make heads or tails of the whirlwind happening around us. While recent economic activity might not be particularly robust, it is significantly better than what we experienced at the end of 2008 and beginning of 2009. Establishing a firm footing is the basis for any economic recovery to take hold, and economic growth creates the ability to finally begin the process of updating fleets and growing operations.
Housing, a strong market for medium-duty vehicles, has hit bottom and finally begun growing again. It is at a much smaller level than the historical average (about 1.5 million housing starts annually), but growth will suffice as good news right now.
In September 2009, housing starts were at 0.6 million units annualized, up 24 percent from its trough earlier that May, and had risen in four of the previous five months. Housing starts were expected to rise to nearly 0.9 million units by the end of 2009. Housing is likely to be on a bumpy ride through 2010, but all indications are for slow and steady growth to persist. (Chart 1.)
The best news is the medium-duty market may approach the peak levels seen during the last upturn within the next five years. It took nearly 20 years to rebound that strongly after the collapse of the medium-duty (MD) market during the 1970s and 1980s. Pent-up demand and a shift in buying decisions will help fuel a strong recovery.
A strong engine for growth is looking to be the lighter range of vehicles — Classes 4 and 5 GVWR vehicles. This market experienced more growth than the heavier Classes 6 and 7 vehicles after the 2001 recession (nearly 35-percent stronger) and has seen a slightly smaller decline during the ensuing 2009 downturn. This market is much more attuned to the needs of a fuel-conscious consumer. Fuel costs have come down significantly over the past year, but the focus of many fleets has not waivered in mitigating its impact.
The Bad: Sales Lowest
in 20 Years
Even though the economy seems on the mend, the list of bad news remains lengthy and is only very slowly dissipating: truck sales at historic lows, unemployment still rising, municipalities in near-dire straits, emissions requirements tightening up.
After peaking in late 2006 (just prior to the last diesel emission mandate), truck sales have been on a long and steep downward path — down to just a quarter of peak sales by the middle of 2009. The only good news seems the declines have finally stopped, hardly a cheering moment. Sales haven’t been this low in nearly 20 years, since the 1991 recession. (Chart 2.)
The heavier Classes 6 and 7 vehicles have taken the brunt of the attack, falling from a peak level of nearly 13,000 monthly sales in late 2006 to just over 2,500 sales in May 2009. At the same time, this market lost nearly 20 percentage points of market share — dropping from nearly 70 percent of MD truck sales in 2000 to basically 50 percent today. The lighter Classes 4 and 5 trucks have also been hit hard, but they achieved a strong level of market share during the middle and latter portions of this decade, which they have not given up.
Though there are hundreds of different vehicle types and thousands of different applications, the main economic drivers of MD truck purchases come down to just a few key components: business investment, construction, and government.
A very strong relationship exists between what occurs in the business investment arena and the outlook for MD sales. Specifically, we look at business investment in “other equipment.” This view does not count investments in buildings and computers, so we are just looking at all the other “stuff” purchased to run a business. This approach makes sense because part of that “other stuff” is fleet costs: both new-vehicle purchases and maintenance costs.
Unfortunately, the outlook in this arena is not particularly bright for the next few years. After a drop of nearly 30 percent in 2009, we look for investment to remain relatively flat in 2010 and to grow only 10 percent in 2011. This is a rather timid rebound from its steep decline over the last two years.
As noted earlier, the housing market is finally on the mend. Too bad this isn’t playing out on the commercial side of the construction industry. While we anticipate a slow-growing housing market, we likewise are expecting declining investment in business construction — too many vacant buildings will exert a drag on this market through most of 2010. A rebound should take hold in 2011, but a modest one at that.
The one area that doesn’t look as if any type of improvement is in the cards is the state and local budget scene. After strong surpluses during the 1990s, many states have been operating in the red for much of the past decade. With revenues down significantly and unemployment continuing to rise, one wouldn’t expect to see municipal fleets heavy into the new-vehicle markets until well after 2010, perhaps staying away for most of 2011 as well.
While many companies went into the recession with a significant amount of retained earnings, this was not the case for many operators of MD fleets, specifically in the housing and construction markets. The two-year decline that preceded the steep downturn in 2008 effectively wiped out most of that surplus. This makes it hard to come up with the financing needed simply to maintain aging fleets, let alone work on replacement cycles or fleet growth.
Another item helping muddy any manager’s outlook is the loss of a significant producer in the marketplace — GM’s shutdown of its TopKick and Kodiak lines last July. Even if you weren’t a purchaser of the GM or Isuzu trucks produced at the Flint Assembly plant, a reduction of more than 10 percent of the vehicle production capacity has an impact throughout the marketplace. Luckily, the low production outlook through 2011 provides enough time for former GM purchasers to get a good handle on their options going forward.
Another market factor is the 2010 diesel emission requirements, the consequences of which are more hardware, more software, and more expense.
The Ugly: Sidelined & Underutilized Units Big Factors
FTR Associates estimates nearly one in four vehicles is either parked on the sideline or severely underutilized. This reality has numerous impacts on the marketplace. First is the huge hit to resale values. Used-vehicle prices are way down and unlikely to rebound strongly during 2010. This puts a big dent into the need for new vehicles in the near-term — we have a huge supply of cheap, late-model trucks.
Second is the fact that since vehicles are underutilized and budgets are taking a hit, replacement cycles are being uniformly lengthened.
With a glut of used vehicles and a longer replacement cycle, the outlook for new-vehicle sales is looking near dismal for 2010. After falling to somewhere near 85,000 unit sales in 2009, we expect 2010 will see only a small rebound to 95,000. Keep in mind the last downturn in 2001-2002 didn’t have a single year that went below 150,000 unit sales. Even the strong growth we expect in 2011, to 150,000 unit sales, just gets us back to those levels. (Chart 4.)
While the outlook for 2011 and beyond is for a stronger rebound to finally take shape, some very dark clouds remain on the horizon. First and foremost is the tepid recovery in business investment. Unless businesses start feeling confident in a consumer rebound by early 2011, the prognosis for improvement in vehicle demand quickly diminishes — it could reduce our 2013 outlook by nearly 50,000 units.
When it comes to the consumer, the biggest worry remains the extremely high unemployment rate, topping 10 percent in October 2009 for the first time in nearly 30 years. Accompanying the unemployment rate is the fact worker hours have fallen more during this recession than any other since 1973, down 8.1 percent during the first 17 months of the recession versus the 1981 recession in which hours declined only 6.0 percent. Worker hours must rise first before job gains can start to make any headwind into the high unemployment rate.
Market Outlook
A simple equation highlights our thoughts:
Excess Capacity + Weak Economic Recovery = Slow Sales Recovery
Through 2011.
Additionally:
Pent-up Demand = Stronger Sales Recovery starting in 2012.
Until businesses feel much more confident consumers have ended their spendthrift ways, fleet budgets will be tight — leading to longer replacement cycles and smaller fleets. Replacement demand will always be there, but anything beyond necessity will be heavily scrutinized for the next year or two.
Ahhh…a new year. Definitely a time to look forward, not back.
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