The Trump bump

From the January 2018 issue.

The unexpected election of on the business front, however, the POTUS’ first year in office has been a success, with a rejuvenated economy boosting freight growth and commercial vehicle sales.

Although only few new laws have been passed during his first year as President of the United States (POTUS), Donald Trump has been able to influence the largest economy in the world in other ways. His impact on trucking and equipment purchases – which are partially symbolic for the economy as a whole – has been significant, for example.

Economy
Following the November 2016 election, consumer and business confidence indexes in North America spiked. Many of these measurements hit levels not achieved in many years, some even reached all-time highs. Executives and citizens alike clearly expected a “businessman president” to be able to improve the economy.

Even though business confidence surveys have traditionally been poor economic indicators as they measure attitude, not action, economists were not able to dismiss this shift as a short-term emotional response – after all, one of the key factors stifling the US economic recovery prior to Trump’s election was deeply emotional in nature. It was fear.

Many businesses barely survived the Great Recession and watched competitors go bankrupt on a daily basis, causing them to be extremely cautious about investing, even years after the Recession ended. That’s why the increase in confidence did make a difference, even though it took over half a year to materialise. Although down from peak levels, most of the confidence indexes have remained at elevated levels until today.

Politics
The US Government is in a highly dysfunctional state: Although the Republicans hold the Senate, the House of Representatives and the Presidency, they have not been able to pass any important legislation. ‘Government gridlocks’ like this, where conditions are stable and the Government idle, traditionally create a favourable business environment, leading to increased investment, which in turn creates jobs and economic growth.
Manufacturing
US manufacturing growth also accelerated around mid-year. That development was not primarily because of Trump, though, but part of the ‘normal’ business cycle. Manufacturing activity slumped late in 2016, impacting the freight and commercial equipment markets, and started to cycle back up early in 2017. It’s safe to say it was still boosted by the spike of confidence and regulatory rollback coming with the Trump Presidency, however.

Consumerism
The US consumer sector has been growing all year, fuelled by a low unemployment rate of just 4.1 per cent (in the US, full employment is considered four per cent due to transition factors). Although there are factors skewing this measurement, there are many more people working than several years ago. Wages have not risen as fast as expected and healthcare continues to eat up a chunk of disposable income, but consumers are spending at a healthy rate.

Trucking
In March 2017, just two months after Trump’s inauguration, the President of the American Trucking Associations (ATA), ten leading industry executives, and 12 truck drivers were Trump’s guests at the White House to discuss a range of issues affecting trucking. They brought along a high-tech truck/trailer combination in which the President was photographed sitting in the driver’s seat – a clear signal of his willingness to create a “friendlier” business climate for the industry. The previous administration was perceived to view trucks as something that polluted the air and endangered the highways, and thus heavily regulated the industry.

Trump’s pro-business attitude coincided with a growth in freight volumes sparked by the recovering economy. Freight growth was 2.9 per cent in Q1’17 and has steadily accelerated throughout the year. Growth is forecast at an impressive 4.6 per cent in Q4’17, which would bring the total year to 3.6 per cent.

It’s not all positive for US trucking, though. After years of slow, manageable growth, fleets now struggle to increase capacity. Freight Transportation Research (FTR) estimates Class 8 (prime mover, ed.) truck utilisation at 95 per cent, much higher than the historical average of 88 per cent.

Capacity utilisation is expected to tighten even more over 2018, reaching as high as 97 per cent. This is already causing problems for shippers, who have problems finding trucks to make on-time deliveries.

Freight Rates
Freight rates have risen steadily as capacity tightened. Loads and rates in the ‘spot market’ (non-contract) have spiked as shippers seek carriers outside their normal channels to prevent late deliveries. Contract freight rates have not increased very much, but will when the new contracts are negotiated.

Regulations
The previous US administration enacted and proposed numerous regulations upon business entities and industries, including trucking; so much so that it was perceived as an anti-business environment. Trump campaigned strongly against “over-regulation” and, in the first six months as President, cut or delayed over 800 regulations.

Regulations regarding the mandated use of aerodynamic equipment such as tails and skirts to improve fuel efficiency (GHG2) have been put on hold, for example, and are expected to be repealed altogether. Other proposed regulations on trucking have been put under review, too.

One measure the Trump administration did not revoke is the requirement for Electronic Log Devices (ELDs), which became effective in December. This is because ELDs are a safety tool to ensure drivers follow the already established Hours-of-Service regulations. There has been an extension of when the ELD mandate will be enforced, however.
Most large fleets have already been using ELDs already, proving that ELD implementation can reduce a fleet’s productivity up to 10 per cent in the short-term and then around two to four per cent after that.

Trailer Sales
Despite intense debate about the trailer-specific GHG2 regulations in 2017, the North American commercial trailer market had another fantastic year. Production for 2017 is expected to come in at 315,000, a two per cent increase from 2016. The trailer market has been uncharacteristically running ahead of the heavy truck market since the third quarter of 2016, likely because fleets were behind in their replacement cycles after the Great Recession.
Many dry vans, for example, were parked for an extended period as the slow economic recovery continued. This disrupted trade cycled well into 2017. What’s more, fleets are buying more dry vans to compensate for reduced productivity due to regulations and the driver shortage.

The use of drop-and-hook methods – dropping off one trailer and hooking up a different one – has become more commonplace, too. Refrigerated vans and flatbeds also are increasingly doing this, leading to growing sales.

Refrigerated vans, meanwhile, have benefitted from a large increase of temperature-controlled freight such as pharmaceuticals, medicines and chemical-sensitive products. Consumer preferences for both fresh and frozen foods have also created more freight moves.
Flatbed or platform trailers started a strong comeback in 2017, too – mainly due to the Trump-fuelled growth of the industrial sector and regenerating energy markets.

Crunch Time
From an economic perspective, next year should be ‘more of the same’ for the US commercial vehicle market. Gross Domestic Product (GDP) is forecast to grow at 2.9 per cent, and it could go even higher if tax reform is accomplished. Freight will continue to grow, too, just not at the robust pace of the last two quarters. Overall, this should keep equipment demand vibrant throughout 2018. 

The big concern, however, is ongoing capacity constraints. Freight growth and reduced productivity mean more trucks and trailers will be needed, but combined with a severe driver shortage (see breakout box), they could create a full-fledged industry crisis early in 2018. It is difficult to predict the impact or the industry response to this unprecedented circumstance, but shipping disruptions and maybe even short-term drops in equipment purchases are likely.

Fast Fact
Heavy-duty truck sales in the US weakened at the end of 2016, and some forecasters, though not Freight Transportation Research (FTR), expected the market to suffer a serious correction. However, after the uncertainty over the presidential elections faded and the surge in economic confidence occurred, sales came out of their tailspin and began a steady, moderate recovery. Overall, 2017 production will be decent (248,000 North America) with the second half build much higher than the first. The 2018 forecast is for 300,000, as the 2017 momentum is expected to roll into 2018.

Fast Fact
An increase in freight volumes, combined with a loss of productivity and the retirement of aging drivers, has created a high demand for new truck drivers in the US. However, a tight labour market and the undesirous nature of the job threatens to push the driver shortage to crisis levels in 2018. Some fleets already have brand-new trucks parked because they can’t find drivers for them, according to industry sources.

Fast Fact
Don Ake is Vice President, Commercial Vehicles at US company Freight Transportation Research (FTR). He has more than 22 years of experience in the transportation industry and a strong sales forecasting and market analysis background. Don has taught economics at Indiana Wesleyan University and Master’s level marketing courses at both Indiana Wesleyan and Walsh University.  He has also been a guest lecturer at the University of Akron.

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