Market Report: North America

The North American trailer market continues to benefit from a vibrant US economy, which experienced nearly three straight quarters of above-three per cent Gross Domestic Product (GDP) growth in 2017.

For 2018, Freight Transportation Research’s (FTR) GDP growth forecast is in the same region at three per cent, with an extra 0.2 per cent expected for 2019. Fellow NAFTA (North American Free Trade Agreement) members Canada and Mexico, meanwhile, are forecast to finish 2018 at a mere 2.2 and 2.5 per cent, respectively.

What makes the US so strong is a wide-ranging tax reform that has been boosting business investment since it came into effect under the Trump administration, as well as the widespread ‘roll back’ of government regulations, which has helped create a more positive business environment. Both measures have also had a positive effect on freight growth and, in turn, fleet utilisation.

Taken by surprise
Local transport businesses have been slow to respond to the improved economic conditions in 2017, mainly because the US economic recovery since the Great Recession has been characterised by moderate upturns that were quickly followed by corresponding dips.

This time, however, the upturn kept going and accelerated into a larger economic upcycle that took many a fleet by surprise: Most of them had managed their businesses much more conservatively since the Global Financial Crisis (GFC) and had much less extra-capacity available to handle the sudden increase in freight. As a result, trailer capacity utilization (the percentage of available trailers in use, ed.) quickly became too tight.

Complicating the situation, enforcement of the Electronic Logging Device (ELD) law went into effect in April 2018 after being delayed from December 2017. ELDs ensure strict observance of the laws dictating how many hours a driver can be on the road. Because some drivers were not accurately reporting on their manual time logs, the use of ELDs resulted in an added loss of fleet productivity.

Record order volume
More freight to haul and a decrease in truck productivity has created a capacity crisis in the market that is more pronounced on the truck side, but also impacts the trailer sector: Many large fleets simply offset the loss of productivity and the tight capacity by adding more trailers.

They utilise a drop-and-hook strategy where a driver drops his trailer for unloading and then hooks up a loaded or empty trailer and heads for the next destination. This has been used in dry vans for years but has greatly increased recently. There is also more use of drop-and-hook in refrigerated vans and flatbeds than in the past. In fact, there are even drivers that get paid just to move empty trailers around a metro area all day to get them where they are needed.

All these factors have combined to generate an unprecedented amount of trailer orders. The 45,800 US orders in December were just a few under the all-time high, and the 120,000 orders in Q4’17 did set an all-time record. All up, there have been 330,000 orders in the past 12 months (last reporting data).

Production restraints
In theory, US trailer OEMs should have been to handle the spike in orders well after several new plants came on line after the robust year of 2015. Delays in components and parts deliveries from suppliers, however, have caused severe production disruptions since March. The shortages especially affected aluminium extrusions, suspension parts and electrical components, among many others.

The supplier problems hit the industry somewhat unexpectedly, since OEMs had been able to produce a large numbers of trailers with minimum delays during previous upturns. With an economy that is now stronger across the board, however, the trailer industry is competing with other strong sectors for component manufacturing capacity, raw materials and factory workers.

In April, the industry was still able to produce in high quantities despite the supplier issues, but if the pipeline gets tighter, production rates are expected to slow down in the coming months, regardless of trailer demand.
Conversely, if OEMs are able to acquire more components, there is the potential for higher build rates due to the added industry capacity previously mentioned. After all, some OEMs are already accepting orders for 2019, with 2018 orders not built this year expected to roll over into 2019, too.

Segment Review
Dry vans are poised to have their fourth banner year in a row in 2018: consumer spending remains vibrant, the economy is solid, unemployment rates are low and people have lots of money to spend. However, replacement demand is sturdy as trailers from the peak years of the 2000s start to wear down. The increasing use of drop-and-hook generates more demand, too. In addition, many dry vans are now used as temporary, or even mid-term, warehouse space, meaning there will be continued pressure on OEMs to keep up with demand. Overall, dry van build rates are expected to increase five per cent year-on-year to near-record numbers and fall only three pre cent in 2019.

Refrigerated vans are also expected to have a superb 2018. Build rates dropped seven per cent year-on-year in 2017 as supply finally caught up with huge increases in demand that began in 2014. But as more “room temperature” freight is now being shipped in reefers – such as pharmaceuticals, chemicals and formulated consumer products – demand is on the up again. Restaurants and grocery stores are also providing an ever-increasing variety of food products, especially convenience foods, which should keep refrigerated freight at high and growing levels.

Flatbed trailers, meanwhile, have made a great comeback after dipping in 2016. Manufacturing was weaker that year, and flatbed sales sank accordingly. With the resurgence of manufacturing, flatbed build grew 25 per cent year-on-year in 2017 and is forecast to jump an impressive 36 per cent this year. The housing market is sturdy and the energy market red-hot in addition to the gains from other industrial sectors, meaning flatbed freight is running at extremely high levels. It is down from the peak, but still robust.

The other smaller trailer segments are all growing, too. The revival of the energy sector is boosting tank trailers, while the increase in construction activity is keeping the dump trailer market steady.

The biggest risk to future trailer sales in the US is the uncertainty over recently implemented trade tariffs and the prospect of additional ones. Some economists have forecast a one per cent decrease in GDP if a full-scale trade war between the US and Europe breaks out. The impact of such a situation on the freight market is highly uncertain.

The NAFTA agreement, which is currently being reassessed, has been very beneficial to freight markets, too, so any disruption could cause issues as well – especially in the short term.

At the same time, more domestic productions could increase freight and offset at least some of these losses. Another risk is the possibility that fleets can’t hire enough drivers – anecdotal reports say the problems here are getting worse as freight grows and the unemployment rate drops.
Overall, the North America commercial trailer build is forecast to come in around 340,000 units in 2018, and around 330,000 units in 2019. However, it would not be surprising to see 2019 top 2018 if supplier issues persist into Q3.

Beyond 2019 lies much more uncertainty – both economically and politically.

About Don Ake
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.

Fast Fact
According to Freight Transportation Research (FTR), US manufacturing is currently stronger than it’s been in more than a decade, maybe two. As a result, the industrial freight market, especially focusing on energy-related material, is brisk right now, as FTR puts it. Flatbed-hauled freight has also been robust, with dry van and refrigerated van freight also surging. “Truck freight is expected to increase a tremendous 4.4 per cent in 2018 and 3.5 per cent in 2019,” according to the research firm.

Fast Fact
In 2018, orders have been sturdy for all segments of the trailer market, with flatbeds showing especially strong year-on-year increases and dry vans racking up some superb volumes, too.

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