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Light at the end of the tunnel, but headwinds on the other side: Economist

NASHVILLE, Ind. -- The economic picture in the US is improving, but there are still some hurdles to clear befo...


NASHVILLE, Ind. — The economic picture in the US is improving, but there are still some hurdles to clear before declaring the recession over and there are still lingering challenges for truck and trailer manufacturers, according to industry forecaster FTR Associates.

 

The group hosted a Webinar Friday to discuss the North American truck and trailer outlook and the economy in general.

 

Bill Witte, co-director of the Center for Econometric Model Research, said economic growth in the US should resume at the end of the year and into next year, following further shrinkage this quarter and a flat third quarter. The first quarter suffered from a drop in business investments – businesses and even government stopped spending.

 

“The enormous decline in business investment we saw in the first quarter is unlikely to be repeated,” said Witte, “and government spending should return to a positive factor.”

 

While the US will have lost close to seven million jobs by the end of the recession, Witte noted that the rate of job losses has slowed. Employment figures will remain negative through the rest of 2009, with some job growth in 2010, Witte predicted.

 

Meanwhile, sales in the housing market have stabilized and consumer sentiment is improving. Witte voiced “muted optimism” about the economy and said while “there’s light at the end of the tunnel, when we get out of the tunnel we may find we’re in the middle of a gale of some kind and facing severe headwinds.”

 

For one, the global recovery will lag that of the US, Witte predicted, which will continue to negatively affect exports for another year or so. Also, Witte said the feds and the Treasury will face the delicate task of removing liquidity which has been pumped into the system to stimulate the economy.

 

“If they don’t remove that liquidity, it raises real serious dangers in a year or two of inflationary pressures, but removing it will be a very difficult task,” warned Witte, likening it to “taking away the punch bowl in a real serious way just as the economy starts to recover.”

 

So, when can equipment manufacturers expect sales to rebound? On the medium-duty front, Jon Starks, transportation analyst with FTR Associates said while credit markets are now thawing, customers aren’t generating enough money in their core businesses to justify buying new medium-duty trucks.

 

Three key factors impact medium-duty sales: business spending, which has fallen dramatically through the recession; construction, which remains slow; and to a lesser extent freight demand, which is also down.

 

Starks said medium-duty sales in the US will likely bottom out in 2009 and remain flat through 2010. As stimulus package spending takes effect in 2010, there may be some uptick in demand in new medium-duty trucks. But a strong rebound isn’t expected until 2011, when “we should see a pretty reasonably rebound.”

 

The picture is similar in the Class 8 market, according to Eric Starks, president of FTR Associates. No immediate rebound in sales is anticipated, because freight demand is still slow and there’s still excess capacity. Starks said FTR expects to see further declines in US freight demand over the next few months, bottoming out at about a 12% year-over-year decline. He said US freight demand should bottom out around July and then slowly improve, although it will still not post year-over-year growth for at least a year.

 

Capacity utilization has dropped below 80%, said Starks, and will bottom out around the third quarter.

 

“In 2010, we’re still going to see a substantial amount of excess capacity in the marketplace,” he predicted.

 

Truck makers and dealers that are expecting sales to be kick-started by pent-up demand to replace vehicles may be disappointed, according to Starks. “Historically, that would be true, but given this current environment with so little freight to move, there’s really no need to replace equipment.”

 

FTR’s latest projections for Class 8 North American orders stands at: 106,000 in 2009; 151,000 in 2010; and 196,000 in 2011.

 

For more on FTR, visit www.ftrassociates.net.


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