Transportation equipment manufacturers are facing the worst supply chain environment since World War II, FTR Intel Vice President of Commercial Vehicles Don Ake explained June 3 in FTR’s quarterly outlook webinar.
And that makes Ake’s job—forecasting equipment production—challenging as well. So he kicked off his presentation with a straightforward question: What is going on here? His answers, however, were anything but simple.
Regarding the supply chain, FTR had alerted its subscribers last November that trouble was brewing.
“But even though we saw it coming early, we never expected it to get this bad,” Ake said.
And by "bad," he points to some 20 components, perhaps as many as 40, that are being delivered late, or in insufficient quantity to truck and trailer OEMs, disrupting production-line rates and even prompting plant shutdowns. Those production swings, in turn, make for inconsistent deliveries as reflected in the "whipsaw" numbers posted in February, March, and April.
Recent research suggests these supply chain issues should improve in July, “but that doesn't mean back to normal,” Ake noted. The semiconductor shortage is expected to linger well into fall, and workers won’t likely return until September when supplemental federal unemployment assistance runs out.
Critically, the material shortages are accompanied by a spike in costs for steel, lumber, aluminum, rubber, and plastic—which are running at record highs.
In turn, FTR’s Trailer Producer Price Index likewise climbed to a record high in April—and “it’s probably going to go higher,” Ake suggested.
Looking at orders, FTR put the May Class 8 preliminary order total at 23,600; that’s down 32% from April and well off the 50,000-plus monthly orders posted in Q4 last year.
“The build slots for this year are filling up. The OEMs, because of those commodity costs, have not opened the order boards,” Ake said. “So if you look at this slowdown compared to 2018, it looks very similar to November 2018, where you had the big drop off. We would expect these orders to continue to fall back to seasonal trends until the order boards are opened up.
“But then you're going to have a very interesting situation because we have all this pent-up demand," he continued. "The fleets can't get the trucks that they need this year, and they're going to be afraid of shortages next year. So we're anticipating once they open those order boards up, you're going to see some very impressive order totals coming up.”
And constrained orders also mean limited retail sales.
“These numbers should be a lot higher," Ake added. "They're just not moving high enough. Why? Because there's not trucks available for sale—we can't make enough. They have to go higher sometime, but not until we build more.”
The production constraints have also pushed the Class 8 backlog-to-build ratio much higher, while inventory has slipped.
Similarly, the fall-off in trailer orders since October 2020’s record high “has nothing to do with the strength of the market.” It’s all about build slots, and Ake reported that several OEMs are booked for the year. And, he noted, many of the recent orders are actually for vocational flatbed and dump trailers, where there’s still some capacity.
And, as with trucks, the trailer backlog is near the all-time high.
“It's almost guaranteed that once those order boards are open for next year, we're going to exceed the record backlog pretty easily,” Ake said.
The good news for trailer manufacturers—and their customers—is that trailer production activity has fared much better than Class 8 production, Ake noted.
Regardless, the pricing environment for both trucks and trailers will be “extremely difficult” on the OEMs because of the material cost spikes and with so many orders already on the books.
“There's going to have to be some discussions,” Ake said. “Traditionally, some people have put in steel surcharges. But the problem here is that it's not just steel; it’s steel and a host of other things.
“If you're building aluminum flatbeds, your costs have soared.”
In presenting the production forecasts, Ake noted the estimates assume the economy remains robust and that production improves in the second half of the year as OEMs increase build rates “as much as they can.” But monthly build rates will remain “volatile,” and any demand left from 2021 will then roll into 2022.
“The big news is the supply chain,” he said. “However the supply chain performs, that's what you're going to see in the second half of the year.”
For Class 8 trucks, FTR puts Q2 factory shipment at almost 76,000 units, up from 66,000 in the first quarter, with Q3 at 84,500 and Q4 at about 84,000. And 2022 “could be the high year” in the current cycle, with quarterly build rates in the mid-80,000s all year. Or, if production picks up at the end of this year, 2023 could be the peak.
“There's no purpose in discussing ’22 versus ’23,” Ake said. “You're going to have two big years; which one is the highest doesn't really matter. This is a great five-year forecast.”
For the five-year North American Class 8 forecast, FTR has this year coming in at 310,000 (up from 213,900 in 2020), rising to 340,000 next year. Looking ahead even further, FTR forecasts 350,000 trucks will be built in 2023; 310,000 truck in 2024; and 285,000 in 2025.
Trailer production is going to be “the same story,” Ake explained.
After 62,626 trailers were built in the first quarter, FTR projects Q2 will top 70,000; Q3 approaches 83,000; and Q4 comes in just under 80,000.
Some 210,800 trailers were built last year, and FTR forecasts 2021 will close with 295,000 trailer builds; 2022 will climb to 320,000, followed by another rise for 2023, to 330,000. Production will moderate somewhat in 2024-2025, coming in at 305,000 and 285,000 respectively.
In terms of downside risks, Ake pointed to inflation and the Fed’s attempt to manage inflation by letting the economy cool—impacting GDP and freight growth.
“It's always tough, looking out two to three years,” Ake concluded. “But if there's some disruption in the economy, obviously, the drop off will be greater, as we've seen in past cycles.
Or, as FTR Chief Intelligence Officer Jonathan Starks summarized, making long-term forecasts is “a difficult task.”
“Trying to understand when a market is going to turn three to five years from now is just riddled with potholes,” Starks said. “And so our basic assumption is that the economy moves toward a long-term pattern of growth. But we know that somewhere in that timeframe, there's going to be a change in market conditions. Trying to model out that impact on demand is just not worth it until we can get a better sense of when that might begin to happen.”
Broadly, the economy is “quite strong,” as Avery Vise, FTR vice president of trucking, explained. And he attributed much of the overall improvement to the $5 trillion in federal stimulus money that has largely gone to the consumer. And with recreational activities limited by COVID-19, the result is a “purchasing spree like we’ve never seen.” Retail sales are at an all-time high, with “robust” growth in the automotive, e-commerce, and home improvement sectors.
Employment remains a “thorny issue” with the number of Americans at work still millions short of the pre-pandemic total. The “good news” is first-time unemployment claims have improved “enormously” since February. However, continued claims are still “stubbornly high,” Vise noted.
“But that's principally due to the federally funded programs—and those are going to start going away, as early as this month, as 22 states have decided to forego the federal program in a bid to try to jumpstart people returning to work,” he said. “And frankly, it was going to happen anyway by early September, because there seems to be almost no political appetite for renewing that $300 a week supplement.”
Indeed, March set a record high for job openings, going back the 20 years the federal government has tracked that data.
Performance in the industrial segments is “a little fuzzy” as well, with orders for core capital goods—a proxy for business investment—hitting an all-time high in April, Vise explained. Similarly, durable goods—with transportation equipment excluded—were also at an all-time high. Transportation equipment has lagged, initially because of slumping civilian aircraft sales and, more recently, automotive sales (a quarter of all durable goods) have been hit hard by the semiconductor shortage and other supply chain issues, with output in April down 12% from February 2020 ahead of the COVID-19 shutdown—and that’s hampered overall durable goods orders.
Residential construction also has been “volatile” recently, even beyond the impact of winter weather in February. And home sales are weaker, a function of limited supply and escalating prices, Vise noted.
And retail inventories are “the leanest on record” due to strong demand, while manufacturing inventories have returned to pre-pandemic levels.
FTR’s economic outlook—following the first quarter’s GDP growth at the previously forecast 6.4%—has Q2 coming in “much stronger” than expected, now projected at a 9.2% rate. The outlook for Q3 is now also slightly stronger, at 5.5%, with Q4 cooling to 4.1%. The outlook for 2022 is “marginally weaker” compared to the very strong 2021 growth.
Looking at industrial production, which came in well below FTR’s estimate at 1.2% in Q1, it will recover somewhat with growth of 7.1% in Q2; 5.9% in Q3; and 3.6% in Q4.
“Given constraints in the supply chain and the shortage of components like semiconductors, we definitely could see some volatility in industrial production from quarter to quarter,” Vise said. “However, at least demand is now quite strong. So we don't anticipate these disruptions to hurt industrial production over a period of several quarters.”
FTR’s measure of the Goods Transport Sector, which saw 8.1% growth in Q1 (lower than the FTR forecast of 12.4%, largely due to supply chain constraints), will grow at a 15.9% rate in Q2; 7.3% in Q3; and 4.9% in Q4.
“The upside of lower inventories is that, going forward, we have more pressure for replenishment,” Vise noted.
In terms of the freight environment, record-high spot rates continue to rise with “no sign of weakness,” he added—although rates will moderate as loads retreat from recent record levels.
FTR projects freight growth to be “quite robust” this year, coming in at 8% growth, with dry van running at about 10% growth to pace the segments, with tank lagging at 4% growth. And while supply chain challenges present some downside risk to the forecast, “given severely depleted inventories, and strong consumer balance sheets, we presume that any lost production this year will simply move into next year,” Vise said.
FTR projects 2022 loadings to grow at 3.6% from this year’s strong recovery. For the rate forecast, FTR anticipates truckload rates will rise nearly 16% this year, with spot rates up more than 20%—an increase larger than 2018’s run-up.
“That freezes shippers in place, to some degree, because the alternative to the spot rate environment they're seeing now is not very attractive—the contract rates they would have to give out in order to moderate those spot rates is not something they want to do,” Vise concluded. “So, in large part, we may be seeing just a bit of a wait-and-see in the hope that we are going to see a turn in the market at some point, sometime soon.
“And we may very well, but we might not know until October or November whether that could happen.”