Among the latest dismal news about the strength of the US economy, on Tuesday ACT Research released preliminary truck orders for March 2019 which showed that Class 8 truck orders collapsed an astounding 66%. The decline is being attributed to a 300,000+ vehicle backlog potentially prompting fleets to halt purchases in the near term, however it is also likely that concerns about the economic slowdown are also playing a major part in the latest collapse
Specifically, March Class 8 net orders were just 15,700 units (16,000 SA; 192,000 SAAR), down 66% YoY from 49,600 a year ago and down 6.7% sequentially.
Class 8 trucks, which are made by Daimler (Freightliner, Western Star), Paccar (Peterbuilt, Kenworth), Navistar International, and Volvo Group (Mack Trucks, Volvo Trucks), are one of the more common heavy trucks on the road, used for transport, logistics and occasionally (some dump trucks) for industrial purposes. Typical 18 wheelers on the road are generally all Class 8 vehicles, and traditionally are seen as an accurate coincident indicator of trade and logistics trends in the economy.
“March marks the fourth consecutive month of orders meaningfully below the current rate of build,” said Steve Tam, vice president of ACT. During that four-month period, Class 8 orders have been booked at a 194,000 seasonally adjusted annual rate, or SAAR. This is down significantly from 489,000 SAAR for the same period a year earlier, Tam said.
Don Ake, FTR vice president of commercial vehicles, said demand is still strong, but supply is limited with all of the choice build slots for 2019 filled. Fleets that need trucks are basically taking whatever is available.
“These are extraordinary market conditions. Most fleets ordered well in advance of their need for trucks in 2019,” Ake said. OEM production slots were scarce in 2018 and supplier constraints caused disruptions in supply, so fleets didn’t want to get shutout this year. Now so many build slots have been reserved, fleets that are currently placing orders for delivery this year don’t have many options. “Even though the economy and freight growth appear to be slowing, it has not impacted OEM line rates as of yet. Fleets are still putting more trucks in service and competing in a still decent freight market. It is expected that Class 8 sales will moderate sometime before the end of the year, as industry capacity begins to catch up with the freight surge that began in 2018.”
Credit Suisse analyst Jamie Cook wrote that truck makers’ backlogs were full through year-end: “Looking ahead, orders are unlikely to materially change in the coming months." This means continued orderbook weakness for the foreseeable future.
According to JPMorgan, the New Orders component of the ISM Manufacturing Index tends to be the best leading indicator of future freight trends and truck demand. Specifically, the year-over-year change in New Orders has historically led the year-over-year change in the Cass Freight Index (the bank's preferred broad-based indicator of freight trends) by 6-9 months. The ISM New Orders index was 57.4 in March, down 8.0% YoY but still above 50. Meanwhile, the Cass Freight Index continues to drop, and was down 2.1% YoY in February (the latest month available).
Despite this latest collapse in the trucking market, ACT Research again tried to put a favorable spin on the latest dismal data: "Even though demand is a shadow of its former self, slowing order intake belies current conditions. Admittedly, economic and freight growth are slowing, but both are still growing. And in the context of retreat from record levels, it is no wonder truck buyers continue to pursue incremental profits, as evidenced by the number of unbuilt units in the backlog."
This news comes on the back of a terrible January and February for heavy truck orders, which we discussed about last month, when we noted that the exponential surge in transportation prices as a result of an acute scarcity of truck drivers sent trucking prices soaring last year, and led to a historic spike in Class 8 truck orders as supply had scrambled to keep up with demand ahead of the launch of Chinese tariffs in 2019. That was, until November, when Class 8 orders started their precipitous drop.
To be sure, the collapse in orders will likely further pressure the trucking sector: as JPM notes, trucking wages were up 4.4% YoY in 2018, weighing on fleet profitability. The truck and truck components group in the bank's coverage underperformed in 2018 (down 23.6% vs. S&P 500 down 4.4%) but has outperformed the broader market in 2019 to-date (up 22.4% vs. S&P 500 up 15.0%).
Back in December, BMO analyst Joel Tiss said that while "there is no doubt that freight and freight-rate growth have slowed, we do not think that it is time to panic just yet" after December's sharp 43% plunge.
With January's collapse now in the books, we ask "how about now?"