By Steve Latin-Kasper
NTEA Director of Market Data and Research
This article was published in the April 2013 edition of NTEA News
The U.S. Bureau of Economic Analysis (BEA) has announced that the U.S. economy grew only .1% at a seasonally adjusted annual rate in the fourth quarter of 2012. While this statement led many in the media to question the fate and direction of the U.S. economy, the truth is, the economy actually performed quite well in many gross domestic product (GDP) components. To gain a better understanding of why the rate of growth was so low, a bit more analysis is required.
The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures, and both residential and nonresidential fixed investment, as depicted below:
Personal consumption expenditures
Residential fixed investment
Nonresidential fixed investment
Equipment and software expenditures
Over the last two quarters, sustained growth in most of these GDP components helped boost the U.S. economy. Growth in the fourth quarter of 2012 was essentially flat, primarily because of declines in government spending. Those declines offset the gains registered by the other components of GDP:
Federal government consumption
expenditures and gross investment
National defense expenditures
State and local government consumption expenditures and gross investment
In addition, inventories fell a bit in the fourth quarter. The change in real private inventories subtracted 1.55 percentage points from fourth-quarter GDP, after adding 0.73 percentage points in the third quarter. Private businesses increased inventories $12.0 billion in the fourth quarter, following increases of $60.3 billion in the third quarter and $41.4 billion in the second quarter.
In sum, there was strong growth in the economic sectors where we want to see growth, and slow growth or even decreases in government spending that shouldn’t be growing right now. However, since government expenditures typically account for nearly 30% of GDP, when there are dramatic decreases, it looks as if the economy isn’t performing well. It should be noted here that declines in government expenditures will be felt in the private sector, and the economic impact will be amplified to a certain extent by the economic multiplier. (The economic multiplier refers to the fact that when one person spends less, the people who would have received that money also have to spend less.) After all, people who work for governments are real. Their incomes are real. Their jobs disappearing will impact the unemployment rate, and ultimately the level of personal consumption expenditures. Moving forward, though, strength in the private sector is expected to more than compensate for these effects, and allow for the economy to continue growing through 2013.
With this in mind, the forecast panel of the National Association for Business Economics (NABE) remains positive about prospects for economic growth in the U.S., as seen in Figure 1. For 2013, the forecast is 2.5% growth for the year. This follows gains of 1.8% and 2.2% in 2011 and 2012, respectively. In sum, the forecast is for continued improvement in U.S. economic growth, albeit remaining below the historical norm. In 2014, economic growth is expected to accelerate, and finally reach its historic cyclical expansion rate of about 3.2%.
Work Truck Industry
This good news for the U.S. economy translates directly into good news for the work truck industry. One of the most important components of GDP is residential fixed investment, which showed an increase of 17.5% in the fourth quarter of 2012, up from a 13.5% increase in the third quarter. This is indicative of a U.S. construction sector which is clearly healthy again, and should provide a strong boost to truck sales, since roughly 25% of all trucks are sold to the construction sector over the course of a complete business cycle. The work truck industry is likely to continue outperforming the U.S. economy in 2013, and that will probably remain true through 2016.
In the first quarter of 2013, orders for trucks were up in January and February, and the American Trucking Associations (ATA) reported that freight shipments were up in January as well. Since freight shipments tend to be a leading indicator of work truck and truck equipment sales, especially of tractors and trailers, this is a good corroboration of the positive forecast for 2013.
As shown in Figure 2, sales of conventional box-off truck chassis have been bouncing up and down since the third quarter of 2009. The ups have, on average, been higher than the downs, and the long-run trend is clearly up. The actual growth rate for conventional chassis was 13.9% in 2012, according to NTEA’s OEM/Body Manufacturers Monthly Statistics Program. While it’s hard to tell in Figure 2, the growth rates for strip and low cab-over-engine (LCOE) chassis were higher than the rate registered for the conventional segment of the market. In 2012, strip and LCOE chassis sales grew 24.3% and 14.6%, respectively. Sales of cutaway chassis grew at a rate of 10%.
In the long run, slow growth (or even declines) in government spending will likely be good for the U.S. economy. From the point of view of the work truck industry, however, this could be problematic, at least in the short term. Since state and local government fleets account for approximately 10% of all truck and truck equipment sales, declines in government spending mean that in 2013, the municipal market is not likely to be a source of growth for the work truck industry. While it may remain a sizable market, it will likely be characterized by fleet managers who want to get the most miles out of their existing trucks. This means they will likely be looking to extend the life of their trucks with additional maintenance and service, and avoiding buying new trucks as long as possible to stay within budget constraints. This situation could well carry over into 2014.
However, in most of the rest of the application markets for trucks, 2013 should be a pretty good year for fleet sales. NTEA’s recently published 2013 Fleet Purchasing Outlook shows that only 14% of fleet managers are planning no acquisitions at all in 2013. Also, 21% are planning to acquire fewer new trucks than they did in 2012, and 26% are planning to acquire more. The rest think 2013 will be similar to 2012.
Aside from the municipal government market, segments that account for sizable chunks of total demand for new trucks are expected to continue growing in 2013 and beyond. These include construction, utilities, oil and gas, mining, rental and lease, delivery/cartage and transportation (buses/shuttles). All of these markets will benefit from expanding U.S. and global economies. The current expectation on the part of IHS Global Insight is that U.S. retail sales of trucks will increase about 4% in 2013 and about 6.5% in 2014. Both of those numbers are probably conservative, if only because the work truck industry tends to grow much faster than U.S. GDP in cyclical expansions.
Steel and aluminum prices were either stable or down slightly throughout the fourth quarter of 2012. They then remained stable through January and February of this year. However, recent history is not necessarily a good guide for short-run expectations in the metals markets. So, which market factors are likely to play a part in pricing for the rest of the year?
Scrap markets will surely play a significant role. According to American Metal Market, U.S. prime scrap prices increased $43 per ton in the first week of March to $423 per ton. That was an 11.3% increase from February. Industry analysts attributed the increase to winter weather reducing scrap flows and to increased exports. In addition, analysts believe that the divergence between scrap prices and iron ore prices had become unsustainable, and therefore a price correction in the scrap market had become necessary.
As part of that correction process, there was a $50 per ton increase in steel sheet prices in the U.S. at the end of February. As illustrated in Figure 3, that price increase hasn’t shown up yet in the steel sheet price index published by the Bureau of Labor Statistics. It will, though, likely show up as a slight turn upward in the March index when it is published in April. Expectations of price increases moving into the second quarter of 2013 remain subdued, though. There are two primary reasons: Chinese demand remains weak and global capacity remains underutilized.
In the oil market, as measured by the Brent spot price, the price of a barrel of oil averaged approximately $111 in 2012. Entering the second quarter of 2013, that price will likely increase slightly, as vacation driving kicks into gear. However, the oil futures market continues to indicate that price may fall back, over time, to a number closer to $95 per barrel. Since this seems relatively close enough to Saudi Arabia’s stated goal of maintaining a price of $100 per barrel, it is expected that oil supply will not become an issue. Another factor influencing price is the global economy’s rate of growth, which should be better than it was in 2012, but probably not quite strong enough to put significant demand pressure on the price of oil. The bottom line is that oil price changes are expected to remain manageable through 2013.
It wasn’t long ago that concerns of a double-dip recession were common. But now it is clear, as shown in Figure 4, that this is not the case.
The yield curve, featured in this chart, is simply the difference between two-year and 10-year Treasury bill rates. The wider the gap, the healthier the financial sector of the economy and vice-versa. A difference of two percentage points is considered healthy. Starting in the third quarter of 2012, the gap started widening again, and as of February 2013, was approaching two. Up to the first half of 2012, it looked as if the curve was heading straight back toward zero and an inversion (10-year rates falling below two-year rates) of the curve about the first quarter of 2015. Clearly, something changed. Actually, a number of things changed.
First, and possibly foremost, there finally appears to be an end in sight to the problem of upside-down mortgages. There are two reasons for this: 1) prices have started recovering and the majority of the problem mortgages had already been resolved by the second half of 2012; and 2) consumer confidence had increased, leading to an increase in demand for loans. Put simply, as demand for money (loans) goes up, the price (interest rate paid on the loan) of money goes up. According to Bloomberg News, ‘Confidence among U.S. consumers climbed for a sixth straight week to the highest level since April 2012 as a rally in stock prices and an improving job market boosted Americans’ view of their finances. The Bloomberg Consumer Comfort Index advanced to ‘31.6 in the week ended March 10 from ‘32.4 in the prior period. The gauge of personal finances reached an eight-month high.” Bottom line: As the economy continues to improve, consumers become more willing to borrow, which pushes interest rates up, and in turn makes banks more profitable and more willing to make loans.
In sum, the yield curve is unlikely to invert prior to 2016, and if the economy keeps improving, the likelihood of an inversion will continue to be pushed further into the future. Since an inversion of the yield curve is a leading indicator of recession, providing about 12 months warning of that happening, the next U.S. economic recession will not likely occur until sometime in 2017, at the earliest.
Another leading indicator of the U.S. economy and the work truck industry is housing starts. The news is all good here as of the beginning of the second quarter of 2013. The number of housing starts is now forecasted by NABE to be greater than 1 million units in 2014. So, not only is the absolute number of units expected to increase in 2013 and in 2014, but the rate of growth is expected to accelerate in 2014.
This is good for the work truck industry because so many of the industries that are involved in the process of building new houses and nonresidential buildings use a lot of trucks and truck equipment. As the work truck industry grew in 2010’2012, the absence of the construction sector’s contribution to that growth was conspicuous. As a result of the construction sector finally having turned around, expectations for growth in the work truck industry have increased accordingly.
Truck and truck equipment sales are expected to increase a little bit more slowly in 2013 than in 2012, probably at a rate of about 10%. However, in 2014 and 2015, expectations are that the rate of growth of truck and truck equipment sales will accelerate.