Class 8 demand to this point has remained relatively resilient, but ACT Research sees clear softening in big fleet profitability and other ancillary metrics. Expectations, as published in the latest release of the North American commercial vehicle (CV) forecast, are that current strong production and sales in the face of weak freight creation will exhaust pent-up demand in 2023, as lower freight rates, higher equipment and borrowing costs, improved equipment availability, and shrinking profits put downward pressure on demand overall.
“Even as the Class 8 market comes under increasing pressure, van trailer demand continues to enjoy secular support from the move to ‘power-only brokerage,’ which has big fleets and logistics companies looking to boost trailer to tractor ratios to bolster spot market productivity,” according to Kenny Vieth, ACT’s President and Senior Analyst.
Vieth added, “We’ve spent most of the past year warning about a potential recession. Admittedly, the economy has proven more resilient than initially envisioned. That said, we think broader economic conditions are softening, and we reiterate our cautious view, including our forecasts for slowing 2H’23 production rates. We continue to expect a shallow recession to materialize, centered on mid-year.”
The critical factor in forecasting, especially as we look to 2024, is when do those demand headwinds, lower freight volumes and rates, plus higher borrowing costs, compress carrier profits sufficiently to kill the peak-cycle activity? One of the critical heavy vehicle demand components, carrier profitability, is increasingly under pressure. In Q1, the public carriers’ profits took a hit, falling to levels last seen in early 2020. While some of the decline was seasonal, core carrier margins were down 250bps y/y, and 300bps below the cycle’s Q4’21 peak. With contract rates expected to deteriorate through 2023, profit margins should continue to narrow.
Vieth concluded, “Aside from near-term Class 8 demand timing, the immediate wildcard in our forecast remains the debt ceiling. While the Fed plays a major role in determining the interest rates businesses and individuals pay to borrow money, the coming debt ceiling battle may serve to pause business investment, unnerve investors, and push interest rates even higher, which could induce a deeper recession sooner.”
The NA CV forecast reports on the trucking industry forecast, providing a status of commercial vehicle demand, tactical and strategic market analysis and forecasts ranging out five years. The report’s objective is to give OEMs, suppliers, investors, and other interested market participants the information they need to make informed decisions in what is traditionally a deeply cyclical market. The report provides a complete overview of the North American markets, touching on relevant demand drivers starting with forward-looking activity metrics, orders and backlogs. Information included in this report covers build and retail sales forecasts and current market conditions for medium- and heavy-duty trucks/tractors, and trailers, North American macroeconomics by country, freight and carrier market performance, used equipment valuation trends, and regulatory environment analysis and impacts.
ACT Research is recognized as the leading publisher of commercial vehicle truck, trailer, and bus industry data, market analysis and forecasts for the North America and China markets. ACT’s analytical services are used by all major North American truck and trailer manufacturers and their suppliers, as well as banking and investment companies. ACT Research is a contributor to the Blue Chip Economic Indicators and a member of the Wall Street Journal Economic Forecast Panel. ACT Research executives have received peer recognition, including election to the Board of Directors of the National Association for Business Economics, appointment as Consulting Economist to the National Private Truck Council, and the Lawrence R. Klein Award for Blue Chip Economic Indicators’ Most Accurate Economic Forecast over a four-year period. ACT Research senior staff members have earned accolades including Chicago Federal Reserve Automotive Outlook Symposium Best Overall Forecast, Wall Street Journal Top Economic Outlook, and USA Today Top 10 Economic Forecasters. More information can be found at www.actresearch.net.
ACT continues to expect a mild recession to materialize, if not as soon as previously envisioned. Broad-based momentum coming out of Q1 increasingly suggests a recession is more likely to materialize in 2H’23. Helping to slow overall growth, at least one more interest rate hike is expected as the Fed strives to tame inflation, according to ACT’s April release of the North American commercial vehicle forecast.
“Our mild-recession thesis is largely predicated on the impact of inflation and the higher interest rates needed to subdue the two-year price spiral. Combined, higher prices and borrowing costs are creating drags on economic activity, freight, and by extension, demand for commercial vehicles. While we take it as a sign that higher interest rates remain necessary, the latest core PCE and employment metrics were encouraging; future rate hikes may only require 25-basis point increments,” according to Kenny Vieth, ACT’s President and Senior Analyst. “One of the factors making the Fed’s job challenging and core PCE elevated is wage inflation, which in turn is exacerbated by a chronically tight labor market.”
The critical factor in forecasting 2023 is when do lower freight volumes, lower freight rates, and higher borrowing costs compress carrier profits sufficiently to kill the cycle? Our current thinking is that the negatives begin to weigh on orders soon, and more meaningfully by the year’s second half. However, with a healthy backlog, early 2023 carrier profitability strength, and the potential for a CARB-induced prebuy in California, there is a compelling case to be made for production volumes to be sustained at end-of-2022 levels through all of 2023.
Vieth added, “The wildcard in any forecast presently is the debt ceiling. While the Fed plays a major role in determining consumer and business borrowing costs, the all-too-familiar disfunction in Washington about another debt ceiling battle may serve to pause business investment, unnerve investors, and spike interest rates even higher, which could induce a deeper recession sooner.”
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