U.S. Commercial Trucks Face Some Rough Road in 2007

Sales of class 8 heavy-duty trucks are slated to reach 283,938 units in 2006, an increase of 12.3%. Heavy truck sales were relatively stable from 2001-03 (2001 = 139.614 units; 2002 = 146,031 units; and 2003 = 141,964 units). Sales were propped up during much of 2002 by pre-buying to beat EPA diesel engine regulations that hit the market in the fall of that year. Since bottoming out in 2003, heavy truck sales have doubled and almost 740,000 vehicles were sold in the United States.

The demand for new equipment during 2006 was driven less by economic and end-market fundamentals and more by pre-buying to beat those looming 2007 EPA diesel engine regulations. Engines meeting the 2007 EPA guidelines are expected to cost more up front, cost more to operate and maintain, and lose a little fuel efficiency. At the same time, there is the usual buyer uncertainty about how well they will perform in the real world. We have felt all along that pre-buying would be most dramatic at the upper end of the market where major fleets, both for-hire and private, who buy big numbers of trucks at a regular basis, dominate. The further down in GVW rating one goes, the buyer mix changes with smaller fleets, vocational markets, agriculture, and public fleets becoming more dominant. Smaller fleets and vocational buyers tend to be in and out of the market depending on their individual equipment needs and financial performance:they do not tend to buy a set number of trucks in any given year. With regards to the agriculture sector, farm income peaked back in 2004 and the farm capital spending sector has been winding down. Lastly, state and local governments, which play no small role in the medium-duty market, buy equipment based on how flush they are when it comes to revenues and how those revenues are allocated in their budgets. Surveys of state and local procurement people have shown that pre-buying to beat the looming 2007 EPA regulations has not been a factor over the past year.

Looking ahead, there is nothing in the cards to suggest that commercial truck sales will do anything other than decline in 2007. One always has to pay the piper so we are expecting a payback for the 2006 pre-buy, with class 8 suffering the most, followed by class 6-7 and then class 4-5. Another factor working against sales in 2007 is the sales success over the past few years, which suggests that the fleet is young and pent-up demand no longer a pressing issue.

Last, but by no means least, we are not expecting 2007 to be a banner year for the U.S. economy or for key truck-buying end markets. The economy is not expected to go to hell in a hand basket, but at 2.2%, GDP growth in 2007 will pale in comparison to this year's growth estimate of 3.3%, and be the weakest it has been since 2003. Historically, this kind of growth deceleration makes truck buyers nervous and they become cautious when it comes to equipment acquisition programs. The crude oil price outlook has improved in recent months, but diesel fuel will not become cheap anytime soon.

Following their 12.3% increase this year, U.S. retail sales of class 8 heavy trucks are slated to drop by 34.1% in 2007 to 187,000 units. Sales then snap back by 9.6% in 2008 and 36.6% in 2009, to 205,000 units, and 280,000 units, respectively. Sales then tumble 30.4% in 2010 to 195,000 units before rising 28.1% in 2011 to 249,747 units.