Reports heralded the positive economic indicators for September 2018, but trade war, tariffs and rising prices are significant concerns. A closely watched survey on U.S. consumer sentiment hit a high range in September achieved only two other times since 2004. A recent study indicated that the rate of manufacturing growth in the U.S. slowed last month, but the sector still expanded, despite worry over tariffs, escalating prices and finding enough employees to handle workloads. The University of Michigan’s Index of Consumer Sentiment reached 100.1 in September, up more than 4% from August and 5.3% from the same month a year ago. September sentiment gain was significantly propelled by households with incomes in the bottom third, indicating that economic expansion has now benefitted nearly all financial subgroups. The study also found that inflation concerns among consumers were less than in August. The surveys showed that consumers expect continued growth in the U.S. economy, and believe the unemployment rate will continue to decline. Despite the good news, the primary issue that consumers felt could derail the economy is tariffs. Concerns about the negative impact of tariffs were cited by nearly one-third of all consumers in September. Those that voiced negative views of tariffs also held much less favorable prospects for the economy and held inflation expectations that were 0.6 of a percentage points higher than those who didn’t mention tariffs. Of the 18 manufacturing industries, 15 reported growth in September. The only industry reporting contraction last month was Primary Metals. There was some cause for concern, though. Also, raw material prices rose for the 31st consecutive month. The trade war with China and resulting tariffs were also fueling anxiety. Manufacturing executives are again overwhelmingly concerned about tariff-related activity, including how reciprocal tariffs will impact company revenue and current manufacturing locations. Some manufacturers were especially affected by tariffs. The market is in a state of chaos with the latest round of tariffs, in the computer and electronic products manufacturing industry. As an electronics original equipment manufacturer, component prices have been impacted almost across the board. The tariffs have caused a mass rush to buy up inventories of affected products to minimize the long-term financial impact. This, in turn, is causing market constraints, which further drive up the cost and increase lead times. The economy continues to fire on all cylinders in the third quarter, after growth hit a near four-year high in Q2. Industrial production for July and August shows the manufacturing sector kept running at full capacity, with large order books poised to maintain strong activity in coming months. Job creation also remained robust in the same two months, while wage growth accelerated, and consumer confidence hit an 18-year high in August, boding well for private consumption despite softening August retail sales. Although headwinds are rapidly mounting with the recent announcement of tariffs on USD 200 billion of Chinese goods, growth in Q3 might benefit from front-loading effects in September and from a replenishment of inventories depleted in Q2. The near-term outlook remains bright thanks to buoyant activity, tax-cut effects and large federal spending increases expected throughout the second half of 2018. Looking further ahead, however, growth is likely to dampen in 2019 and beyond as tax-cut effects fade while inflation heightens, and interest rates continue rising. The now full-fledged trade war between China and the U.S. is the main downside risk, which could strike a heavy blow to both consumer spending, as well as to business investment and economic momentum amid heightened uncertainty. We see GDP expanding 2.8% in 2018 and 2.5% in 2019, up 0.1 percentage points from last month’s estimate.
North America Class 8 net order data show the industry booked 42,800 units in September, down 19% from August, but up 90% compared to same month year ago. Through year-to-date September, Class 8 orders have totaled 397,200 units, an average monthly order intake of 44,100 units/month. Medium-duty, Class 5-7 truck orders were also up in September, hitting a four-month high of 24,800 units. Over the past 12 months, orders have averaged 24,500 units per month. Fleets are attempting to add capacity as fast as possible in a dynamic market. Some OEMs had exceptional order months as fleets scramble to lock in order slots for this year. Capacity is extremely tight and expected to remain this way for months. Fleets need more trucks to handle huge freight demand and continue to order trucks at record setting rates. Freight growth continues to climb at a rapid rate. Status of industry is as follows:
- Domestic heavy-duty truck markets experienced a huge third quarter in 2018.
- Medium-duty vehicles Classes 6 and 7 sales in July 2018 were over 12,000 units. Medium-duty sales strength continues like in Class 8 market, for which sales were 20,649 units in July. This was a summer of trucking records.
- Sales for July 2018: Class 7 were 6,131, Class 6 with 5,898 and Class 3, 4 and 5 were 30,743 units.
- In July 2018, heavy-duty Class 8 sales in the US were 20,649 units. Freightliner on top with 7,438 units, Kenworth with 3,266 units followed by Peterbilt with 3,112. International moved up in rank with 2,701 units, Volvo 2,325 units, Mack 1,300 units, and Western Star 507 trucks.
- Leasing companies and large fleets are under pressure to add capacity to keep up with a robust freight market. The economy is surging right now, putting stress on shippers to find trucks to deliver goods on time. Fleets don’t want to be stuck in the same situation next year, so they are placing huge orders for trucks well ahead of time.
- Autonomous vehicle developer Waymo is testing self-driving Class 8 trucks carrying freight bound for Google data centers in Atlanta, Georgia. This program will allow Waymo to further develop its autonomous truck technology and integrate it into the operations of shippers and carriers, as well as the network of factories, distribution centers, ports and terminals served by carriers.
- August trailer orders continued to reflect the early opening to the 2018/19 order season with total trailer net orders of more than 38,000 units. This number was up 31 percent month-over-month and 142 percent better than the same period last year.
- Demand for spot market truckload shipments dropped sharply in July, returning to typical seasonal levels after an all-time peak in June. Spot truckload freight volume fell 29% month over month but was 3.4% higher than a year ago. The national average spot van rate fell 2 cents from June to $2.29 per mile, while the flatbed rate slid 5 cents to $2.77.
- Aftermarket parts growth for truck are strong as commodity costs such as steel are relatively stable while the dollar continues to be strong. About 12% of heavy-duty parts are purchased online. Of all online parts purchases, heavy-duty distributors are getting bulk of the business with truck dealers getting the second biggest share. Amazon is currently only getting 14% of the online purchase of heavy-duty parts.
Industry Watch: US Economic growth in the third quarter of 2018 remained strong and overall global economy growth has followed to a lesser extent. Global economy continues to show strength with growth in most of the developed countries while addressing trade issues. Significant uncertainty still lies ahead in 2018 as trade issues with China remain unresolved. US economy and growth rate is experiencing strong growth with recent tax reforms. New tariffs, reduction in taxes, repatriation of the dollar, globalization, defense, healthcare, and infrastructure are affecting growth. With all the new truck orders, the supply chain is struggling to keep pace with the growing OEM builds. Demand, as indicated by the surge in orders, will be even stronger next year. It is uncertain if suppliers can meet this challenge, as they compete for workers and materials in a vibrant economy.
