Strong Class 8 production, sales to exhaust pent-up demand in 2023

Class 8 production and sales could exhaust pent-up demand in 2023. (Photo: ACT Research)

Though demand for Class 8 vehicles has remained relatively resilient, ACT Research, in the latest release of its North American Commercial Vehicle OUTLOOK, is forecasting softening in big fleet profitability and other ancillary metrics in 2023.

According to ACT Research’s analysis, Class 8’s strong production and sales should exhaust pent-up demand in 2023, with weak freight creation, lower freight rates, higher equipment and borrowing costs, improved equipment availability and shrinking profits putting 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,” said Kenny Vieth, president and senior analyst of ACT Research.

Vieth said that even though there have been warning signs of a potential recession in the past year, the economy has proved more resilient than previously thought.

ACT Research President and Senior Analyst Kenny Vieth. (Photo: ACT Research)

“That said, we think broader economic conditions are softening, and we reiterate our cautious view, including our forecasts for slowing 2H’23 production rates,” Vieth said. “We continue to expect a shallow recession to materialize, centered on mid-year.”

Supporting this outlook, April figures for Classes 5-8 showed that backlog registered at 203,100 units, a decline of 15,100 units month over month, according to ACT Research.

“As supply conditions have improved, so has output,” said Eric Crawford, vice president and senior analyst at ACT Research. “Evidencing this trend, heavy-duty and medium-duty production each exceeded build plans (again) in April.”

The Class 8 build rate in April was 1384 upd, 6% above industry build plan, and the industry produced 26,302 Class 8 units across April’s 19 production days.

Classes 5-7 build averaged 1192 upd, 13% above build plan. April’s build rate on these units was the highest in nearly four years (since August 2019), and the industry produced 22,650 units across April’s 19 build days.

“Heavy-duty and medium-duty retail sales remain robust, and each rose double digits year over year in April,” Crawford said. “The heavy-duty unit per day rate, 1431 seasonally adjusted, was its highest in nearly four years, and the medium-duty rate, 1009 seasonally adjusted, was its highest in 18 months.

“We expect positive momentum to slow in 2H’23, as the impact of prior Fed rate increases takes hold and additional rate increases may still be yet to come, and the cumulative impact of depressed freight rates over an extended period weighs on pent-up demand,” Crawford said.

In forecasting 2024, ACT Research’s report is focusing on when demand headwinds, lower freight volumes and rates, and higher borrowing costs compress carrier profits sufficiently to kill the peak-cycle activity.

Carrier profitability, a critical component of heavy vehicle demand, is increasingly under pressure, according to Vieth.

Public carrier profits took a hit in Q1 of 2023 and fell to early-2020 levels. Though some of this decline was seasonal, core carrier margins decreased 250bps year over year – they were down 300bps from the cycle’s peak in Q4 of 2021.

ACT Research is predicting contract rates to deteriorate and profit margins to narrow through 2023.

“Aside from near-term Class 8 demand timing, the immediate wildcard in our forecast remains the debt ceiling,” Vieth said. “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.”