ROCHESTER HILLS, Mich. (Jan. 6, 2003)—Well, Christmas is in the past and you've had almost a week to recover from your New Year's Eve celebrations. If you're like me, you looked in the mirror this morning and recognized the fact that a diet is in the forecast for the immediate future.
But you're also probably wondering, ``What's in the offing for the commercial tire and trucking businesses this year?'' Will you have a good year or is it going to be tough going again? Well, let me gaze into my crystal ball and see what appears.
Groundwork for 2003
It seems to be generally agreed upon by many economists that 2002 was a transitional year in which the economy built the groundwork for better days in 2003. While there was some economic growth in 2002, it was in fits and starts and remained sluggish throughout most of the year. However, inventories have been worked down, and consumer confidence seems to have returned. The outlook for 2003 is 4-percent growth, starting slow, then accelerating through the year. Sales of goods typically grow faster than services in a normal business expansion, so freight demand likely will grow faster than the Gross Domestic Product.
With Republicans regaining control of both houses of Congress following the November elections, homeland security and defense spending will grow a little faster since President Bush got a green light from voters on these issues. But this also means that the U.S. is moving closer to a conflict with Iraq.
Many experts expect Congress to reduce barriers to added oil production in Alaska and in offshore areas. However, don't expect to see an impact on pump prices for at least two years.
The new Senate also will confirm many of the dozens of judicial nominations that have been on hold for a year. This will result in less cost for business and likely in smaller and fewer liability judgments-which is good news for liability insurance rates. It also may mean the senior drug benefit stalemate in Congress will be resolved with a privately managed solution that will restrain cost increases on employer-financed health plans.
Orders for exports have been growing since the first part of 2002. It is expected that exports will be strong in 2003 due to a weaker dollar and the economic recovery of U.S. trading partners, including our two biggest, Canada and Mexico. This should help boost manufacturing and, ultimately, demand for freight in and out of factories.
Auto sales continue to remain high as a result of rebates and zero-interest loans. These incentives may come and go as needed, but auto makers will use them to keep production lines moving. The weak dollar could mean more exports from U.S. assembly plants.
Low interest rates on mortgages and home equity loans have spurred new home construction and home remodeling, which boosts the demand for building materials, appliances and home furnishings. While demand has probably peaked, the construction industry should remain robust as will freight for this segment.
Shippers got a wake-up call with the closure of Consolidated Freightways Corp. and are beginning to realize that freight hauling is not a rate game anymore. With tighter capacity to haul freight due to closures of some large and a lot of small carriers and continually higher costs, the trucking industry's announced rate increases for 2003 should hold due to less discounting and a stronger freight market.
An upward trend in freight rates is expected to continue through 2003, although carriers may still have to struggle some to stay ahead of higher costs.
Insurance rates are expected to increase some in 2003 but then level off, with most increases in the 15-20 percent range. Those who took the biggest hits in 2001 and 2002 may see only minimal rate hikes if their safety records are good.
Few economists expect near-term improvement in overall unemployment because job growth won't be rapid enough to absorb new workers. Since it takes about 120,000 new jobs a month to keep the unemployment rate steady, it could be well into 2003 before that occurs again. This should mean more people looking for jobs.
However, in the trucking industry, drivers won't come cheap. The National Master Freight Agreement expires in March, which means the Teamsters and the major LTL (less-than-load) carriers will do battle over pay and benefits for more than 160,000 people. Talks began last fall, and it appears discussions are focusing on wage increases and protection of health care benefits.
To save money, many trucking companies are asking employees to pick up more of the costs, either by paying part of the premium or through higher deductibles and co-pays. But growing freight demands, tougher driver screening rules and driver shortages will put pressure on driver wages.
Fuel will continue to be a concern for trucking. War with Iraq could really hurt supply. While Iraq is not a big oil supplier, it does have a lot of friends that are. Even if there is no outright war, these ``friends'' could put pressure on prices.
However, national supplies are reportedly at safe-enough levels to get us through the most frigid winter. But upward price pressure is building anyway with the worldwide economic recovery, so the OPEC oil cartel could decide to tighten supplies and increase prices slightly simply to make more money. Diesel prices are ex-pected to average $1.40-$1.45 per gallon through winter, and it is expected that fuel will increase an average half-cent a month through 2003 providing war with Iraq is averted.
Demand for trucks and trailers will increase in 2003 to address aging fleet problems and capacity issues. Several economists have forecasted that truck production will increase about 20 percent to around 195,000 Class 8 trucks-up from about 163,000 in 2002 and 150,000 Class 6 and 7 trucks, which is a 19-percent increase over the 126,000 sold last year. Some economists believe the first half of the year will be rather weak, but the second half should be quite strong.
The commercial tire industry's fortune is inextricably tied to the trucking industry. Obviously a better economy that provides more freight to haul results in more truck miles being run and more rubber being worn off truck tires.
While the year may start off slowly, 2003 is expected to gain momentum and actually mark the start of an up cycle that may extend into 2007. This is extremely positive news.
As I said already, the market for new trucks and trailers is expected to continue to grow in 2003 and, as a result, so will the demand for new tires on original equipment. Sales in this area should grow by about 17 percent in 2003 to 4.3 million units from the 3.7 million that were sold in 2002.
Replacement commercial tire sales grew in 2002 by 7.5 percent to 14.6 million units. The forecast for an economically healthier 2003 should result in a 2.5-percent growth rate and replacement sales of 14.9 million units. With more miles being run and fleets still closely watching their costs, you can expect retreading to improve as well.
Most of the tire companies have announced tire price increases of 3-5 percent as a result of rising raw material costs. With the demand for original equipment truck tires increasing in 2003, there is more likelihood that these price increases may not be discounted into oblivion.
Hopefully the freight rate increases that most trucking companies have announced will stick so that they can pay for their higher-priced tires. However, the first quarter of 2003 will be rather weak, so this will be a real test of tire manufacturers' mettle to see if they can resist the pressure to discount.
Other issues to watch
Another test looming on the horizon is contract talks with the United Steelworkers of America. You may recall that in August 1997 about 15,000 workers struck Goodyear for three weeks in an effort to reach an agreement on job security, work rules and wages and benefits. Their six-year contract expires this year and it will be interesting to see whether the USWA strikes again.
Neither Goodyear nor Bridgestone-both normally targeted to hammer out a master agreement-is in a strong financial position to take on a strike. Naturally, a strike will reduce tire availability and also could seriously impact the health of the selected manufacturer. And the contract agreement will have an impact on all tire companies.
Another area of concern for commercial truck tire dealers is the Transportation Recall Efficiency, Accountability and Documentation (TREAD) Act. The National Highway Traffic Safety Administration (NHTSA) has turned its sights on commercial truck tires and will begin testing both new and retreaded tires in 2003. The goal of the testing is to compare the performance of commercial retreads against new medium truck tires and the current truck tire standard.
The current truck tire-testing standard may have to be rewritten, and it is possible that one may be developed for retreaded tires. This could have a serious impact on retreaders. Also, this act requires that tire pressure monitoring systems be used as well.
NHTSA may mandate this technology for commercial vehicles or simply recommend and encourage its use. Either way, expect government intervention to have an effect on both you and your trucking customers.
As you can see, 2003 should be one of improving business conditions in which you should sell more tires. But it still may be fraught with pitfalls and perils.
While belt tightening may be impossible now as you stand in front of your mirror with those extra five pounds inflating that spare tire, you'd better watch what you eat the rest of the year and start an exercise regimen.
You'll also want to remain flexible to react quickly to any significant events in international relations, government policies and the trucking and tire industries that could affect your company's health and profitability.