Another great depression

The United States (US) economy has been hit particularly hard by the global economic downturn, but it seems as if it might finally be recovering. Does that mean that commercial vehicle manufacturers can finally heave a sigh of relief?

It is difficult to convey the true magnitude of the US recession. Economically speaking, things haven’t been this bad in a long time. There have been quite a few periods over the last three decades during which the country’s economy contracted, but all those instances pale in comparison to the current one.

Take the early 2000s, for example. The inevitable collapse of the dot-com bubble was followed quickly by the September 11 attacks and the accounting scandals at companies such as Enron, but despite this rapid succession of disasters, that recession was almost insignificant compared to the current one.

In fact, there hasn’t been a recession like this in the US since the Great Depression. An incomprehensible number of people lost their livelihoods, their homes and their life savings.

According to a report released recently by the American Commerce Department’s Bureau of Economic Analysis, the country’s economy shrank twice as much in the first 12 months of the recession than previously estimated.

The economy contracted by 1.9% from the fourth quarter of 2007 to the last three months of 2008. Far more than the 0.8% drop previously predicted. In addition, gross domestic product, which measures total goods and services output within US borders, shrank by 3.9% in the past year.

But the situation is finally improving. Gross domestic product fell at a 1% annual rate in the second quarter of 2009, the US Commerce Department reported recently. And after tumbling 6.4% in the January to March quarter, the biggest decline since early-1982, a 1% fall is less than expected.

According to analysts, who had anticipated a fall of around 1.5% during the second quarter, this is a good indication that the worst of the recession might be over.

That doesn’t mean that the country’s financial woes are officially over. It’s going to take quite some time before the US economy returns to normal. The International Monetary Fund (IMF) recently stated in its annual report on the US economy that the recession was ending, but also warned that recovery would be slow.

But what does this mean for commercial vehicle manufacturers? Like the rest of the automotive industry, they are no doubt desperate for a return to normalcy.

Unfortunately, however, while the economy might be improving, it’s not going to happen overnight. July sales statistics for class 8 heavy trucks did not give manufacturers much to be optimistic about. Compared to July 2008, sales declined by a worrying 33%.

Sales for the year to date are also well below that of 2008. A total of 50 960 class 8 trucks were sold in the first seven months of 2009, the lowest number since 1985 and a third below 2008’s statistics.

Looking at current sales statistics, Navistar International isn’t very confident that things will change quickly. The company now projects that total truck industry retail sales volume for class 6-8 trucks and school buses in the US and Canada for the fiscal year ending
31 October, 2009, will total between 165 000 and 185 000 units, down from the previous forecast of 210 000 to 225 000 units. If one considers that the industry reached a high of 454 700 units in 2006, the steepness of the decline becomes very apparent.

“It is now clear that the economic recovery will take longer than had been originally expected. We are addressing this likelihood straight on by maintaining focus on our core product and market initiatives while taking the necessary steps that will allow us to adapt to the rapidly changing marketplace,” states Daniel Ustian, Navistar chairman, president and chief executive officer.

Ustian adds, however, that: “Continued reductions in our product costs, lower selling, general and administrative expenses and increased market share growth, along with the company’s military business, will enable us to maintain pace toward a profitable fiscal 2009 despite three consecutive years of dwindling truck volumes.”

One need only look at Paccar’s second quarter results to realise the difficulty that the market is still experiencing. The company earned $26.5 million (R210 million) for
the second quarter of 2009 compared to $313.5 million (R2.5 billion) earned in the second quarter last year; a massive profit reduction of 92%.

“These results reflect the impact of a recessionary economy on freight shipments and truck purchases worldwide,” states Mark Pigott, chairman and chief executive officer of Paccar. “The recession continues to affect our business in North America and Europe as truck markets remain weak. Second quarter 2009 financial results were negatively impacted by lower gross margins, temporary plant shutdowns and reduced build rates. The challenging market conditions are continuing as we enter the second half of 2009. PACCAR has reduced operating expenses, capital expenditures and dividends to proactively position its business with current market conditions.”

It’s going to take a long time for commercial vehicle sales to return to the levels they were at prior to the global economic crisis. While the US might be moving out of recession, recovery will not be quick. And truck manufacturers will continue to suffer. In the coming months, manufacturers will have to focus on reducing costs and operating efficiently. The economy is affecting everyone, but those who deal with the situation intelligently will be able to make a far speedier recovery once the storm finally passes.