Unsold Class 8 truck inventories second highest since Great Recession

Mack truck on dealer lot

The ratio of retail sales of Class 8 trucks to inventories in January ranked second-highest in industry history, trailing only the worst month of the Great Recession a decade ago.

That means that without a rebound in orders, manufacturers will have to cut production further to achieve balance, according to ACT Research.

Overall sales of Class 8 trucks are expected to be down 33-34% this year compared with 2019, one of the best on record.

While inventories are swollen because of sluggish retail sales, the industry is in good shape in terms of how many trucks it is building per day compared to the order backlog, Kenny Vieth, ACT president and senior analyst, told FreightWaves.

The inventory-to-sales and the order-to-build ratios taken together present a picture of the health of the heavy-truck industry. Retail sales follow the hierarchy of orders, backlog, production and inventory. Orders, production and sales are tracked and reported monthly

Inventory to sales 

The inventory of Class 8 trucks rose 3,400 units in January over December 2019 because production outpaced weak sales. The inventory-to-sales ratio in January was 3.9 months, the highest since 4.4 months in April 2009, the worst month of the Great Recession.

The ideal inventory-to-sales ratio is 2 to 2.5 months, Vieth said.

That is about where PACCAR Inc., (NASDAQ: PCAR) the parent company of Peterbilt Motors and Kenworth Truck Co., found itself at the end of December, CEO Preston Feight said on the company’s Jan. 28 call with analysts.

“We make sure that what we’re building has a customer name on it, so we’ve been able to adjust our build rates to align with our orders,” Feight said.

Inventory management is critical in a cyclical business like trucking, which depends on how much it can charge per mile for hauling a load of freight. Falling spot rates over the last year led to slackened demand for new trucks after a frenzy of orders in the second half of 2018.

“There comes a time in every cycle when the industry needs to start shedding inventory,” Vieth said. “High inventories were a positive contributor through most of 2018 and 2019. The total amount of inventory is going to be a headwind for production in 2020.”

Simply put, there is no need to build more trucks when sales are slow. 

In the U.S. tractor market, which accounts for 60% of the heavy-duty truck sales, the inventory-to-sales ratio jumped to 3.1 months in January from 2.5 months in December.

“Low is better, at least if you are a manufacturer,” Vieth said.

The vocational truck market, which includes off-highway trucks used in construction, also is experiencing lower sales while inventories remain flat. The inventory-to-sales ratio for vocational trucks was 4.3 months in January. The ideal ratio is three months, he said.

Backlog to build

At 5.4 months, the backlog-to-build ratio is in much better shape than the inventory-to-sales ratio, Vieth said.

The industry order bank stood at 119,000 units at the end of January when manufacturers built 1,050 trucks a day. The backlog fell about 4,500 units from December because more trucks were produced than orders placed.

“Where the backlog rates are compared with the build rate, we’re golden,” he said. “This is very sustainable and very good for the industry.”

By contrast, in August 2019, manufacturers built 1,400 units per day with a backlog of 151,000 orders.

If orders continue to be weak and production continues at January’s rate, the backlog will fall further, possibly prompting further reductions in the build rate.

Truck makers acknowledged this possibility in their most recent earnings reports.