Rising Sales, Falling Inventories Brighten Trucking’s Prospects

This story appears in the Oct. 19 print edition of Transport Topics.

Recent economic reports showing that inventory levels are dropping and that retail sales are increasing provided some welcome positive news for trucking executives last week.

While experts cautioned that freight demand remains weak and the economic recovery fragile, at least some trucking executives are reporting improvements in business activity.

The Commerce Department on Oct. 14 said inventories fell 1.5% in August to the lowest level since September 2008, using a measure called the inventory-to-sales ratio. Meanwhile, retail sales excluding the auto sector rose 0.5% during September, Commerce said.

“We have certainly seen evidence of demand picking up to restock inventory,” said Andy Vanzant, vice president of sales at Roehl Transport, Marshfield, Wis. Roehl ranks No. 74 on the Transport Topics 100 list of the largest for-hire carriers in the United States and Canada.

U.S. businesses still have $1.31 trillion in inventory, and the ratio — which measures goods in stock relative to sales — moved downward to 1.33 in August from 1.36 in July, potentially creating some need to restock shelves. Earlier this year, the index peaked at 1.46.

Coupled with better-than-expected earnings reports from large companies such as computer chip maker Intel, the positive reports pushed the Dow Jones industrial average over 10,000 for the first time in a year in the middle of last week.

“The August inventory-to-sales ratio figure was a good improvement, particularly for the trucking industry,” said Bob Costello, chief economist of American Trucking Associations. “The industry has been held back by bloated inventories, in addition to the weak, albeit improving, economy.”

“While the ratio is moving lower, which is very important, it [inventory] is still quite high,” said Costello, who said he expects economic growth will be “modest and choppy” with uneven freight volume growth.

“Inventories are way down, but except for retail, inventories have not dropped sufficiently to reflect the present level of depressed consumption,” said Stifel, Nicolaus & Co. analyst John Larkin, citing factors such as rising unemployment and credit pressures that have kept spending down.

Retail inventories dropped the fastest at 2.4%, followed by wholesale stockpiles at 1.3% and factory inventory at 0.8%, Commerce said.

Among the carriers that saw improvement in August and September, at least in dry van truckload operations, were CRST International and Crete Carriers.

“I assume [customers] were replenishing or sales were up,” said John Smith, chief executive officer of CRST International Inc., Cedar Rapids, Iowa. He said miles per tractor per week were 7% higher in September than the same month of last year for the van business. Customers “are replenishing inventories of some sort.”

Smith said it was important to note that “last September was not a good month. We were beginning to see that something was really wrong with the economy last September.”

Another favorable sign at CRST was positive year-to-year comparisons in August, but at a more modest level, he said.

“There was a slight pickup from August to the end of the quarter,” said Crete’s CEO Duane Acklie, referring to his company’s van service. “Very possibly, yes, there could have been an end to destocking.”

Those improvements didn’t extend to either company’s flatbed business, Smith and Acklie said.

In the less-than-truckload sector, Steve O’Kane, president of A. Duie Pyle, West Chester, Pa., said the company’s volume improved sequentially from July through September.

“While we are feeling kind of OK and are glad that September was better than August and bucked our usual seasonality, the fact of that matter is that we have had a really strong summer in terms of getting new accounts and business,” O’Kane said.

But in general, he said, year-over-year freight comparisons aren’t encouraging. Volume still trailed last year by what he described as “mid-single digits,” he added.

“We are looking at a very trying fourth quarter,” O’Kane said. “The consumer economy is still struggling. The only thing that makes the fourth quarter look better is because of comparisons to last year. We didn’t see any pickup in back-to-school business, and that is usually a pretty good precursor of future trends.”

Morgan Stanley analyst William Greene also commented on modest improvement, saying he has “marginally raised expectations for truckload utilization given improving

volume trends across freight and the slowing pace of destocking.”

“Businesses still have too much inventory, thus a supply build is not imminent,” Kim Whelan, an economist at Wells Fargo Securities, told Bloomberg News. “But each month’s rundown improves the situation, allowing the pace to ease.”

Larkin also noted that changes in supply chains — such as reducing product size, packaging improvements and shorter freight routes — will continue to reduce the amount of freight available, even after there is an economic recovery.

Freight lost because of supply chain redesign is most likely not ever returning, no matter where the ultimate new normal level of consumption should settle out, he said.