Trucking Industry to Face Major Challenges, Slow and Choppy Recovery, Economists Say

This story appears in the Oct. 12 print edition of Transport Topics.

LAS VEGAS — While a recovery from the recession appears to have started during the third quarter, it is likely to be an extremely bumpy road back to prosperity and trucking will continue to face major challenges in the year ahead, according to a panel of economists.

“We’ve bottomed out. This is very, very important,” Bob Costello, chief economist of American Trucking Associations, told attendees of the federation’s Management Conference & Exhibition here on Oct. 6. “We are moving in the right direction, but it will be slow and choppy ahead.”

Despite that note of optimism, he warned that trucking would not lead the way out of the recession, despite the industry’s longstanding reputation as a leading economic indicator.

The reason for this shift, he said, is that trucking has witnessed “an inventory cycle like never before.”

The inventory-to-sales ratio plunged so significantly during the recession, he said, that “the largest reduction in capacity ever has been masked by that drop in demand.”

Freight volumes were hit far harder than the overall economy, he added, with full truckloads dipping as much as 20% year-over-year during 2009. The resulting trucking overcapacity ate away at revenue figures, with ATA’s revenue index posting a drop of 30% in August from 12 months earlier.

When the recovery does begin to gain traction, fresh demand will be filled first by excess inventory, forcing truckers to wait even longer for additional loads, he said.

Further hampering the outlook for trucking are the lasting effects the banking and credit crisis could have on spending, said Sara Johnson, managing director of global macroeconomics for IHS Global Insight.

“Just as the Depression [of the 1930s] left a mark on a generation, we’ve experienced a financial crisis that is a once-in-a-generational event that will create a new norm,” she said.

As the credit crunch unfolded, Americans began saving at a higher rate and spending more conservatively. The new trend could result in spending gains of about 2% annually, rather than the more traditional 4%, she estimated.

The successful federal “Cash for Clunkers” program and short-term tax credits aimed at first-time homebuyers are providing a boost for growth in the second half of this year, but the figures won’t be matched in the coming quarters.

Johnson projected real gross domestic product growth at 2% in 2010 and 2.9% in 2011. Home construction and business equipment investment are expected to perform well, but nonresidential construction of hotels and retail outlets will continue to slump, she said.

Besides sluggish spending and tight credit, growing unemployment remains a significant risk.

“There is a 20% chance we will fall back into recession next year,” Johnson said in response to a question from Fox Business analyst Stuart Varney, who moderated the panel discussion.

Meanwhile, shippers, facing their own challenges during the downturn, continue to focus on simplifying packaging to reduce their transportation costs, said Charles Clowdis Jr., managing director, North America, global commerce and transport for IHS.

He said one telecommunications company, for example, can now load 300 units on each pallet, up from 120 units just a few years ago. The obvious result is that fewer trailers are needed to move the same amount of merchandise.

“Packaging will continue to play a role and directly impact your business,” he told conference attendees, many of whom appeared to be more pessimistic than the economists.

“The economy is not good. We are seeing some uptick, but nothing sustained,” Christopher Burruss, president of the Truckload Carriers Association, told Transport Topics during the conference. “Even those companies and sectors that are seeing a small bump in volume are not seeing increases in revenue, because rates are at best flat and there continues to be downward pressure.”

In his comments, Costello said the worst might not yet be over for flatbed fleets, which already have been the segment hit hardest by the recession. The only sector that escaped a major setback was refrigerated, mainly because even though people may spend less on dining out, they still have to eat.

“We have not seen any recovery,” said Todd Long, CEO of Daily Express Inc. “I don’t think the stage has been set for a recovery based on the actions of the current administration.”

The specialized and heavy-haul carrier, based in Carlisle, Pa., has about 40 company-owned trucks and contracts with 300 owner-operators. The economy is the main reason he has chosen to extend the life cycle of his fleet, even though that extension will result in higher maintenance costs, he said.

During the panel discussion, the economists did offer a few glimmers of hope:

• Costello said U.S. truckers in 2009 are expected to ship about 20,000 used tractors overseas for a second straight year. This emerging trend — along with a number of other factors — should help bring the capacity more in balance with demand in the next six to 12 months.

• The global market is oversupplied with oil, Johnson said, so trucking likely will see a period of more stable oil and fuel prices — at least in comparison to the unprecedented volatility of the prior few years.