THE most critical factor for trailer customers in 2011 and 2012 will be the ability to attract, train, and retain an adequate number of drivers and owner-operators, according to Donald Broughton, managing director and senior transportation analyst for Avondale Partners.
“This will be more difficult this cycle than it has ever been,” he said in “A Wall Street View of the Industry,” his portion of the Industry Analysis.
Broughton, who has forged a reputation for being more colorful and controversial than most economists and analysts, said CSA 2011 will constrain capacity and result in fewer drivers and lower asset utilization.
“The dirty little secret of trucking is that almost everybody cheats once in awhile: 15 minutes here, five minutes there, 30 minutes there,” he said. “Some (do it) more egregiously, but they all cheat a little bit. If you put an onboard recorder on the truck, that efficiency and asset utilization goes away. Obviously, you are going to have to buy more trailers. You can't spend time unloading and loading. You have to spend time driving. Hours of Service constrains that even further.”
Other Broughton predictions for 2011 and 2012:
For truckload, the worst is over. “By the second quarter, will become extraordinarily tight and pricing will be very strong.”
No one wants to buy the new engines, overhauls could make an attempted return, but eventually EGR loses and SCR wins. “The simple reason is that it works. And the industry has had SCR longer and is fully compliant to test. In the end, when you have to really make a push-comes-to-shove buying decision, if they have the miles, then they're going to buy SCR because they've been able to test.”
Bankers had a worse credit experience in segments other than transportation.
By the end of 2011, new tractor orders will make a meaningful recovery. “The 2011 order cycle will be much more back-end-loaded than front end.”
The break-even point for intermodal is shorter and shorter.
Domestic manufacturing and assembly, along with export commodities, will continue to drive the first stage of the rebound. “We are very good in this country at software and technology. This is the information age. That's a good thing. I believe we've already seen the first stage and will continue to see the rebound of our domestic manufacturing assembly. That's new to almost everyone. The last manufacturing recovery was 1983.”
The next big American consumer spending boom will come from those living outside our border. “It may come from Beijing.”
He said that with trucking company failures, there will be shifts to other modes, supply will remain constrained, pricing will improve, and margins will not improve as much as commonly believed.
Higher fuel prices once again led to higher failure rates. After the diesel price bottomed out in the first quarter of 2009 and then started rising, so did trucking failures, which hit a high of over 700 in the first quarter of 2010.
Correspondingly, the size of the failed fleets increased, with the average size reaching 50 in the third quarter of 2009 before falling back to 27 in the third quarter of last year.
Total trucks parked reached 32,000 in the first quarter of 2010 — the highest since the first quarter of 2008 (45,000).
“The sizes of fleets are larger in part because the process of elimination killed small fleets, so there are fewer small fleets,” he said. “The result is that we took out more capacity this time than we did the last time.
“In the last cycle, trucking failures took 11% of the gross capacity off the road. The remaining players added trucks, bringing the net capacity reduction to only 7%. At its worst, demand was down 9%, and the recovery was slow, steady, and L-shaped. In this cycle, trucking failures took 12% of the gross capacity off the road. The remaining players reduced their fleets, bringing the net capacity reduction to more than 15%. At its worst, demand was down 13%, and the recovery has been V-shaped.”
In analyzing the historical Class 8 heavy-duty truck cycles, he said pent-up supply from the ‘06 pre-buy has yet to be fully exhausted.
“Despite engine emission changes, fundamental truck tonnage correlates with heavy-duty truck production,” he said. “It turns out if you use more trucks, you have to buy more, and if you use fewer trucks, you have to buy fewer. As we see tonnage continue to grow and thrive, guess what?”
Broughton disagrees with FTR Associates president Eric Starks on rates. He believes that although margins will improve with tight capacity, they won't hit 15%.
“I disagree with most on this (who say that) we will see some 10%, 15%, 20% pricing,” he said. “Unless this Truckload Spot Index changes, it says we will not be anywhere near 15% or 20%. Actually, for the full year 2011, we'll end up with more modest numbers.”
The big picture
Broughton said a number of factors contributed to the economic malaise that has ravaged the country and is only beginning to ease:
In 1999, the Clinton administration pushed to expand home ownership to those with lower credit scores by pressuring Fannie Mae to buy sub-prime.
The Glass-Steagall Act was repealed in November 1999.
The 9/11 terrorist event produced a dramatic expansion in wiretapping, search and seizure, and transportation oversight authority.
Volatility and uncertainty expanded the desire for, and profitability of, underwriting increasingly exotic derivatives.
Two of the largest providers of “counter-party risk” (ie, Bear Stearns and Lehman Bros) were “allowed” to fail. “One of the single largest miscalculations that heightened panic and extended the recession.”
Stocks were placed on the “cannot be shorted list.”
Hedge funds were required to decrease leverage ratios.
The rate of growth in government authority and oversight into the financial system has been expanding unchecked.
So where are we going?
He said there are a number of “ghouls” we have to worry about: the beginning of a 30-year bond market bear market; inflation has already returned, no matter what the reported number is; marginal tax rates are going up; the dollar's lack of strength against slow-growth Europe is a signal; and what President Obama can no longer accomplish legislatively, he will try to accomplish through regulation.
On the other hand, Broughton has some good news: banks' reserves for bad loans as measured by total loans outstanding are at record high levels; 50- to 100-year corporate bonds are being issued at low rates; corporate balance sheets have never been stronger when emerging from a recession; foreign manufacturers are building or expanding plants on US soil (BMW, Volkswagen/Audi), which he says is a “powerful trend”; control of the House of Representatives and the ability to stall the Senate is in Republican hands; there is a record number of applications to graduate and undergraduate schools by US citizens; and Texas currently is consuming more cement than California and Florida combined, meaning that high growth is still going on in some areas.
He said truck tonnage was signaling a recession for six quarters, then a recovery, then a depression. Now it's predicting a recovery again.
The American Trucking Associations' advance seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 2.2% in December after falling a revised 0.6% in November. The latest improvement put the SA index at 111.6 (2000=100) in December, which was the highest level since September 2008. In November, the SA index equaled 109.2.
Compared with December 2009, SA tonnage climbed 4%, which was higher than November's 3.3% year-over-year increase. For all of 2010, tonnage was up 5.7% compared with 2009. In 2009, the index had plunged 8.7%.
He said we're closing in on pre-recession highs in total intermodal units originated Class I US railroads, which were about 220,000 in January, the highest since July 2008. Total carloads originated by Class I US Railroads were modestly up, as were coal carloads.
In December, chemical carload volume hit its highest level since March 2008.
“Our favorite predictor of US domestic industrial production continues its overall bullish trend,” Broughton said.
Agricultural products carload volume has been volatile because “weakness in the dollar results in incremental export volume, especially to countries whose currency is strong versus ours.”
Metal/metal ore carload volume has almost doubled after bottoming out in the middle of 2009.
“Driven by exports to Asia and increased auto activity, this key group continues to show strength,” he said. “This data runs counter to those calling for a slowdown in China.”
Non-metallic minerals and products carload volume is up over 15% since the middle of last year, prompting Broughton to say, “Signs are pointing to a rebound in highway building and commercial construction. What would happen if Congress could actually get a highway bill passed?”
Talking about the forest/lumber carload volume, he said: “A fall seasonal drop-off didn't really happen in 2009 or 2010. Broadly speaking, housing is no longer getting worse.”
Capital Markets and the Economy
William Strauss, senior economist and economic advisor Federal Reserve Bank of Chicago
He said the recession ended in June 2009, but he classified it as a “technical distinction” because it “doesn't mean that the economy is operating at a normal level.”
He said the US GDP grew 3.2% in 2010, but that's nowhere near “normal.”
“So, technically, the words we would use are, ‘The economy still stinks,’ “ Strauss said. “It doesn't feel like it's doing that well.”
Strauss said 62% of the growth is rooted in rebuilding inventories, and that doesn't necessarily translate into consumer sales.
“This is truly the story of the tail wagging the dog,” he said.
Industrial output in manufacturing fell quite sharply during the recession, but has risen strongly over the past eighteen months, averaging 7.8%, and has recovered 56.6% of the loss during the recession. Manufacturing capacity utilization has been rising since June 2009, increasing from 65% to 73%. Declines in manufacturing output were broad-based during the great recession, especially in motor vehicles and parts (48%) and primary metals manufacturing (43%).
The recovery has also been broad-based, with automotive (up 52%) and primary metals manufacturing (up 50%) leading the way.
“Spectacular increases have taken place off of depressed levels,” he said.
Trailer loads, while improved, remain “quite low.” Total trailer loads originated fell to a low of 50 million in 2009, but have only recovered to 55 million as the country headed into 2011, after being as high as 68 million in 2007.
“It has flattened, and that's a bit of a concern,” he said. “If freight isn't coming in, is there going to be demand for products?”
Net orders of medium-duty trucks are roughly 700 per day after being 1900 per day in the middle of 2006. Heavy-duty truck orders fell to 400 per day in 2009 but are now nearly 1400 a day.
Industrial production is forecast to rise at a strong pace, with increases of 4.1% and 3.8% forecast for 2011 and 2012, respectively. Blue-chip light vehicle sales are forecast to be up 13% in 2011 and 13.8% in 2012.
Housing starts fell to a post-World War II low, but mortgage rates remain very low — with a fixed 30-year rate at around 4.8% as the new year began.
“Home-price declines have been large, but appear to be close to a bottom,” he said. “Housing affordability improved dramatically, yet consumer attitudes for buying a home remain very low. The forecast calls for a very slow recovery in housing. Credit spreads between corporate high-yield securities and corporate AAA securities have been edging lower. Monetary policy has been very aggressive, lowering the fed funds rate by nearly 525 basis points and keeping them near zero since December 2008.”
Overall, he said the outlook is for the US economy to expand at a “solid pace” this year and next year.
“It's not substantially different from last year, but it's a bit better,” he said. “But because it will not be driven by inventories or by government stimulus, it will feel a lot better. Final sales will probably be twice as much. Employment is expected to rise moderately over the next two years, with the unemployment rate edging lower. We still believe that having had eight million people lose jobs, there's too much slack in the economy to generate a lot of inflation. Manufacturing is forecast to grow at a solid pace in 2011 and 2012. Hopefully, that turns out to be true.”