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State of trucking: ugly, bad, good

June 1, 2007
WHAT is the state of the trucking industry? Bob Costello, chief economist and vice-president of the American Trucking Associations, painted a detailed

WHAT is the state of the trucking industry? Bob Costello, chief economist and vice-president of the American Trucking Associations, painted a detailed picture during his presentation at the TTMA convention.

“We are going through a soft patch right now. There's no doubt about it,” Costello said. “But I do think that we will get out of it later this year and continue the progress we have.”

The trucking industry is facing plenty of challenges, which Costello addressed. But one of those is simply how to handle all the freight that fleets will be asked to haul in the future.

Right now, though, carriers could use a little more freight.

“Year-over-year change in truck tonnage in the last year or so has not been a very pretty picture,” Costello said. “From mid-2006 to February 2007, we have had less tonnage than in the corresponding month of the previous year. However, we did see a nice year-over-year gain in March.”

He warned of near-term volatility in truck tonnage. The March upturn may or may not be sustained

“There is a lot of uncertainty in the economy right now,” Costello said. “I am in the camp that believes we will gradually see better times. We are not in for a recession, but we will have what is called a mid-cycle correction or pause. There are people out there that think we are headed for recession, but I do not believe that is the case. One of the reasons is because of the trucking data that I will show you.”

Expect a lot of volatility in the near future, which is typical of an economy in transition, Costello said. The transition is from high rates of growth to lower rates of growth — not contraction.

“Truck tonnage was up in March,” he said. “April was so-so, and May is starting off pretty good for fleets.

Truck tonnage for all of 2006 contracted 1.7%. But the number of loads actually grew 0.3%.

“The reason was the decline in the housing market,” Costello said. “In recent years, the flatbed segment of the industry was one of the best groups. Not only has this segment fallen, but it is down much more significantly than overall tonnage. Typically, the average flatbed load will weigh between two and three times as much as the average dry-van truckload. The flatbed sector is pulling down the overall tonnage index, and it is still down significantly this year — 4.5% in the first quarter.”

This slowdown is not unique to the trucking industry. It also is going on in the railroad industry. Rail cargo, excluding coal, is down almost 7%. (ATA subtracts coal from the rail cargo because coal is not shipped by truck).

The for-hire motor carrier industry has enjoyed unprecedented revenue growth since the last recession — and some unprecedented cost increases.

ATA's For-Hire Truck Revenue Index year-over-year revenue grew sharply in 2004 and 2005, but it trended downward in 2006. The index dipped into negative territory late in 2006, but it has been climbing this year. Expect a little more volatility short term.

“Don't be surprised if the index goes back into negative ground, at least in the next few months,” Costello said. “Then look for gradual improvement through the year.”

Real revenue

Costello charted the amount of revenue per mile that fleets have earned since the industry was deregulated in 1980. Following deregulation, real revenue per mile slipped consistently for 20 years. By 2000, revenue per mile had fallen to just over half its 1980 level.

During that 20-year period, fleets either learned to operate more effectively or they went out of business, Costello said. But in 2000, real revenue per mile began to improve. While still 30% below what it was before the trucking industry was deregulated, revenue per mile has been growing consistently since 2000.

“Economic studies say it takes 20-25 years for an industry that has been economically deregulated to come out of that environment and become a mature industry,” Costello said. “For motor carriers and those who supply the motor carrier industry, they have gotten more mature and wise when it comes to operating in a deregulated environment. If the slowdown we are seeing now had happened 10 years ago, imagine the carnage that would have happened.”

The future, however, is much brighter.

“The biggest challenge facing motor carriers is not the current slowdown,” Costello said. “The biggest challenge will be hauling all the freight that they will be asked to haul in the future. It's a great challenge, and we need to be optimistic about the future.”

ATA is forecasting that fleets will be hauling 31% more freight in 2017 than they did in 2005. Trucks haul 70% of the tonnage shipped in the U S today, a share that ATA expects will be retained. The next three most used modes (rail, pipeline, and water) are expected to grow 27%, 21%, and 29%, respectively.

“People want to know why we can't use rail intermodal to alleviate some of the truck traffic on our highways,” Costello said. “But if the amount of rail intermodal tonnage doubled, that simply means that it would go from 1% of the total to 2% of the total. Rail intermodal is not going replace trucking.”

Supply and demand

Demand for trucking, as represented by the number of loads, increased 0.3% in 2006 — at best. At worst, it decreased 1.7% if measured by tonnage. However, fleets bought an exceptionally large number of trucks in 2006, leading to a 2.3% increase in fleet size.

“There is anywhere from 100,000 to 120,000 too many trucks in the market right now,” Costello said. “But here's the silver lining. If demand picks up just a little, I think that is all we will need to suck up the overcapacity and start needing more trucks again. We think capacity will tighten throughout the year. In the long run, the industry will be hauling a lot more freight, and we will need equipment to do it.”

Costello said fundamentals still support tight capacity. The reason is a shortage of drivers.

“You can buy all the equipment in the world, but if you can't put a driver in it, you still don't have the capacity,” Costello said. “A shortage of drivers is still one of our greatest challenges.”

Economic outlook

Costello reviewed recent economic data and its effects on the trucking industry

Gross domestic product — the total value of all goods and services produced in the United States — is expected to reach a trough in 2007 and then rebound in 2008. GDP has grown at or above 3% annually since 2004. ATA anticipates 2.1% growth in 2007, with GDP growth expected to reach 3% again in 2008.

But for tracking the trucking industry, Costello does not specifically use GDP. He factors out services (which cannot be shipped by truck), and he includes imports (which are shipped by truck). The result is Goods Producing Economy (GPE) — and a different picture than Gross Domestic Product.

Unlike GDP, which is expected to grow at 2.1% this year, GPE will only increase 1.3%

“A lot of this has to do with housing,” Costello said. “Automobile production is also a factor. Other parts of the economy are not nearly as bad.”

Costello expects GPE to grow faster than the overall economy in 2008 and that the second half of 2007 will set the stage for that growth. Trucking, he said, leads the economy into recovery as well as recession.

Manufacturing production

Manufacturing is the single largest customer of the trucking industry. Manufacturing production, as calculated on a year-over-year basis by the Federal Reserve, had been on an upswing since it bottomed out in 2001. The rate of increase, however, slowed down in late 2006 and early 2007.

The Federal Reserve calculates manufacturing production by the value of the goods produced. But to more accurately reflect manufacturing's effect on trucking, Costello calculates manufacturing by the weight of the goods produced.

“This is a better picture for trucking than the value of the goods,” Costello said. “And when we do that, we get a much different picture. This tends to change before the overall manufacturing index does. It goes down faster, and it recovers faster.”

While the Federal Reserve shows manufacturing production declining on a year-over-year basis, the index never falls below year-earlier levels. But when viewed by the amount of weight produced, rather than value, manufacturing production has been in negative territory for the past several months.

“That's one reason why trucking is negative year-over-year,” Costello said. “And it's why trucking has slowed down more than the overall economy.”

Residential investment

Costello compared what is happening in the housing market today with what frequently happens in the stock market. After a strong run-up in values, the market is undergoing a correction.

“When you see a fast run-up in the stock market, you expect a correction,” Costello said. “The same is true for different sectors of the economy, including housing. We saw tremendous growth from 2002 to 2005, and now we are going through the correction phase. It doesn't matter if we are tracking overall GDP or just a section of the economy. When you grow that fast, a correction will come.”

Residential investment in 2006 declined more than 5% from the previous year, and Costello believes it will drop an additional 17% in 2007. And while the picture improves somewhat in 2008, residential investment is expected to be down an additional 5% in 2008.

Costello was not willing to pinpoint the bottom of the housing market, but he believes the worst will be sometime this summer.

“After that,” he said, “we will start moving in the right direction.”

Inventory outlook

Inventories are another factor affecting trucking. As the amount of inventories change, the need for additional goods also changes — along with the need to transport those goods.

“I look very carefully at the level of inventory throughout the supply chain,” Costello said. “But it's not enough to look at just inventory levels. They have to be viewed in relation to sales.”

The U S Census Bureau compiles an inventory-to-sales ratio for the total supply chain. That ratio has been trending downward as businesses of all types strive to maximize sales and minimize inventories.

When the inventory-to-sales ratio is below the trend line, as it was between 2003 and 2006, the result is good for trucking. When it is above the trend line, as it was in 2001-2003, demand for trucking services falls.

In 2006, the ratio swung upward, from the deepest point below the trend line to a point slightly above the trend. But inventories have been trimmed recently, and the ratio is now just below the trend line.

The inventory-to-sales ratio, however, can vary significantly by sector. For example, the manufacturing sector continues to have an uncomfortably high inventory-to-sales ratio. By contrast, inventories are in much better shape in the retail sector.

Petroleum prices

Expect continued high prices for petroleum, Costello said, for a variety of reasons.

While some refineries in the United States have expanded and thereby increased capacity, it is true that no new refineries have been constructed here in decades. It is far easier to get permits to expand what is already built than it is to construct something new.

Continued strong demand, combined with too little investment in upstream (oil exploration) and downstream (refining capacity) will continue to make the U S energy deficient.

“In Washington D C, people talk about the need to be less dependent on foreign oil,” Costello said. “But just the opposite is going to happen. The volatility we are seeing in oil prices is here to stay.”

Costello pointed out that 61% of oil reserves are in the Middle East. Although efforts are being made at producing oil from renewable resources, he did not expect a major increase on the supply side for petroleum products.

But we can expect a major increase on the demand side. Developed countries such as those in Western Europe and North America have 19% of the world's population, but they account for 60% of annual oil consumption. India and China combined have 37% of the world's population, but they were responsible for only 11% of the oil consumed in 2005. Rapid economic development in those two countries alone will put significant pressure on the markets for oil and other commodities in the years to come.

Despite the growth in China and India, diesel prices are expected to moderate this year. Citing U S Department of Energy data, Costello said prices are expected to peak in the second quarter at almost $2.90 per gallon and gradually decline to about $2.75 in the first quarter of 22008.

As a result of these elevated prices, fleets are expected to spend $105.9 billion in diesel fuel this year, compared with $44 billion five years ago.

Stuck in traffic

One other major concern for the trucking industries is the nation's overcrowded highway system.

Traffic congestion is going to be one of the biggest factors affecting trailer customers in the coming years, Costello said.

“I expect congestion in Washington D C,” Costello said. “But when you encounter it in places like Louisville, Kentucky, and Des Moines, Iowa, you know you have a problem. Traffic congestion is now moving beyond metropolitan areas and into freight corridors.”

Highway construction simply has not kept pace with economic and population growth. Since 1980, the economy has nearly doubled, the number of commercial vehicles has increased almost 80%, the number of passenger cars is up sharply, and the population is up 30%. But we have increased the number of highway miles by only 3%, Costello said.

With state and federal governments facing financial shortfalls, the trend in highway construction has been to turn more projects over to the private sector.

“We haven't kept pace with highway construction, and now we are having to pay for it, either in higher congestion or higher taxes,” Costello said. “Yet as the 2008 elections approach, see how fast politicians will promise no new taxes.”

According to the Federal Highway Administration, a full 40% of congestion is due to bottlenecks — indicating too many vehicles for the capacity of the highway. The cost of this congestion is 243 million hours lost each year sitting in traffic and a cost of $7.8 billion annually.

Congestion is a leading reason for reduced truckload productivity in recent years, Costello said. ATA's index of miles per truck per month increased approximately 7% between 2000 and 2002. But since its peak in 2002, the index has lost approximately nine points to its 2006 level.

Other factors contributing to the decline in the index included changes in hours of service regulations, falling average length of haul, and less efficiency in routing because of a desire on the part of fleets to increase the amount of time drivers are at home.

“I think that in the long run, though, the trucking industry has a fantastic future,” Costello said. “We are going to be asked to haul a lot more freight.”