Trucks at Work
Watching freight’s fundamentals

Watching freight’s fundamentals

"The levels of uncertainty cited about prospects for both U.S. and global economies over the next year show that companies are still carefully navigating the sector's landscape with cautious hope for the future.” –Barry Misthal, U.S. industrial manufacturing leader for consulting firm PricewaterhouseCoopers

A lot of the polls and surveys tracking the many fundamentals affecting freight volumes – manufacturing activity, retail sales, and of course oil prices – report things are still uncertain at best, although confidence seems to be growing in many sectors that the worst of the economic upheavals of late are now behind us.

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Take the latest edition PricewaterhouseCoopers LLP's Manufacturing Barometer, for example. This survey reports that optimism about the U.S. economy is down slightly from last quarter, but still shows strength, with almost half (45%) of U.S. industrial manufacturers optimistic about the next 12 months. Only 12% of industrial manufacturers are pessimistic about the U.S. economy's prospects over the next 12 months, while 43% are uncertain.

Of those marketing abroad, 38% are optimistic about the world economy over the next 12 months, down 15 points from last quarter. PricewaterhouseCooper’s quarterly survey – based on interviews with 60 senior executives of large, multinational U.S. industrial manufacturing companies about their current business performance, the state of the economy and their expectations for growth over the next 12 months – also discerned that while more respondents are uncertain, at 46%, only 16% are truly pessimistic about global economic growth.

The majority of the survey’s panelists (58%) believe the U.S. economy was growing in the second quarter this year, marking the first quarterly survey since the third quarter of 2007 (nearly three years ago!) for which a majority reported growth. Only 15% viewed the U.S. economy as declining, PricewaterhouseCoopers pointed out.

Among international marketers, only 45% viewed the world economy as growing in the second quarter, similar to the 44% reported in the first quarter this year. Yet more (27%) viewed it as declining; a reading that swelled by 11 points.

However, of survey respondents selling abroad, 42% reported an increase in sales, which dipped from last quarter but is notably above the prior three quarters, even though 24% reported a decrease in sales abroad, while 34% stayed about the same.

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"While international sales dropped from last quarter, the fact that they are still significantly above the last three quarters of 2009 indicates that global manufacturing sales will most likely continue their upswing in performance, despite the present uncertainty,” noted Barry Misthal, U.S. industrial manufacturing leader for PricewaterhouseCoopers.

Looking at the next 12 months, the projected average revenue growth rate among panelists doubled from 3% to 6% quarter over quarter, bringing it back into the normal range seen in this survey for a more stable economy, Misthal said, with 73% expecting positive revenue growth for their own companies over the next year, with 30% forecasting double-digit growth (up 18 points) and 43% forecasting single-digit growth (up 20 points). The 30% forecasting double digits are directly responsible for the rise in the overall average projected growth.

Here’s another piece of confident forecasting: according to Marcela Donadio, oil and gas leader for the Americas at Ernst & Young LLP, oil prices should stay relatively stable in the near term.

“Oil prices have been remarkably constant,” Donadio said. “More modest consumption habits and weak developed economies have eased demand pressures creating consistent prices in the $70 to $80 per barrel range for nearly a full year. Pending any swings in the economy, prices are expected to remain relatively stable in the short to medium term.”

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That dovetails with what Noel Perry – principal of research firm Transport Fundamentals, as well as managing director and senior consultant with FTR Associates – thinks will happen.

While the excess production capacity maintained by OPEC [the Organization of Petroleum Exporting Countries] has dropped by a third from its four million barrels per day peak of last year, there’s still enough left to give truckers a year or two “grace period” before any major fuel price spikes might occur, he noted in FTR’s recent The State of Freight webinar.

“Fuel remains a wild card, of course, but I think it won’t be until 2012 where we’ll be more susceptible to the type of price swings we saw in the 2007/2008 time period,” he noted.

All that being said, big bumps remain along this road to economic recovery.

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“Class 8 industry retail sales in the U.S. and Canada are expected to be in the range of 110,000-130,000 vehicles in 2010, reflecting the uneven economic recovery, high unemployment, and the continued low level of housing starts and auto production,” noted Dan Sobic, executive vp with global truck maker Paccar in the company’s second quarter earnings report.

“There are some encouraging signs as freight tonnage continues to modestly increase and our customers’ profitability benefits from stable fuel prices and recent improvements in freight rates,” he said. “[But] truck retail sales are still below replacement demand levels, resulting in the North American truck average fleet age of nearly seven years.”

More broadly, U.S. manufacturers are also becoming increasing concerned about the regulatory landscape. For the second quarter in a row, PricewaterhouseCoopers’ survey found that legislative/regulatory pressures ranked highest among perceived barriers to growth over the next 12 months, with 63% percent of panelists naming it as a concern, though that number is down 10 points from last quarter.

Taxation policies rose 14 points this quarter, cited by 57%, as another potential hurdle. Yet the number concerned about lack of demand dropped 13 points in the second quarter, even though it remains a potential barrier according to 50% of respondents, followed by the monetary exchange rate, cited by 40% of the survey panelists.

Just some of the factors we’ll need to keep a close eye upon as the global economy continues to revive in fits and starts.