A variety of indicators point to slowing U.S. economic growth, which most likely will depress freight volumes in the near future.
According to recent comments by Phillip Swagel, Asst. Secretary of the Treasury or Economic Policy, the weak housing market in particular looks to be a drag on U.S. gross domestic product (GDP) growth for the next several quarters. However, the housing downturn doesn’t appear to have had serious impact on other parts of the economy, he stressed.
“The labor market remains broadly healthy, with low unemployment, continuing job creation, and wage gains that should support consumer spending,” said Swagel. “World output growth has boosted net exports and core inflation appears to be contained. Looking forward, however, the ongoing drag from construction, the problems in credit markets, and higher oil prices have led private forecasters to reduce their projections for GDP growth in the fourth quarter of 2007 and into 2008.”
Declining residential building activity has subtracted substantially from GDP growth since the correction began, Swagel said, with annual housing starts falling nearly 50% through September this year after peaking at an annual rate of almost 2.3 million units in early 2006.
Trucking executives noted that the U.S. economic slump continues to impact operating results. “The third quarter presented the most difficult operating environment in several years for … our business model,” said Kevin Knight, chairman & CEO of Phoenix-based Knight Transportation, in its third-quarter earnings report.
The carrier’s net income decreased to $14.5 million in the third quarter despite a 3.2% increase in revenues to $180.3 million compared to the same period in 2006. Year to date, net income declined to $49.3 million from $52.8 million in the same quarter last year, even though total revenue increased 7.7% to $527 compared to the same nine-month period in 2006.
“During the third quarter, the industry wide supply of truckload equipment outpaced freight demand, which pressured pricing and resulted in lower equipment utilization,” said Knight. “[Our] average freight revenue per tractor declined 7.7% vs. the third quarter of 2006, resulting from a combination of lower freight rates and fewer average miles per tractor … [as] our revenue per loaded mile decreased 3.7%.”
“Our third quarter financial results were disappointing as we continue to work through the sustained weakness in freight demand,” said Robert Weaver, president of Tontitown, AR-based P.A.M. Transportation Services. “The prolonged softness of the freight market and continued aggressive price competition resulted in a 4.7% reduction in revenue per tractor per day for the [third] quarter compared to the same quarter in 2006.”
P.A.M. compiled net income of just $36,178 in the third quarter on roughly $86.6 million in revenues, a far cry from the $3.36 million in earnings it booked on revenues of $85.5 million in the same period last year.
An increase in fuel expense without a corresponding increase in surcharges paid by customers as well as a decrease in fuel efficiency measured in miles per gallon due to the use of trucks equipped with 2007 emission-compliant engines also hurt P.A.M.’s bottom line. “Looking ahead at the remainder of the year, we do not expect our current market environment to improve significantly, and intend to focus on cost control and reduction,” said Weaver.
On the energy front, Treasury’s Swagel said higher energy costs should continue. “Energy prices increased 5.4% over the latest twelve months, although prices have been volatile in this period, and crude oil prices have surged in the most recent few weeks,” he said. “The sharp run-up in oil prices since mid-August has prompted forecasters to lower their projections for near-term growth. High energy prices remain a challenge for consumer and business spending, while tight inventories and limited global production capacity mean that the possibility of sharply higher oil prices from a supply disruption is a key downside risk for the economy.”