Investment analysis firm Fitch Ratings believes the freight market will experience a sluggish 2008, at least through the first half of the year, as overall U.S. economic growth remains restrained.
“The past year proved challenging for the freight transportation industry in the U.S., and 2008 will likely remain difficult, at least through the first half [of the year],” said Fitch in its quarterly market outlook statement. “Demand for the goods shipped on U.S. highways and rails declined in 2007 as compared with very strong demand levels in 2005 and the first half of 2006. This decline in demand over the past year has been largely due to the slowing U.S. economy.”
The firm said weakness in the residential construction and auto manufacturing industries, falling home prices, increasing energy costs and, more recently, tightness in the credit markets have put increasing pressure on consumers. The resultant weakness in retail sales has led to reduced industrial production, which has in turn driven declines in demand for both raw materials and finished goods, and thus freight services.
“Following three years of strong demand growth that led to higher volumes and pricing power for both the railroad and trucking industries, demand began to wane in the latter half of 2006 and weakened further over the course of 2007,” Fitch noted. “The hoped-for up-tick in demand that many expected in the second half of this year never materialized, and demand in the peak season has been about as weak as the lackluster period last year. Excess truck capacity in both the TL and LTL sectors has forced truckers to choose between price and volume.”
Fitch believes continued weakness in housing, potential tightness in the credit markets and high energy prices will restrain economic growth in the U.S. gross domestic product (GDP) to 1.7% in 2008, down slightly from a forecast of 1.8% for full-year 2007 and well below the long-term average projection of 3%.
“This slow growth rate will continue to weigh on the financial performance of both industries, blunting demand growth and restraining pricing. Railroads are expected to perform better overall than their trucking peers as relatively tighter rail capacity and less exposure to cyclical shipments will continue to support pricing,” the firm said. “With thinner margins, lower liquidity cushions and reduced free cash flow, credit profiles within the trucking industry will be more sensitive to changes in the external environment.”