Far more uncertainty is now projected for truck freight volumes going forward, according to the latest analysis conducted by research firm FTR Associates, largely because the U.S. economy is performing far more poorly than previously thought.
During its quarterly “State of Freight” webcast, FTR President Eric Starks said the firm’s previous projections for tonnage growth of 4 to 5% over the next year to year and a half “no longer holds” due to current and projected economic conditions and will now most likely fall into the zero to 3% range over that time period.
“It’s very difficult to see signs for strong growth in freight due to the condition of the overall economy,” he said. “Even if freight volumes stay flat, we’d be real happy with that.”
What’s driving FTR’s “freight downgrade” is very simple, explained Bill Witte, the firm’s economist and principal of Witte Econometrics: revisions to U.S. gross domestic product (GDP) figures for the last three years indicates an economy in much worse shape than previously thought.
For example, corrected data from the U.S. Dept. of Commerce now indicates GDP dropped 8.9% in the fourth quarter of 2008, compared to previous estimates of 6.8% – the worst single-quarter decline in GDP since the 10.4% drop in the first quarter of 1958, and exceeding the 7.9% decline in the second quarter of 1980.
Though those revisions now make the initial rebound seem a bit faster, with growth running just below 4% in the first and second quarters of 2010, the data also indicates the U.S. economic recovery started losing momentum over the second half of 2010, faltering to 0.4% GDP growth in the first quarter of 2011, instead of the previous estimate of 1.9%, and climbing just 1.3% in the second quarter this year.
In short, “it’s taken an already ugly picture and made it look a lot worse; ultimately, the economy now won’t show significant improvement for at least a while.”
Separately from FTR’s webcast, Nigel Gault, an analyst with consulting firm IHS Global Insight, said the GDP figures now show more starkly than before an economic recovery that looked rapid at first – helped by inventory re-building and fiscal and monetary stimulus – simply fading away as those supports weakened.
“Since the private sector – especially the consumer and the housing market – remain burdened by the excesses of debt and overbuilding from the boom and bust, it’s unable to play its traditional role driving the recovery forward,” he noted.
Based on this revised economic data, FTR’s Witte believes the U.S. GDP will only grow at best by 2.2% for the next three quarters, with only the chance for a slight improvement above that figure by the end of 2012. As a result, unemployment should remain above 9% for the rest of 2011 before declining to 8% by the end of next year.
“There’s a small chance something better [than this outlook] will occur, but there are a lot more potential pitfalls ahead,” Witte stressed. “There are definitely significantly more potential sources of trouble.”
Yet there are some bright spots for truckers, too, according to FTR’s analysis. For starters, oil prices are dropping and that could really help consumers and truckers alike if that sparks a decline in gasoline and diesel fuel costs. Interest rates also will remain low, as the Federal Reserve recently said it plans to keep them near zero percent until 2013, and that will keep the cost of credit down.
FTR’s Starks added that the projected falloff in freight volumes won’t hurt the industry’s ability to charge higher rates, largely because truck capacity still remains very tight under the lower tonnage scenario. As a result, FTR still expects TL freight base rates to increase 5 to 10% over the next year, with LTL rates expected to be up 10%.
“Even with the lower freight forecast, truck capacity utilization only declines from 95 to 90%,” Starks noted. “Even if U.S. GDP growth falls down into the 1 to 2% range, we don’t see a collapse in the trucking industry as capacity [utilization] will stay be in the 90% range.”
The economic slowdown will also ease the driver shortage in trucking as well, “though it will only delay and not defeat this issue,” he stressed.
FTR’s projections also contain a silver lining of sorts for truck makers, as the firm believes growth in Class 8 orders and sales will be flat next year – not necessarily a bad thing, as OEMs have struggled of late to keep up with demand for new trucks. “The OEMs should like that as the rapid run up in sales this year left many of them trying to play catch up,” Starks said.
Near term, though, he expects truck makers will sharply curtail production plans. “As of now, there are still 20,000 build slots available in the fourth quarter, but we don’t think the OEMs will be willing to put trucks into inventory now,” Starks explained. “So we think they’ll cut those build slots back to 10,000.”