Motor carriers shouldn’t feel too much of an impact from a dip in freight volumes of late as trucking capacity still remains well below demand – and all indications are that fleets are not planning to expand their fleets anytime soon.
According to Jon Langenfeld, transportation analyst with investment firm Robert W. Baird & Co., the outsized freight demand that occurred in the first half of this year is starting to moderate to what he terms “more sustainable growth trends.”
The Institute for Supply Management noted that its new orders index decreased five percentage points in July to 53.5% from June’s 58.5%. The group added that manufacturers’ inventories grew for the first time following three consecutive months of contraction, with ISM’s inventory index registering 50.2% in July, which is 4.4 percentage points higher than June’s 45.8%.
As a result, Baird's Domestic Freight Index dropped to +6.1% in June, vs. +6.5% in May, indicating June freight trends were not as robust as May, Langenfeld pointed out, That reflects slowing retail sales, concerns over Europe and hesitancy to add inventory. “Looking ahead, we expect a more normal seasonal progression to emerge as part of a sustainable recovery, which will result in slowing growth,” he said.
That being said, Langenfeld pointed out that trucking capacity remains constrained, even at current freight levels, which will support both spot and contractual rate growth. He also doesn’t believe carriers will add capacity anytime soon, either, as 2010 already represents the fourth consecutive year of below-replacement level orders for new trucks.
The motivation of carriers to buy and the motivation of banks to lend remains low.
Eric Starks, president of research firm FTR Associates, said Class 8 net orders dropped to 11,473 units in July, which is a 27.2% decline month-over-month from June. “We’re seeing some replacement of equipment, and that’s good, but we’d hoped the numbers would be better,” he told FleetOwner.
“Right now, we’re sitting at a nine-month average of 12,000 net Class 8 orders per month. If we were to be in a stronger growth mode, we’d see that order level up around 20,000 per month,” Starks explained. “That’s the next benchmark that’ll indicate significant economic improvement.”
The overall economy remains the big wildcard, he stressed, as many businesses are staying in a holding pattern of sorts. For instance, according to a Federal Reserve report in early July, the largest 500 non-financial firms in the U.S. had accumulated $1.8 trillion in cash on their balance sheets, yet most were not investing in new factories, equipment, or workers.
Still, economic expansion is occurring, albeit at a much slower pace. Norbert Ore, chair of the Institute for Supply Management’s manufacturing business survey committee, said that while the group’s purchasing managers index (PMI) dipped 0.7 percentage points in July to 55.5% when compared to June’s 56.2%, any reading above 50% percent indicates that the manufacturing sector is still generally expanding.
“Manufacturing continued to grow during July, but at a slightly slower rate than in June. Employment, supplier deliveries and inventories improved during the month and reduced the impact of a month-over-month deceleration in new orders and production,” he said. “If the PMI for July (55.5%) is annualized, it corresponds to a 4.5% increase in real GDP annually.”
