Trucks at Work

Some sunshine breaks through the economic clouds

I’m sure it’s unsurprising – if not downright tiresome at this point – to hear the U.S. economy characterized as “uncertain” and “sluggish” for the umpteenth time.

Yet optimism within the business community about the U.S. economy’s overall path seems to keep strengthening, with several big trucking companies sharing some positive vibes as well in their first quarter earnings reports.

Take the most recent International Business Report (IBR) compiled by global consulting firm Grant Thornton – a survey of more than 3,300 business leaders in 45 countries.

In first quarter this year, optimism among U.S. business leaders rose 30 percentage points to a net balance of 66% – the IBR’s highest level since 2004, which is saying something – with that increasingly positive take on the U.S. economy mirrored y rising optimism in other global markets.

A net of 44% of businesses globally are optimistic of the economic outlook, according to Grant Thornton’s poll – the highest level since 2007, and a 17 percentage-point increase from the previous quarter – with business optimism in China, the world’s second largest economy, increasing to a net balance of 38%, up from 22% in fourth quarter of 2013.

Japanese business optimism increased 11 percentage points to a net balance of 17 percent, while “BRIC” business optimism [with “BRIC” referring to Brazil, Russia, India and China, collectively] rising from a net balance of 22% to 40%, driven by a dramatic 26 percentage-point increase in Brazil.

Optimism in Brazil rose to a net balance of 36%, up from 10% in fourth quarter last year while business sentiment in India improved to a net 89%, up 20 percentage points from the fourth quarter of 2013.

Returning to the U.S., while there has been marginal improvement regarding plans to invest in plants and machinery (net 43%), plans to invest in research and development in 2014 (net 17%) did remain flat. Encouragingly, though, a net balance of just 29% of U.S. business leaders cite economic uncertainty as a constraint on their ability to grow their operations in the next 12 months, down from 37% in the previous quarter.

“Following our nation’s political leaders reaching a short-term budget agreement late last year and as economic indicators continue to show improvement, the large increase in optimism among business executives could be indicative that we have moved into the first prolonged period of economic stability since the financial crisis,” noted Stephen Chipman (seen above at right), CEO of Grant Thornton LLP.

He pointed out that IBR data reveals an improvement in sentiment about most areas of business performance and stability for the U.S., with profitability expectations improving eight percentage points to a net 60% of business leaders expecting to see profits climb in the next year, following a two percentage-point decrease in the previous quarter.

Hiring expectations in the U.S. increased to a net 45%, up seven percentage points from last quarter, while revenue expectations for U.S. businesses slipped a bit to a net balance of 64%, though that’s just a slight decline from 65% in the fourth quarter last year and a substantial increase from a net 46% in the first quarter of 2013.

Still Ed Nusbaum, Global CEO at Grant Thornton, added a few notes of caution to this rosier economic picture now in development.

"The IBR data provides strong hope that the global recovery is starting to take hold. The rise in optimism closely mirrors recent growth of stock markets around the world - the S&P 500 closed at a new record high earlier this month,” he explained. “We have moved into the first prolonged period of economic stability since the financial crisis and while challenges remain – particularly in the Eurozone, Ukraine and some emerging markets – firms can think and plan for the longer term.”

Importantly, Nusbaum (seen above at left) said business communities in five of the world's largest economies – the U.S., China, Japan, Germany and the U.K. – have all seen tremendous rises in confidence over the past three months.

“As major powers with significant cross-border ties, a more positive outlook in these economies is bound to trickle down to their trading partners and boost the global economy,” he said.

“With the IMF [International Monetary Fund] predicting robust global growth of 3.6% this year, we believe conditions are perfectly poised for dynamic firms to begin to invest more. We expect to see this pick up during the rest of 2014,” Nusbaum pointed oiut. “There has been a marginal improvement in plans to invest in plant & machinery, but R&D has remained flat and not increased in line with optimism. As IMF Managing Director Christine Lagarde said recently, greater investment needs to happen if this new found optimism is to be converted into meaningful growth.”

Meanwhile, the outlook for freight volumes continues to improve – building on the optimism voiced at the Mid America Trucking Show last month.

For example, the for-hire truck tonnage index compiled by the American Trucking Associations (ATA) trade group ticked up 0.6% in March, after increasing 1.9% in February indicating that freight continues to “recover” form the “hole that was dug in December and January,” according to ATA Chief Economist Bob Costello.

“However, with a cumulative gain of 2.5% during the last two months, we still have a way to go to offset the total loss of 5.2% in December and January,” he cautioned. “[But] despite the fact that tonnage hasn’t snapped back to the levels we saw late last year, the fundamentals for truck freight continue to look good. While it will take time to regain what was lost due to weather and other factors, like a potential inventory correction in the first quarter, I remain optimistic for 2014.”

Kevin Knight, chairman and CEO for TL carrier Knight Transportation, noted some positive trends in his company’s first quarter earnings report – especially greater demand for capacity as well as a stronger used equipment market.

''Revenue per tractor increased 5.1%, year over year, as a result of a 4.9% improvement in revenue per loaded mile, a 4.2% increase in our length of haul, a 140 basis point improvement in our non-paid empty mile percentage, and a 1.3% decrease in miles per tractor,” he added. “In the first quarter of 2014 our trucking businesses improved their operating ratio to 82% from 85.3% in the same quarter last year. Our brokerage business continues to grow rapidly and increased revenue 94.4%, increased gross margin 91.2%, and increased operating income 89.2%, when compared to the same quarter last year. As the trucking environment remains strong, we feel well positioned.”

Knight also noted that total revenues increased 5.8% to over $249.1 million in the first quarter this year compared to the same period in 2013, with net income jumping 25.6% to a shade over $19 million – not bad after plowing through arguably one of the worst winters in recent U.S. history.

And he stressed that even though the trucking industry continues to be faced with multiple inflationary pressures – including rising driver pay, increased regulation, additional maintenance cost associated with the 2010 EPA emission engines, and rising equipment cost – the carrier is finding ways to not only manage them but improve profitability as well.

“Our specific efforts to improve yield, strengthen our network, and drive operational efficiencies have yielded positive results,” Knight explained in the company’s earnings statement. “We experienced a 4.2% longer length of haul and reduced our non-paid empty mile percentage to an all-time low 9.6%.

Those are some very good trends. Now all that’s got to happen is for them to get some sustainable legs for the rest of the year.

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