INDIANAPOLIS. A less-than-rosy future of the U.S. economy and truck freight markets got painted here at the 7th annual FTR Transportation Conference this week. With 2% gross domestic product (GDP) growth expected over the next three quarters considered the most optimistic projection on the table – with a “growth recession,” where GDP stays flat or inches up a mere 1%, considered a “significant possibility” as well.
“The U.S. economic situation has deteriorated over the last six months,” said Willard “Bill” Witte, senior economist for FTR Associates at the conference. “The first half of this year was far weaker in terms of GDP growth than expected and the outlook now for the rest of 2011 and 2012 is now more pessimistic.”
Witte noted that FTR previously forecast GDP growth of 4% over the first two quarters of 2011, but in reality, GDP grew a mere 0.7%. “So now what we see moving ahead is the hope that we may end up averaging 1.6% GDP growth for all of 2011,” he said.
Witte added that while a “double dip” recession still remains an unlikely scenario, “it clearly must be put back on the table” in light of how the U.S. economy is currently underperforming. “Lots of things could precipitate a ‘double dip’ here, such as a worsening of the European sovereign debt crisis,” he explained.
The impact on truck freight from this “economic downgrade,” however, will be mixed, stressed Noel Perry, FTR’s senior consultant and president of Transport Fundamentals LLC. “You need to look at this from two time frames, viewed in terms of how long-term trends and short-term business cycles are affected,” he pointed out.
Over the long term, the U.S. economy is now expected to recover steadily but far more slowly than expected, with the 10-year average for economic growth dropping from 3% to 2%. “That means that the economy itself will not provide sustained growth for your transportation business as growth is going to be less than it used to be,” Perry explained. “That’s the first conclusion.”
In the short term, though, the trucking industry may actually experience better times than other economic sectors. “That’s because there’s a much stronger freight component to this economic recovery, as it’s being led by increased manufacturing and exports and that’s insulated much of transportation from the recent decline,” he said.
As a result, FTR expects TL tonnage growth to range between 3 and 3.5% over the next two to three years.
However, Perry warned of some new wrinkles trucking companies need to contend with. The first is that the downside of a “slow growth” economy is that business cycles are becoming far more volatile and the recent recession has also put what he called a “permanent crimp” in trucking growth.
“In the 1980s and 1990s, we would go 10 years between recessions,” he explained. “In the ‘aughts’ [2000 to 2010] that narrowed to seven years. Now we’re looking at the possibility of three years between recessions.”
Perry added that shippers are also finding permanent ways to reduce transportation expenses during recessions too, meaning the trucking industry’s “margin for error” in terms of correctly sizing freight capacity is getting slimmer and slimmer.
“In 1992, for example, fleets would be happy – and profitable – with capacity utilization rates of 88 to 89%,” he said. “But by 2011, they are only happy if utilization is above 95%. So if you’re wondering why one of the weakest economic recoveries ever produced such substantial capacity tightness, there’s why.”