LAS VEGAS, Nev. - US motor carriers have seen their loads drop by about 20%, their revenue-per-mile or per-tonne fall off dramatically and their total revenues shrink by 30% on average so far in 2009....
LAS VEGAS, Nev. –US motor carriers have seen their loads drop by about 20%, their revenue-per-mile or per-tonne fall off dramatically and their total revenues shrink by 30% on average so far in 2009. In other words, the industry has taken it on the chin. So the fleet executives who converged at the posh Las Vegas Mandalay Bay Resort for the ATA’s annual conference were hoping to hear some good news from the much anticipated All Eyes on the Economy panel session.
Yet all they got from the three experts on the economy and the industry was an assurance that the worst was behind them. The worst recession to hit the US in the post-war era likely ended in the third quarter but unlike past recessions, it will not be followed by a strong and quick recovery.
Panel moderator Stuart Varney from Fox News warned fleet executives that Sara Johnson and Charles Clowdis Jr. of IHS Global Insight and the ATA’s Bob Costello would not sugarcoat anything, and they certainly did not.
Johnson, managing director of global micro-economics, said any projections of a recovery in 2010 with 3-4% GDP growth are too rosy, even though past recessions have been followed by even stronger growth.
She figures the final quarter of this year will see GDP growth around 3% as will the first half of 2010 but the second half growth will slip to just 1.5%. In total she projects the US economy, Canada’s largest market which absorbs more than 70% of our exports, to grow just 2% in 2010.
“We see some speed bumps in the road ahead,” she said, explaining that the US consumer, which accounts for 70% of spending, is still under considerable financial stress. American households have lost $14 trillion in net worth, so they’re not likely to soon return to their pre-recession free-spending ways. Johnson said just as the Great Depression left its mark on a generation of people, so too will the worst recession of the post-war era change the spending habits of today’s consumers.
“People are now a lot more conservative in their spending. They are still deep in the hole,” she said, adding that by 2005 US consumers were setting aside just 1% of their annual income, as they counted on the appreciating value of their homes to provide their retirement money. The collapse of the housing market changed all that in a hurry and now the savings rate is up to 3% of income and she expects that to climb to 6%.
So the US consumer will be saving more and spending less and will also be checked by reduced access to credit. She expects consumer spending to grow by just 2% annually rather than 4-5%. Also by the end of 2010 some of the boost to the economy gained from the Obama administration’s monster stimulus package will start to wear off and business will again slow down.
“There is a 20% chance we will indeed fall back into recession next year,” Johnson said.
Historically the trucking industry has been a leading indicator of both economic slowdown and economic recovery. But it will not be leading the US economic recovery this time, held back by still large volumes of inventory in shipping circles that needs to be worked off before there’s any need for trucks to transport new products into stores, plants and warehouses.
“We have seen an inventory cycle like never before,” ATA’s chief economist Bob Costello said. “By mid-2008 there was an unprecedented increase in the inventory-to-sales ratio.” Companies did move aggressively to bring inventory in line with sales but sales dropped faster and deeper than expected.
“Freight volumes got hit much, much harder than the overall economy but I am happy to say it has hit bottom. Volumes are still at very, very low levels and it will be slow and choppy ahead,” Costello said.
Year to date, tank loads are down about 20%, dry van loads down about 18%, reefer loads down about 2% (we still need to eat, drink and take medications during recessions) and flatbed has been hit the hardest with about a 25% decline in loads.
“And I still don’t know if we can call this bottom for the flatbed sector,” Costello warned.
Fleet capacity is down 10% across the board as carriers operate one of the oldest fleets in recent memory and employment in the for-hire sector is at its lowest level since 1995. Costello figured it would be at least another six months before trucking returned to any degree of normalcy and more likely it will take 12 months. Nor did Costello have good news for truck makers, even though the fact the industry has experienced one of its largest capacity reductions ever would make it seem on the surface as if truck plants will soon be getting much busier.
“I think you are lagging behind the fleets. Fleets don’t have plans to buy any time soon,” Costello said. Aside from weak demand for their services, fleets remain reluctant to buy because the age of their vehicles is deceptive. The average miles travelled by truck fell 22.6% in 2009 compared to the previous year. Based on a five-year replacement cycle, that basically saved a year of driving.
(Incidentally, it’s also interesting where many of the used trucks are going of late. At the start of the decade very few used trucks were finding a home outside the US. By last year, however, about 20,000 used Class 8 trucks found new homes in Russia and Nigeria. This year more than half of used truck exports from the US went to Africa).
Several issues will combine to make navigating through the next few years choppy. Bankruptcies in the industry are not close to where they should be given the economic pressures, Costello said, surmising that many lenders are reluctant to move on companies as long as their used truck assets remain low. Once the used truck market picks up, however, that will change.
“Don’t be surprised if more carrier failures start to happen as demand picks up,” Costello said.
One of the more interesting issues is the focus on reduced packaging. Supply chain executives, faced with high fuel costs and environmental concerns, are on a drive to reduce packaging, explained Clowdis Jr., managing director, North America for global commerce and transport. And they are meeting with some success which has distinct repercussions for trucking.
Clowdis Jr. gave an example of one large telecommunications company which by redesigning the packaging for one of its products was able to get 300 of them on a pallet compared to just 120 under the previous packaging design. Hewlett Packard’s packaging redesign for one of its computers is helping it reduce weight by 8% and cube by 25%. The company is able to now move in three trailers what used to take four trailers.
Wal-Mart has a much publicized plan to reduce packaging and is leaning on its suppliers to follow suit. Clowdis Jr. figured that 8% savings on weight and 25% savings on cube will become an industry norm, placing even greater pressure on capacity as fewer trailers are required to move the economy’s goods.
The panelists did deliver good news about fuel pricing, which just last year was the top concern for motor carrier executives.
Johnson said the global market for petroleum is currently over-supplied and expects pricing for a barrel of crude to stay around the $70 mark and then fall to $62 by March as the economy gets more sluggish. She added that if the impact of speculators was removed and only supply and demand issues drove crude pricing, the price would range between $50 and $70.
More good news: there’s little chance of inflation despite the $1.56 trillion deficit the US has racked up and will likely not be able to take below a trillion for another two years. Johnson said excess capacity, wage gains that are down to 1% and significant productivity gains will protect against inflation.
“But clearly we will have to pay for the deficit,” she said, explaining the heavy borrowing by government will crowd out private investors.