NASHVILLE, Tenn. — A leading industry forecaster held a Webinar today to discuss the state of the US economy and its impact on carriers and equipment manufacturers. If you’d like to end your week on a positive note, you may want to check back and read this on Monday.
FTR Associates held the Webinar for its subscribers to offer insight on the recession and its impact on commercial vehicle trade cycles and production. Economist Bill Witte of the Center for Econometric Model Research said keeping up with the economic situation is like “trying to catch a falling knife.”
“Things are changing very rapidly,” he said. “Over the last three months, it’s hard to find much to be very joyous about.”
His comments came just hours after the US Commerce Department announced US GDP contracted 3.8% in the fourth quarter of 08, which was the worst since the first quarter of 1982. In 2008 as a whole, the US GDP grew 1.3%, however Witte pointed out that when removing a strong build-up of business inventory from the equation, GDP actually shrunk 5.1%.
What’s in store for carriers?
Noel Perry, managing director and senior consultant with FTR Consulting Group, said the US trucking industry has actually been experiencing a freight recession for nearly three years, “When the economy slowed down from 3-4% growth to 0-2%.”
He said that raises concerns about “cumulative stress” on the industry in addition to the immediate effects of rapidly-falling freight volumes.
“We have two parallel issues: the freefall right now and also the question of cumulative stress on the industry and the question of excess capacity,” he explained.
Today’s freight conditions in the US are similar to the last big recession in 1982, he pointed out, which was followed by a rapid recovery in 1983 and 84.
“If that were to re-occur, we’d have a pretty good freight year next year, but in the meantime we’re looking at the worst year we’ve had in anybody’s memory,” he said. “Nobody working in the industry now has experienced these kinds of levels in their lifetime.”
Fleets in the US were able to weather the storm in the fourth quarter better than expected, thanks in large part to dropping fuel prices, Perry pointed out. However, he warns that buffer won’t be around for long.
“We have not had in the industry amongst the fleets, the kind of trauma you’d expect the fourth quarter to have produced. While freight was falling off the cliff, so were fuel prices…all through the latter part of 2008, truckers were getting a nice little boost in cash,” he explained. However, he said the decline in diesel prices has flatlined, and “fleets will be left to deal with the freight downturn without this huge benefit.”
FTR Associates maintains a Trucking Conditions Index which measures many variables that impact the health of the trucking industry. It has fallen to “unprecedented negative numbers,” according to Perry.
When asked which types of fleets are best-suited to survive the recession, he said his money’s on fleets that haul personal care items for large discount retailers.
“The large dry van guys oriented towards personal care items like diapers and such and closely aligned with discount retailers are doing relatively better than some of the bulk haulers,” he said, adding “I wouldn’t want to be a flatbed operator right now.” He also said the fleets that went into the recession with the largest cash reserves have the best chance at surviving.
“One would expect the large, well-capitalized fleets to be the winners,” Perry said.
In the meantime, he said fleets competing in the US should prepare for major downward pressure on rates.
“In the fourth quarter, a huge reduction in fuel surcharges gave shippers something to declare victory over,” he pointed out. “That’s going to stop. Traffic managers are going to be under more pressure to cut costs than they were before. I would expect the worst recession in any of our lives to force the worst price pressure that fleets have felt in our lifetime.”
As a result, he said he anticipates the number of US fleet bankruptcies to “continue and accelerate” over the remainder of 09 and even into 2010.
What about equipment providers?
The news was equally grim for equipment manufacturers. Eric Starks, president of FTR Associates, said his company has lowered its 2009 annualized Class 8 sales projections from 145,000 units to 135,000 units. Non-US markets (including Canada and Mexico, where demand for new trucks was almost non-existent at the end of 08), were largely responsible for the revision, Starks said. When pressed for his “worst case” scenario for 2009, Starks said Class 8 sales could be as low as 95,000 units in 2009 and even 2010.
While some forecasters are predicting sales to rebound as tractors near the end of their traditional life-cycle, Starks said it’s more important to consider “useful life” than “age” and many of the trucks that are currently parked still have a lengthy useful life.
The export market for excess trucks has dried up due to the global economic meltdown, and Starks said fleets will have little choice but to park them til freight demand returns.
“What’s going to have to happen (with excess capacity)? These (fleets) are going to have to park these trucks and they’ll have to get eaten up as freight picks up. There really is no place to send these trucks.”
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