Analysts Growing Cautious on 2016 Trucking Outlook

Freight industry experts are increasingly growing cautious about 2016, based on the expected continuation of recent sluggish market conditions as well as other factors.

Freight growth is likely to slow because the U.S. economic expansion is “growing old” after nearly seven years, said Noel Perry, a managing partner at consultant FTR.

“The very strong manufacturing and industrial expansion that we have had in this recovery . . . is slowing,” he said. Industrial production dropped about 1% so far this year after climbing 4% or more in 2014.

That strength has sustained freight growth, which has exceeded GDP so far in the current recovery. However, as the economy slows, that trend should reverse itself, based on historic trends of slower freight growth late in recovery periods, Perry said.

That means freight will grow more slowly than the economy, he said. There could even be a recession in the freight sector as soon as 2017 even if the overall economy is growing, he said.

FTR economist Bill Witte projected GDP growth in the 2% to 2.5% range for next year, following the familiar pattern over the past four or five years.

“Looking to 2016, we anticipate these sluggish but stable trends to continue,” said a report by BB&T Capital Markets analyst Thom Albrecht, who also cited the increasing risk that widespread weakness in energy and other commodity markets could further damage trucking growth.

“Something that should be a worry for 2016 freight creation but isn’t being talked about are corporate America’s capital expenditure budgets. November through January are when budgets are set, and this global demand drop-off portends lower [capital expenditure] budgets across a lot of industries.”

Transportation equipment, he said, is an industry where lower capital spending will lead to a drop of 20% or more in tractor, trailer and railcar manufacturing.

Others were more optimistic.

Deutsche Bank analyst Robert Salmon said “the operating environment is still in decent shape” for next year.

“The consumer is relatively stable with lower fuel costs and gradually improving employment trends, which should provide a modest bump in delayed peak-season demand,” he said in a report last week.

Werner Enterprises Chief Financial Officer John Steele said at an investor conference last week that 2016 is “more dependent on the consumer” in an economy that “generally feels OK.”

The executive at the No. 16 company on the Transport Topics Top 100 list of the largest U.S. and Canadian for-hire carriers also said that, while he expects a “good, solid freight market, it is hard to determine the strength at this time.”

Also last week, No. 3 J.B. Hunt Transport Services became one of the first fleets to offer a 2016 forecast. It expects 8% to 11% profit growth in 2016, which is slightly below the first three quarters of 2015.

Perry said the driver shortage shouldn’t worsen in the first half because fleets have enough capacity to move freight at current demand levels. Tightness could worsen in the second half as federal regulations tighten, he added.

“The big uncertainty is how much hours-of-service restrictions might return,” he said.

Witte and Perry said there should be more concern about the global economy, particularly in China. Perry said manufacturing in China already is in recession.

That fact should further weaken world commodity markets, hurting trade in commodities used as raw materials.

One area that seems certain to soften next year is truckload rate growth, said Ben Hartford, a Robert W. Baird & Co. analyst who believes rates are likely to rise 2% compared with 4% to 5% this year.

“The magnitude of the deceleration depends on the strength of the fourth-quarter 2015 peak season and the passage of an electronic logging device mandate,” he wrote.

In addition, Hartford said, there could be further pressure on future rate increases as shippers negotiate rates, “given the soft spot market pricing and the availability of truckload capacity during 2015.”