Freight Seen Remaining Weak Until Consumer Spending Rises

This story appears in the Sept. 7 print edition of Transport Topics.

Fleets shouldn’t expect a pickup in freight business anytime soon, because wary consumers remain reluctant to spend and shippers continue to stock less inventory, fleet executives and industry experts said.

That message was delivered at an FTR Associates Transportation Conference late last month by U.S. Xpress Enterprises Co-Chairman Max Fuller, USA Truck Chief Financial Officer Darron Ming and FTR officials Eric Starks and Noel Perry.

“I think consumers are still concerned about their jobs,” Fuller told Transport Topics several days after the conference concluded. He noted each 1% consumers save instead of spend reduces economic activity by $116 billion.

“That is the effect that the truckload guys are feeling,” Fuller said. “This is a pretty severe dip. We are seeing things improve lately, but it is going to be very muted. I’m still optimistic and bullish on the truckload industry, but it is going to be a trying period for the next 12 to 18 months.”

The latest evidence of the weakness was the 10.4% year-over-year drop for July in American Trucking Associations’ seasonally adjusted truck tonnage index.

“We have hit the bottom, and we are bumping along there,” Ming told TT. “You’ll have a week where things are better, or at least less worse, and then you will have a week where you go backwards. We are not seeing any spike in demand. It’s still way at the bottom.”

Paul Will, chief financial officer of Celadon Group, also said the market has bottomed, and added that “we may be seeing a little bit of uptick here and there.”

He told TT business seems to have stabilized through a combination of capacity reduction — particularly by large fleets — and possible modest inventory replenishment by shippers.

“We won’t see any massive inventory restocking until the consumer starts spending again,” Ming said, a point also stressed by Fuller. “We still see inventory levels as being too high, even though they have come down a little bit.”

The Conference Board’s ratio of inventory to sales, a measure of how much product is in stock relative to sales, hit a 30-year high in January at 1.471 and improved only to 1.459 in July. In the two years before the economy began to slide last September, the ratio averaged 1.327.

“Fleets were hoping that inventories would save the day for them a little bit — that maybe there would be a little restocking,” Eric Starks, president of FTR, told TT. “People now seem to be realizing that is not going to be happening.”

Despite the lack of inventory restocking, Starks said he still expects the third quarter will be “fairly decent,” citing estimates from meeting participants of gross domestic product growth rates between 1% and 3%.

Those numbers would be an improvement from a 1% second-quarter drop and 6.4% decline in the first quarter.

“That [third-quarter estimate] suggests we could be coming out of the recession,” Starks said. “The major question is that kind of growth enough to generate freight. The consensus was that was not likely. It could be mid-to-late 2010 before you see freight picking back up.”

“We are at the bottom of the steepest decline in freight since 1980-82, 15% down from the previous peak,” said Perry, a former Schneider National and CSX executive.

He believes equilibrium between supply and trucking demand possibly may not be reached until late 2011 if the past recovery patterns after a banking crisis are repeated. It’s still possible, Perry said, that the supply/demand balance could be reached a year sooner.

“There is a macro tend and an economic trend that are overlapping” to challenge truckload operators and create excess capacity, Fuller explained.

He pinpointed several factors in the macro trend that has continued since 2002: shippers’ supply chains have become more efficient, intermodal rail has taken some market share and the pre-buy of truck prior to 2007 emission regulations changes swelled the tractor fleet.

That overcapacity was being worked down by truckload operators until the economy fell apart late last year, he said.

Count Fuller among those who think trucking bankruptcies will swell later this year after declining so far in 2009.

“At the end of this year, [fleets] with extended payments, insurance payments and license plates will have a lot of problems getting the money,” Fuller said.

Perry agreed, saying “small fleets are surviving this time due to the banks’ reluctance to foreclose in the face of the weakest used truck market in memory. We expect bankruptcies to turn up at the end of the year when insurance and tax bills become due.”

“Fuel is the wild card,” Fuller said. “If fuel goes up it will take longer to work off the excess inventory. The more it [fuel] goes up, the more it will slow down the recovery.”