Freight Worries Growing

By Rip Watson, Senior Reporter

This story appears in the Sept. 29 print edition of Transport Topics.

Truck tonnage gained 2.6% in August from last year but fell sharply from July, which analysts said was evidence of a deteriorating freight market that could become even worse because of mounting economic uncertainty and financial market problems.

American Trucking Associations said tonnage fell 1.6% from July, the steepest monthly drop since March. The decline brings the preliminary seasonally adjusted index for August to 113.6, the lowest level since November of last year.

The August drop followed a de-cline in July that itself was revised downward — to a 0.9% drop from the 0.3% decline that was reported earlier.

“The freight recession is lasting much longer than expected, as fiscal and monetary policy stimuli are not helping much in the face of the ongoing credit crunch, high energy prices and the uncertainty surrounding the upcoming presidential election,” analyst David Ross of Stifel, Nicolaus & Co. said in a Sept. 24 report.

The latest evidence of a flagging truck freight market emerged as financial markets’ uncertainty mounted last week during the debate in Congress over how to bail out banks whose lending power has been cut by their bad loans.

American Trucking Associations President Bill Graves urged quick action by Congress and the Bush administration to approve the Treasury Department’s plan to stabilize the U.S. financial system. Congressional leaders said late on Sept. 25 that an agreement in principle had been reached on the plan.

The latest signs of weak demand in the economy were a 4.5% drop in durable goods orders last month, rising unemployment claims and an 11% drop in new home sales to the lowest rate since January 1991.

“The current situation adds a big cloud of uncertainty on the economic outlook and thus truck tonnage,” said ATA’s chief economist, Bob Costello. “Make no mistake about it, freight volumes are weakening. I believe the economy will slip into a recession late this year and early next year, which is going to negatively impact truck volumes.”

The tonnage decline was reported for a month that in better times has kicked off the peak freight shipping season.

The latest ATA figures confirmed comments from carrier executives earlier this month about the weakening freight market.

Speaking at a conference in Atlanta, Mark Rourke, president of truckload services for Schneider National, said conditions could weaken further if tighter credit prompts consumers to pull back on their purchases. Two worrisome indicators are the rising unemployment rate last month and back-to-school sales that were “not thrilling.”

“I don’t think anyone’s feeling more optimistic as a result of this news,” he said.

Ray Kuntz, chief executive officer of Watkins & Shepard Trucking and current ATA chairman, said at the same conference that he believes soft demand “will continue through the second half of this year, and we’ll see a stronger trucking economy next year.”

Tonnage declines in August and even worse volume this month have been driven by that industrial and international weakness rather than by the housing market troubles and weak consumer demand that prompted the initial drop in truck tonnage that began two years ago, said Stephens Inc. analyst Thom Albrecht.

One factor that is helping fleets that have worked their way through sluggish demand earlier this year is the reduced capacity that has followed more than 1,900 bankruptcies in the first half of the year. Analysts estimated that at least 4% of capacity has been culled from the freight fleet.

Rourke and Kuntz corroborated that view.

“Any recovery that we’ve seen has not been driven by increased demand for trucks but from a tightening in supply,” Rourke said.

Kuntz agreed, saying that “there is still a soft demand for trucking, but there are not as many trucks available because the supply has tightened.”

Freight tonnage began to fall in August 2006 before beginning to recover year-over-year in October last year. Tonnage is up 3.4% in 2008 over 2007 after dropping 1.7% last year.

“As a result of a softer economic backdrop, healthy manufacturing inventories and a constrained consumer, we remain cautious about second-half 2008 freight demand,” Wachovia Securities analyst Justin Yagerman wrote on Sept. 23. He lowered his estimates for less-than-truckload carrier earnings, citing excess capacity.

Albrecht raised the prospect in a Sept. 24 investor note that the August performance could signal a new round of tonnage declines later this year, triggered by weaker demand for industrial products and exports.

Poor August numbers and even worse volumes in September illustrate weakening demand for industrial products used in commercial and government construction projects, he said. Those sectors have held up better than residential construction.

At the same time, exports of heavy goods such as machinery, which also have buoyed tonnage this year, are in danger of dropping as well, Albrecht said.

“The industrial slowdown re-flects broader global worries,” he wrote.

Associate News Editor Jonathan Reiskin contributed to this report.