Carriers that have survived the recession should be well positioned for a modest rebound this year, but spiraling insurance costs still threaten many companies. That was the message Bob Costello, chief economist for the American Trucking Associations, delivered to attendees at this year’s Randall Trucking Symposium in Tuscaloosa, Ala. Meanwhile, the truckload industry’s financial troubles and consolidation in the past couple of years has, not surprisingly, resulted in a shift of truckload activity to larger carriers, Costello told Symposium attendees.
Costello said signs point to a mild economic recovery this year, and he cautioned trucking executives not to be overly enthusiastic about positive economic news from the first quarter of 2002. Driven by gains in personal and government spending and inventory rebuilds, the gross domestic product grew 5.8 percent in the first quarter of 2002 from a year earlier.
That’s the strongest GDP growth in more than two years, but it’s not as great for trucking as it might sound, Costello said. Exports, for example, rose 6.8 percent, but that reflects 26.9 percent growth in export of services and a 1.2 percent drop in the export of goods. Also, while personal spending was up 3.5 percent, business spending fell 5.7 percent.
“Until business is convinced the recovery is real, that’s going to keep a lid on the potential for domestic manufacturing,” Costello said.
Particularly revealing is the fact that more than half of the growth in the first quarter GDP represents rebuilding inventory, Costello said. During 2001, manufacturers slowed production and allowed their inflated inventories to dwindle. By the beginning of this year, companies saw the need to rebuild inventories. Therefore, strong numbers in the first quarter do not necessarily indicate a continuing resurgence in the manufacturing sector. Manufacturing has been hurt by strong exports and a strong dollar, which makes U.S. goods more expensive overseas. In fact, manufacturers are using only 74 percent of their capacity. The historical average is 83 percent, Costello said.
Costello believes that as the economy sees gains in employment, consumer spending will prop up a subdued economic recovery. Whether that recovery continues, Costello told Symposium attendees, depends on whether businesses begin to invest more.
The state of trucking
The economic slowdown hit truckload carriers early, producing reduced and flat volume, Costello said. Today, truckload volume is recovering but less-than-truckload is suffering. Flatbed has seen the most growth since the late 1990s, while bulk and dry van saw modest expansion of their markets. Refrigerated had the slowest growth, but was also the most stable.
Particularly striking, Costello noted, is the shift in truckload activity from smaller to larger carriers in the past couple of years. According to ATA’s index of truckload loads, activity for smaller TL carriers – defined by ATA as those with less than $30 in annual revenue – began dropping fairly steadily in the middle of 1999. Activity for larger carriers, meanwhile, held fairly steady during 2000 and grew during 2001. Costello attributes the sharp differences to consolidation and to the industrywide problems that have hit smaller carriers particularly hard in the last couple of years.
And those factors, such as insurance and fuel, remain trouble spots, Costello said. On average, primary truck insurance premiums rose 17 percent in 2000, then 32 percent in 2001, he said. Premiums for umbrella coverage rose 33 percent on average in 2000, then 87 percent in 2001. Many carriers saw far higher increases.
“It hasn’t gotten any better,” Costello said. ATA believes the answer to skyrocketing insurance costs is civil justice reform. “Even though the trucking industry has gotten safer and safer, the average cost per claim has gone up and up.”
Fuel prices have moderated from the $1.50 to $1.60 levels that marked much of 2000 and 2001, but their volatility remains a concern.
“That makes business decisions very difficult,” Costello said. “With what’s going on in the Middle East, you can expected volatility in this area.”