Ready to go

A sustained recovery in trucking depends on a strong manufacturing sector. Increased orders in recent months point to a near-term rebound in manufacturing-related hauling.

For three years or so, economists have predicted a rebound in the second half of the year. These optimistic projections often seem based on an unlikely simultaneous occurrence of numerous positive factors akin to drawing into an inside straight flush. You really can’t blame these pundits. Psychology plays a significant role in the economy, so it’s natural to accentuate the positive.

Today, however, it hardly seems necessary to puff up the economy. In the third quarter of 2003, for example, the gross domestic product (GDP) grew at an annualized rate of 8.2 percent. Some of that growth surely came from a one-time boost in incomes due to the child tax credit refunds mailed in July and August. But business spending on equipment and software rose nearly three times as fast as personal consumption, according to data compiled by the Department of Commerce’s Bureau of Economic Analysis.

Finally, the economy has found its missing ingredient. Consumers have stubbornly kept the economy from floundering, and housing starts – driven by low mortgage rates – have remained relatively strong for several years. But now, the other side of the economy seems to be starting an upswing.

“Businesses are beginning to invest again,” says Bob Costello, chief economist for the American Trucking Associations. The last time businesses truly were in an investment mode was in 1999 as they prepared for the Y2K bug, he notes. The confidence of the business community shows in the stock market. The Dow Jones Industrial Average, for example, has been steadily rising and is within striking distance of its record.

“I think 2004 definitely will be better than 2003,” Costello says. “There will definitely be an increase in volumes.”

“Monetary policy, fiscal policy and fairly dramatic devaluation of the dollar make me extremely bullish about the U.S. economy in general,” says Donald Broughton, transportation equity analyst for A.G. Edwards & Sons.

Partner Insights
Information to advance your business from industry suppliers

While the economy and trucking industry as a whole may be looking at a great year, individual carriers face challenges. The new hours-of-service regulations add to carriers’ difficulties in ensuring driver availability and maximizing equipment utilization. In a strong recovery, especially under the new hours rules, carriers must shift their thinking from lowering costs to increasing productivity – without letting costs spiral out of control.

Rising demand
The trucking industry’s fortunes are tied closely to those of manufacturers. That’s been a weakness in recent years, but manufacturing is beginning to pick up. In the last few months, factory orders have grown on a year-over-year basis. On the strength of both consumer and business spending, analysts see 2004 as a good year for freight.

“It should be the best year since 1999,” says Chris Brady, president of Commercial Motor Vehicle Consulting, which tracks trucking economic trends for industry suppliers. Freight is

One reason why 2004 should be a good year is tight capacity. A.G. Edwards estimates that more than 11,000 carriers have shut down since the beginning of 2000.

on the upswing, Brady says, primarily because business investment is recovering, exports are starting to come back and consumer spending is growing moderately or better. A weaker dollar abroad makes U.S. exports more appealing, and about 25 percent of U.S. industrial production is related to exports, Brady notes.

Costello expects to see growth in tonnage of close to the average since 1985 – 6 percent. By comparison, tonnage growth in 2003 will come in at 3 to 3.5 percent.

“The big development will be the upsurge in the strength of the manufacturing sector,” Costello says. While manufacturing represents 10 to 12 percent of GDP, it’s far more important than that to the trucking sector, he says.

“Manufacturing orders are growing at a good clip,” Costello says. But he cautions against becoming too confident based solely on the government’s industrial production figures. Those numbers are based on the value of goods, not volume or weight. Currently, high-value, lower weight goods are driving the rise in industrial production, he says.

Even so, Costello sees positive signs, especially in personal consumption of durable goods, such as furniture, televisions, computers and automobiles. “The consumer is not only spending but is ramping up spending, including for durable goods.”

While many observers are encouraged that manufacturing is recovering, Broughton believes a rebound is just the beginning. “I am becoming more and more convinced that the U.S. heavy manufacturing economy will see a renaissance that no one is expecting,” he says.

Labor costs for U.S. manufacturing are high, Broughton concedes. “But in the United States, we are very good at taking capital and technology and replacing labor.” Broughton compares manufacturing to agriculture. “The U.S. farmer’s labor is expensive, but he makes an acre so incredibly productive that we end up producing so much more than others.”

The key ingredients are in place for an upswing in manufacturing, Broughton argues. Cost of capital is the lowest in 40 years. Technology is robust and cheap. Fiscal policy encourages investment. “And we have a currency that’s acting like a double-edged tariff.” A weak dollar makes U.S.-produced goods more attractive overseas while making foreign goods less attractive in the United States.

“I expect U.S. companies to take cheap capital and innovative technology, take advantage of the tax benefits and reinvent U.S. manufacturing,” Broughton says.

Such a resurgence – beyond just a recovery to production levels a few years ago – would be very good for trucking. “If you import something, you get the move from the port to the final point of consumption,” Broughton points out. “But if you make something here, you get a multiplication of ton miles.” Every step, from raw materials through final purchase of the retail good, involves transportation.

One factor that can affect carriers’ fortunes in the near term is the holiday retail season. “What we need for the industry is for sales to be strong enough to drive demand for replenishing inventories,” Costello says. “We will be very happy if that happens. However, if

American Trucking Associations’ index of truck tonnage has been volatile, but the general trend is upward.

it doesn’t happen, it doesn’t mean that 2004 will be bust.” As of late December, the final tally was uncertain. Sales immediately following Thanksgiving were brisk, but they appeared to weaken somewhat over time. And a major snowstorm blanketing the whole East Coast didn’t help.

But the holidays aside, observers see a broad-based economic recovery as helping almost all trucking segments. If there is a loser in the short run it’s probably the carrier that hauls mostly for importers.

Tighter capacity
Don’t forget the law of supply and demand, however. High demand is always better than low demand, but carriers don’t really reap the rewards unless demand outstrips the supply of trucking capacity. Fortunately for the survivors of several years of turmoil in trucking, the balance seems to be in trucking companies’ favor.

One reason is the spike in business failures over the past three years. A.G. Edwards estimates that more than 11,000 carriers operating five or more power units have failed since the beginning of 2000. Probably far more owner-operators exited the business as well, many of whom lost their trucks to repossession. And consolidation has put remaining capacity in fewer hands.

Usually when demand outstrips capacity, carriers motivated by better pricing rush in to supply more capacity, thereby balancing out the situation.

“The long-awaited capacity crunch is on our doorstep,” Broughton says. He expects the situation to drive truck sales. “Carriers are about to become either comfortable with the new technology and its reliability or the trucks are so old that they will have to buy trucks anyway.”

But don’t expect a sudden influx of capacity.

“It can’t happen,” Brady says, adding that he believes a ramp up in capacity will take two years or more. “The upturn in freight volumes will be higher than carriers planned, and there will be a rush to buy trucks,” Brady acknowledges. “But they can’t be built immediately. [Truck manufacturers] can’t just turn on a switch.”

Even though trucking is one of the easiest industries for new competitors to enter, barriers to entry are still relatively high compared to past years, Costello says. One factor is volatile fuel prices. “The smaller you are the harder it is to manage,” he says.

Although average retail prices have remained fairly stable – albeit at a high level – for several months, carriers should expect volatility in the coming months, says Brad Simons, vice president of Simons Petroleum’s Pathway Network, which offers buying strategies to manage fuel costs. The futures market would suggest that diesel prices will be lower a year from now, but the strength of worldwide demand, unrest in the Middle East and the severity of the winter in the Northeast are unknowns that can bring short-term volatility, Simons says. Today, diesel prices are held in check by ample inventories, he says.

Other barriers to entry, Costello says, are insurance and truck financing requirements. In both cases, the situation may be better than it was a year or two ago, but they still represent significant barriers to entry by marginal players.

Factoring in drivers
The biggest capacity constraint, however, may be driver availability, especially in light of the new hours-of-service regulations. In the fall, some carriers already were facing a problem. Swift Transportation, for example, reported 350 empty trucks at the end of September. If the hours rules reduce productivity – and they surely will at many carriers – the problem will only grow.

In face of a growing shortage, several large carriers already have announced new pay packages with increases ranging from 1 cent to 5 cents per mile. “Well capitalized carriers will pay what they have to to get drivers,” Brady says. He believes that driver availability is a big issue separate from the impact of the hours rules, which he sees as overblown. “Carriers will adjust to minimize productivity loss. It will be a lane-by-lane kind of thing.”

The silver lining of a driver shortage is that it suggests the employment market in general is getting a little tight, and that’s a positive indicator of future consumer demand. “Unfortunately for many, driving over the road is a job of last resort,” Broughton says. When driver pay started going up in the fall, it suggested other jobs were becoming available, he says. “It’s a bullish indication of the health of the overall economy.”

What’s the outlook for 2004?

CCJ posed the question to a number of carrier executives. Here’s a sample of the responses.

“We’re certainly concerned about productivity loss with the hours-of-service changes. Until we know exactly what that is going to be, it’s hard to say. I think that with the capacity issues we saw earlier this year in the third quarter, if the economy is as good as it was then, we probably won’t have as much trouble receiving rate increases to keep us whole in this process.”
Stephen Selig, president and COO
Maverick Transportation, Little Rock, Ark.

“We’re not quite sure how the hours of service will affect individual driver wages and the need for additional trucks to service our accounts. We’ve gone to customers and presented plans for increased freight revenues. We gave our drivers a pay increase in November to counteract the lost productivity for the new hours of service.”
Kerry Kearl, vice president of company fleets
Crete Carrier Corp., Lincoln, Neb.

“It looks positive. The key is diversification. I’ve spread myself out through different flows of revenue. We’re all watching the hours of service to see what impact that will have, but we’re getting positive feedback from all shippers about accessorial charges.”
Dean Sexton, president
D&D Sexton Inc., Carthage, Mo.

“Carriers are trying to increase revenues to offset costs of the new hours of service. Our customers will have to pass on costs to the consumers. The economy has been coming back in the last couple of months. The outlook is really good, but the further we go with the new hours-of-service rules, it will get worse.”
Rex Johnsonbaugh, vice president
J-Line Inc., Altoona, Pa.

“I think it’s going to be fairly good. We anticipate revenues of somewhere between 36 and 40 million. We’re going to be close to 36 million this year. We’re anticipating that our customers will do better too. More and more they will be going to one carrier, and forcing us to step up a little more.”
Jim Andrus, president
Andrus Transportation Services, St. George, Utah

“It will be OK – about the same as this year. We don’t believe the hours of service will affect us too bad because of the runs we have. Everything should stay about the same.”
Jason Burditt, president
Burditt Trucking Inc., Phenix City, Ala.