ATA economy panel: Low GDP growth, higher costs will pressure carrier margins

Updated Aug 12, 2014

More of the same from the economy, with a real chance for rate traction just over the next hill: that’s the message delivered – yet again – by a panel of experts during this year’s crystal ball session at the American Trucking Associations’ Management Conference and Exhibition. Until the delicately balanced supply-and-demand scale tilts trucking’s way, the bottom line for carriers is to continue to guard the bottom line.

ATA Chief Economist Bob Costello. (File photo)ATA Chief Economist Bob Costello. (File photo)

The lackluster forecast was nothing to email home about, but the trucking industry executives attending the Sunday luncheon discussion took away more positives than negatives.

The panel, “All Eyes on the Economy,” was hosted by Stuart Varney of the Fox News Channel and featured ATA Chief Economist Bob Costello, Kenneth Vieth III of ACT Research and Mark Vitner, senior economist for Wells Fargo.

The outlook, at it has for the past two or three years, hinges on whether GDP growth will edge closer to 3 percent or continue to linger around 2 percent.

Leaner carriers have managed to make do with current fleet sizes, and trucking has been able to maintain the market equilibrium – so any uptick in the economy will move the needle significantly in the industry’s favor, Costello explained.

“At the moment, fleets are expanding slowly,” Costello said, “which means that once we see more consistent, accelerated economic growth, it will eventually cause very tight capacity.”

The question, however, is just what might drive that growth, and when?

The housing market has shown signs of a recovery, though the weather in the South dampened performance over the summer, Vitner said. But trucking can expect a better-than-normal fall construction season as builders play catch-up before winter sets in. He predicts “modest but steady improvement” in the next year. So flatbed has seen some growth and will see more, while tankers continue to do well as the boom in domestic oil and gas drives that segment.

Indeed, as Costello pointed out, the nice growth in ATA’s truck tonnage has been somewhat misleading as a measure of industry health.

“Heavy freight is really driving tonnage even if the number of loads is growing slower,” he said.

And those load numbers, in order to grow, need an improvement in the overall economy. But gains in wealth have come exclusively to the richest Americans, though the lower end of the income scale has seen some growth in transfer payments. The result is that goods and services aimed at the wealthy or at the poor have done well, Vitner explained. Trucking – especially the dry van segment – needs a thriving middle class to support retailers.

“I don’t see that breaking out until at least the second half of 2014, but it will probably be a 2015 story,” Vitner said.

In the near term, the holiday season “will not be great,” hampered, essentially, by the calendar: the late Thanksgiving means six fewer shopping days before Christmas – the shortest shopping window ever.

On the supply side of the equation, the national truck population continues to be older than ever. And while used truck prices have been strong, the significant gains in fuel economy being posted by new vehicles will ultimately devalue those older trucks, Vieth said.

Additionally, maintaining older equipment is expensive. Without a bump from the economy, those carriers that have been unable to buy new trucks will be threatened as the industry struggles with increases in other other operating costs.

So, whether through a growth in demand or an unfortunate reduction in the truck supply, the market equilibrium  â€“ one that has been delicately maintained by shippers’ aggressive focus on improving efficiency  â€“ is due for disruption.

“I know I sound like a broken record, but all of this is going to lead to a capacity crunch. There are still fewer trucks in the market today than there were before the Great Recession,” Costello said. “But until we get to those consistent levels of growth, margins will be under pressure because the costs of fuel, driver recruitment and retention and equipment will rise faster than freight rates.

“However, once capacity does tighten, carriers will see improvement on the bottom line.”

ATA’s signature annual event runs through Tuesday at the Orlando World Center Marriott.