Cutting through the economic chop

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During lingering economic pressures and unsteadiness in the general freight markets, intermodal and dedicated contract services once again revealed a higher degree of resiliency than that of traditional, full truckload transportation models.” –John Roberts, president and CEO of J.B. Hunt Transport Services in the company’s second quarter earnings report

By any statistical measure, the U.S. economy seems mired in a very slow patch of late.

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Take the all-important jobs report for June released last week: Only 18,000 jobs were added in total, with 57,000 private jobs added but 39,000 government jobs lost, pushing the unemployment rate up from 9.1% to 9.2%.

“The June jobs report was a shocker. It was far worse than expected, and weak on all key dimensions—job creation, unemployment, the length of the workweek, and hourly earnings,” said Nigel Gault, an analyst with research firm IHS Global Insight.

“The recent pattern of jobs suggests that the economy hit a brick wall in May. It added an average of 215,000 jobs per month in the three months ended April, but only 22,000 per month in May and June,” he noted.

“Supply-chain disruptions and bad weather are unconvincing as explanations for the extent of the weakness,” Gault added. “A delayed response to the cumulative impact of surging commodity costs during the first half of the year is a more plausible explanation, but this report has dashed hopes that the economy was about to accelerate again now that those costs have eased back.”

It didn’t help that the Commerce Department’s U.S. Census Bureau noted that retail sales for June only increased 0.1%, while U.S. exports of goods and services in May decreased 0.5% from April to $174.9 billion.

And such data is convincing many economists to pull back on their U.S. economic forecasts for growth. Investment giant JPMorgan, for example, cut its U.S. gross domestic product (GDP) growth forecast for the July-September period from 3% to 2.5%.

Doesn’t sound like a lot, I know, but economists say 3% GDP is just enough to keep unemployment steady and keep up with population growth, whereas a GDP growth rate of 5% is required for a year to knock down the unemployment rate by a measly one percentage point.

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OK, obviously, this all adds up to something far less than a pretty picture for the U.S. So what happens to trucking in to all of this?

Well, first of all, trucking – along with other freight moving transportation modes – remains in what many experts are calling a “recovery phase” with sustained growth throughout the North American Free Trade Agreement (NAFTA) region.

For the clearest example, just look at the continued growth in freight and rates. For the month of June, TransCore’s North American Freight Index recorded the second-highest load volume this year and in its 15-year history, with freight availability higher only in the month of March this year.

Compared to May, June freight increased 15% and soared 37% compared to June of last year. June also marked the sixth consecutive month to exceed its five-year historical comparison.

Simultaneously, TL spot market freight rates kept climbing in June for all equipment types, according to TransCore’s Truckload Rate Index. The national average rate rose 4.5% in June for dry vans compared to May this year and 3.8% compared to June 2010. Refrigerated van rates were up 5.6% month-over-month and 4.9% year-over-year, while flatbed rates increased 0.6% for the month and 7.4% compared to June of last year, said TransCore.

“The prolonged period of falling and subdued [freight] volumes had a systemic impact on much of the industry, resulting in greatly reduced capacity,” noted global consulting firm Research & Markets. “In turn the rebound of the economy is having the impact of creating tighter trucking capacity, a shortage of truck drivers and higher rates.”

Interestingly, the uptick in freight demand combined with the surge in fuel prices we suffered through during the first part of the year helped drive the growth of more cost-effective rail intermodal services, the firm added.

“This trend has been compounded by greater government regulation of the trucking sector,” it reported. “Overall, the outlook for the industry is good. However the one major cloud on the horizon is the impact of global oil prices. Soaring costs will drive trucking volumes to intermodal, but could potentially strangle the entire sector's recovery by suppressing demand.”

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Still, those truckers that have diversified their freight transport offerings are finding themselves in a catbird seat of sorts.

Take J.B. Hunt Transport Services, for example. That company posted record net earnings for the second quarter this year: some $65.7 million on $1.15 billion in total operating revenue. The reason? Big growth in the company’s intermodal and dedicated contract services (DCS) divisions.

In particular, load growth of 18% in intermodal helped drive a 29% increase in segment revenue, while J.B. Hunt’s Integrated Capacity Solutions (ICS) and DCS segments increased operating revenue by 27% and 16%, respectively. That makes the 4% revenue growth in the company’s TL division look miniscule by comparison.

“Intermodal and DCS, which make up over 80% of the Company’s total revenue, continued to demonstrate the differentiation qualities we have been working to highlight for some time,” noted John Roberts, J.B. Hunt’s president and CEO, in a statement.

“During lingering economic pressures and unsteadiness in the general freight markets, intermodal and DCS once again revealed a higher degree of resiliency than that of traditional, full truckload transportation models,” he added. “While the bid season is substantially over for 2011, customers continued to inquire about converting freight from over-the-road tractors to intermodal as a method of managing their freight budgets.”

The lesson here is that even though some intermodal shipments means sharing revenue with the railroads, it also means keeping a good bit on trucking’s side of the ledger while remaining a critical “point of contact” for shippers. It’s not a panacea, by any means, but intermodal surely also offers carriers an opportunity to craft shorter, more predictable routes for drivers that get them home on a more frequent and regular basis.

In the end, it just shows that by staying flexible, trucking should be able to continue successfully – and profitably – navigate the uncertain economic tides now lapping upon its steely shores.

What's Trucks at Work?

Trucks at Work: Sean Kilcarr comments on trends affecting the many different strata of the trucking industry.

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