Downshifting, but still rolling

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Freight trends have been choppy in recent months, reflecting lean inventories and ongoing skepticism regarding the sustainability of the current recovery. We believe volatile monthly freight trends are reflective of a cyclical recovery transitioning to a period of slower growth.” –Benjamin Hartford, transportation analyst with Wall Street investment firm Robert W. Baird & Co.

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Assuredly, the good folks at Robert W. Baird & Co. are giving voice to what everyone in trucking pretty much already knows: freight’s been uneven over the last few months and though volumes are expect to grow for the rest of 2011, they ain’t going to grow all that much.

There it is.

While it’s certainly not an outlook that encourages the popping of champagne corks, it’s nonetheless one trucking can hang its hat upon for a while – especially with capacity projected to remain tight for the foreseeable future (and who would seek to expand their fleet now, anyways, with the “slow-growth ahead” sign a’ flashin’?)

“Truckload pricing remains solidly positive and within the expected 3% to 5% growth rate for core contractual rates,” noted Benjamin Hartford (quoted at the start of this post), one of Baird’s transportation analyst, in the firm’s monthly Freight Flows brief.

“We expect continued pricing improvement and moderating fuel prices [that occurred] late in the second quarter likely offset weaker-than-expected volumes,” he added. “That said, a more ‘normal’ 2011 peak season into what remains a tight truckload capacity environment could be a positive catalyst for the group.”

Baird’s view, based on conversations its analysts conducted with carriers and shippers, is that despite the ongoing pressures to retail/consumer demand, the trucking industry is cautiously optimistic about a seasonal pickup in the second half of the year, as available ocean freight capacity is reducing the urgency among shippers to pull-forward inventory stocking, continued moderation of fuel prices, and lean inventory levels.

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Baird’s Freight Index stayed flat in May, holding at 3% growth year-over-year (yoy), equaling the 3% mark for April, but down from the 5% yoy growth record for the first quarter of 2011. “The domestic demand environment remains consistent with a slow-growth economy,” Hartford noted. “By region, the Midwest and Southeast are healthy and demand trends in California – which have lagged much of 2011 – have firmed in recent weeks, while the Northeast and Pacific Northwest remain relative laggards” in terms of freight demand.

“Notably, seasonal demand improvement has continued into June, which supports even tighter supply/demand dynamics,” he added. “Given multiple years of capacity rationalization through below-replacement new tractor sales, supply/demand dynamics continue to favor carrier pricing growth even in a slower growth economic environment. Increased industry regulation, higher capital equipment costs, and greater carrier capacity discipline in a slower growth economy should limit capacity growth and support supply/demand favorable to carriers.”

Baird’s analysis dovetails with what other experts are seeing. Research firm FTR Associates, for example, said its Trucking Conditions Index (TCI) record for May remained basically flat month over month with a reading of 7.3. Eric Starks, FTR’s president, noted that the TCI has remained in positive territory for the past seven months, meaning the current freight market is fostering an “adequate” trucking environment.

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“The leveling off of the TCI after only a one-month decline is an encouraging sign,” Starks added. “The trucking industry appears to be negotiating the economic ‘soft patch’ in good fashion. Although we have moderated our expectations with regard to the industry’s ability to raise rates later this year, the overall environment remains favorable, and we expect the TCI to resume its improvement trend shortly.”

The recent drop is diesel fuel prices has helped big time in this regard, with Baird noting they are down 4% now from early May, residing at levels roughly equivalent to the end of the first quarter this year. “Recent diesel prices of $3.95 are 35% higher year-over-year and 19% higher than early January,” noted Baird’s Hartford. “But recent crude oil at $95/barrel represents a decline from the $100/barrel range present since mid-May. Current crude oil price levels are roughly consistent with levels experienced in February.”

Again, while this is not an outlook to get out and cheer about, at the very least, it keeps truckers in positive territory where rates and freight volumes are concerned. And that’s nothing to sniff at, especially after coming through one of the roughest patches in this industry’s history.

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

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