The state of trucking’s freight picture

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We’re at another interesting inflection point in our outlook. While we don’t think we’ll see a double-dip recession, we do project the overall economy growing slower than we previously forecast. That means the downside risks are increasing.” –Eric Starks, president and senior consultant, FTR Associates.

So I listened in on FTR Associates “The State of Freight” webinar today and got mixed bag of projections for trucking’s near- and long-term health.

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On the plus side, Noel Perry – principal of research firm Transport Fundamentals, as well as managing director and senior consultant with FTR Associates – said freight volumes are definitely on the upswing, with a growing capacity crunch helping truckers boost rates and margins.

After watching truck freight pricing plummet by 11% last year, excluding fuel surcharges, Perry said prices should recover roughly 10% this year and next because freight demand is exceeding current capacity so strongly.

Fuel costs, of course, are always a wild card in all of this, but here Perry also sees some positive trends shaping up.

While the excess production capacity maintained by OPEC [the Organization of Petroleum Exporting Countries] has dropped by a third from its four million barrels per day peak of last year, there’s still enough left to give truckers a year or two “grace period” before any major fuel price spikes might occur.

Of course, there are some areas of concern, noted Perry. The first (unsurprisingly) regards the growing shortage of drivers. “Fleets just received a big lesson in caution during this recession, and when they are in pain, they cut overhead,” he explained.

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Yet that overhead is the key tool through which truckers expand – especially in terms of the management and administrative skills necessary to hire drivers.

Those skills will be even more highly prized as hours of service (HOS) reform and new Comprehensive Safety Analysis (CSA) rules are put in place – efforts that may put at least 12% of the current drive pool off limits. He believes that may create double the size of the driver shortage faced by the industry back in 2004.

“It takes a LOT of work to hire drivers, and reducing all the overheard contracted the hiring pipeline by 33% or more over the course of the last year or so,” Perry said. “It’s going to take several years to rebuild all of that.”

Finally, there’s the overall economic picture. Based on its analysis, FTR is scaling back its U.S. gross domestic product (GDP) forecast to the 3%-3.5% range – a full percentage point lower than its previous estimate. The firm also thinks growth will remain “choppy” not only for the foreseeable future but will become the nominal state of economic behavior.

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“We’re entering an era of ‘slow’ economic recovery, one characterized by several quarters of slow, uneven growth,” Perry said. “Economies just don’t recover in consistent ways – they jump around a lot more and while this is painful it will be normal.”

That’s also going to be strongly reflected in trucking industry financials from here on out, he thinks. “The long term volatility of the economy is going to be six times that of the 1980s and 1990s,” Perry said. “And transportation demand is going to be five times more volatile, with extremes in capacity doubling.”

As a result, trucking earnings are going to be far more volatile as well and not necessarily match the economic picture. “Carriers have tried to maintain steady earnings and just can’t. That’s going to be the challenge in the future here,” he said.

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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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