The latest U.S. freight market outlook issued by FTR Associates presents a mixed bag of projections. Freight volumes should start recovering by early 2010 and could gain significant strength as the year progresses, according to the firm’s economists. Yet much of those gains will depend on the strength of the overall U.S. economic recovery, which is predicted to be only modest at best as consumer spending is expected to remain at lower levels.
“We seem to be exiting the ‘Great Recession’ but it’s not clear yet if that exit is leading to more demand for freight,” said Eric Starks, FTR president, during a webinar conducted by the firm today on the state of the U.S. freight market.
FTR is forecasting a modest U.S. economic recovery through 2010. The firm sees U.S. gross domestic product [GDP] rising 4.5% in the first two quarters but then backsliding to 3.5% to 4% in the second half of the year. Freight volumes are expected to outperform GDP, however. They will rise 4% by the second quarter, increase to 5.5% in the third quarter, and top out at 7.7% in the fourth quarter of 2010 as inventories – currently at historically low levels – are replenished.
Yet even that modest outlook comes with significant caveats for motor carriers. Part of the problem is that the downturn in trucking predates the current recessionary period, explained Noel Perry, a senior consultant with FTR and principle of research firm Transport Fundamentals.
“Trucking has been in a recession since 2005, because once GDP drops below 3%, there’s little or no growth in freight,” Perry said. “That’s created a lot of cumulative stress on carriers that got added to the ‘shock’ of the recession, putting an enormous strain on their capital resources.”
On the positive side, Perry’s data indicates that “we’re at the bottom of this recessionary event,” meaning that freight volumes are stabilizing, which should allow fleets to more completely optimize capacity. That being said, Perry’s numbers indicate there’s still a huge amount of “active” surplus heavy truck capacity in the market – roughly 300,000 units, not counting trucks that have been parked.
Another issue complicating the capacity issue is what’s being termed “zombie truckers” – fleets that should be bankrupt or shut down yet remain in operation because the banks do not want to repossess their equipment as its value remains minimal.
“We saw a big spike in bankruptcies last year during the rapid rise in fuel costs, but we haven’t seen that same corresponding spike during the recession this year,” Perry said. “The reason is that banks are reluctant to foreclose on the assets [of these carriers] because they can’t sell them, so the banks are allowing them to stay in business in the hope of getting some money back on their loans to them.”
The irony is that such carriers, with no equity in their equipment and little if any cash in the bank, are keeping keep freight rates low as they keep capacity levels high within the industry. This situation will delay a return to higher freight rates for carriers, even though the zombies are expected to exit the industry once fuel prices start to climb again.
“They will keep rates down until fuel prices spike – and we expect to go through another fuel price shock as the global economy recovers,” Perry said. “Overall, we don’t expect the trucking industry to return to the rates they experienced in the 2004-2005 timeframe until 2012.”