There is a major discrepancy between the weak earnings in the trucking industry and the solid 3.5% growth in the U.S. economy in the fourth quarter. But the worst of the deterioration in freight volumes is over, according to analyst Chris Brady, president of Commercial Motor Vehicle Consulting (CMVC).
In the fourth quarter the gross domestic product (GDP) growth was fueled by a 4.4% jump in consumer spending—the strongest since the first quarter of 2006. Consumer spending drives over 70% of the total U.S. economy. This more than made up for the 1.8% decline in business investments, which made up about 9% of the economy. Imports dropped 3.2% while exports were lifted 10%.
But manufacturing activity contracted in January, the Institute for Supply Management (ISM) said today. According to ISM, the last four months of the manufacturing index indicates the sector’s growth was relatively stagnant.
“After a slight rebound in December, the manufacturing sector failed to grow in January,” said Norbert J. Ore, chair of ISM. “In overall terms, manufacturing lost momentum in the second half of 2006, and is starting 2007 in a less than robust fashion.”
And this “less than robust” growth has hurt the freight transportation industry.
Trucking and railroad executives say freight volumes are still slowing as 2007 progresses, and they blame slow economy.
CMVC’s Brady believes that there is now a glut of inventories slowing manufacturing output. However, given that retail sales appear to be continuing their growth trend, manufacturing output will pick up once inventories are drawn down.
“This is a moderate inventory correction,” Brady told FleetOwner. “As inventories get in line with sales volumes, manufacturing orders will pick up. We’re probably about three-fourths of the way [to that]. As inventory gets in line with sales, you’ll see freight volumes pick up.”
In the meantime, trucking companies with manufacturing customers are experiencing weak volumes, as are haulers for the auto and housing sectors. These carriers are trying to diversify their freight mix into other sectors, which is driving up competition among all carriers.
“The fourth quarter freight environment is more challenging than we anticipated as the normal seasonal freight surge failed to materialize,” said Max Fuller, co-chairman of truckload carrier U.S. Xpress Enterprises. “Further, softness in the housing and automotive sectors caused an influx of capacity in markets served by our truckload operations.”
“We’ve experienced declining demand for truckload freight services,” said Jerry Orler, the new president & CEO of truckload operator USA Truck. “[The fourth quarter of 2006] was the most difficult operating environment that we have seen in several years, due to the deteriorating demand and the absence of the normal peak shipping season. We also experienced more pricing competition … which created an increasingly challenging environment to generate the necessary revenue volume.”
Also at issue is the surge in the number of trucks on the road as trucking companies snatched up 2006 model trucks to avoid buying 2007 models equipped with expensive emission reduction technology. More trucks meant more trucking capacity in a slow freight environment in the fourth quarter.
“I believe the growth in truck capacity in ‘06 grew faster than freight volumes,” CMVC’s Brady said. “It’s going to be gradual but you’ll see a steep decline in truck sales so the growth of trucking capacity in ‘07 will be much slower than ’06. You’ll see freight volumes gradually gain momentum. It may take the whole year, but over time you’ll see truck utilization begin to increase again.”
To comment on this article, write to Terrence Nguyen at email@example.com