Continued growth in U.S. industrial production, coupled with dwindling inventories and ever-tightening trucking capacity, is boosting the outlook for profitable freight demand in the first half of 2011, according to analysts. Fuel prices, however, are dampening expectations somewhat as diesel has crept back to highs not seen in two years due to higher petroleum costs.
Positive freight growth is expected at the top of 2011 across all modes of transportation, according to analysis by investment firm Robert W. Baird & Co. Baird tags industrial production as the key source of demand for railroads, LTL carriers, and “integrated” transportation providers, such as UPS and FedEx.
Industrial production is expected to increase 3.5% to 4%, according to Baird’s most recent Freight Flow report, with truckload pricing expected to grow 4% to 8% this year as capacity remains tight.
“Freight trends [are] stable, with lean inventories and modest restocking offsetting consumer demand headwinds from earlier in 2010,” said Jon Langenfeld, Baird senior transportation analyst. “Despite a more muted peak than expected, November 2010 trucking volumes were better than seasonal, as [the] peak season extended longer than expected. As a result, the demand outlook for 2011 is positive, with industrial end-markets likely outperforming retail.”
“We’re definitely getting more optimistic with our outlook,” Eric Starks, president of research firm FTR Associates, told Fleet Owner. “We’re currently forecasting 3% GDP [gross domestic product] growth for 2011, but we could see 4% if the positive trends we’re beginning to see take hold.”
Starks pointed out that manufacturing continues to maintain “a good foothold” in the economy, and expectations of further growth in this sector should lead to more hiring. And that job growth that would lay the groundwork for further economic recovery and expansion.
Indeed, the Institute for Supply Management (ISM) has reported that economic activity in the manufacturing sector kept expanding in December– which was the 17th consecutive month of such expansion – while the overall U.S. economy grew for the 20th consecutive month.
“We saw significant recovery for much of the U.S. manufacturing sector in 2010,´said said Norbert Ore, chairman of ISM’s manufacturing business survey committee. “ The recovery centered on strength in autos, metals, food, machinery, computers and electronics, while those industries tied primarily to housing continue to struggle. Additionally manufacturers that export have benefited from both global demand and the weaker dollar. “
The ISM Purchasing Managers Index (PMI) jumped to 57% in December, rising 0.4 percentage points over November’s reading of 56.6%. ISM views readings above 50% as indicating manufacturing is generally expanding.
At the same time, the ISM Customers Inventories Index (CII) registered 40% last month, 5.5 percentage points lower than in November, when the index hit 45.5%. That’s the 21st consecutive month CII remained below 50%, said Ore. And that indicates respondents believe their customers’ inventories are too low at this time – a good sign that freight demand will rise to replenish those inventories.
Yet Baird’s Langenfeld cautioned to not read too much into low inventory levels in his analysis.
“Lean inventories support future freight growth, but 2010's inventory restocking activity [is] unlikely to remain a catalyst,” he explained. “Inventory restocking activity, above average throughout 2010 and at a generational high in November, is likely to moderate in 2011 – a potential near-term [freight] demand headwind. However, inventory levels remain below recent average levels across channels: retail, manufacturing, and total business.”
The cost of diesel, though, remains a much more near-term concern, Langenfeld said. “Fuel prices continue an upward trajectory, with recent diesel price of $3.23/gallon a year-to-date high and the highest price level since October 2008,” he warned. “Notably, diesel prices have increased 10% since the beginning of the [fourth] quarter [of 2010] and present a potential headwind to earnings given the lag in fuel surcharge recovery.”
That being said, Langenfeld contends TL and LTL pricing dynamics still favor carriers. “Looking ahead, ongoing capacity rationalization, increasing federal regulatory burden [CSA, Hours of Service ], and continuing supply/demand dynamics favor TL carriers [gaining] further pricing growth even into a slow-growth economy,” he noted.
“Improved LTL demand is supporting industry yield improvement, [with] carriers indicating good traction retaining announced general rate increases (GRIs) implemented in the past few months,” Langenfeld added. “Encouragingly, industry demand dynamics [remain] favorable, as larger carriers remain focused on improving profitability through better yields, and industrial end-market demand outlook remains improved.”
FTR’s Starks added that fleets also seem to be gaining more confidence as orders for Class 8 trucks exceeded 25,200 units last December – only slightly below higher-than-expected order volume in November. “That’s a very good sign; especially since monthly Class 8 orders ranged between 5,000 and 6,000 units at the start of 2010,” he said. “It suggests fleets are a lot more confident about the freight market as we head into 2011.”