The most recent “State of Freight” outlook provided by research firm FTR Associates indicates that positive short-term trends for the trucking industry will eventually go negative over the long term – meaning that carriers should start preparing for the next “down cycle” right now.
“The conclusions for trucking are quite different when you look at the economy in the short term versus the long term,” explained Noël Perry, senior consultant with FTR and principal of consulting firm Transport Fundamentals, during a conference call with analysts and reporters.
Right now, near term, truck freight volumes will continue to increase, which, when placed alongside a continued dearth of capacity, means rates will also keep rising.
“This is due to the continued strength in manufacturing, which is the sector leading the current economic recovery,” Perry noted. For 2001, he expects the U.S. economy to post gross domestic product (GDP) growth of 3%.
The strength in manufacturing is also helping create a big upside in terms of trade, as the U.S. is now exporting more goods, meaning its trade deficit is shrinking, he added.
“Exports create a ‘positive multiplier’ for the economy,” Perry explained. “For every $1 we export, we get a $2 benefit for the economy and for freight.”
However, in the long term, there remain huge structural imbalances in the U.S. economy that will negatively affect trucking over the next decade.
The residential housing market remains the sorest point in Perry’s outlook as it is responsible for 37% of trucking’s freight mix between 2006 and 2011.
“Due to government policy and easing lending, the participation rate in housing jumped significantly, adding 500,000 extra housing starts [new home construction] annually,” he said. “Now we’re subtracting 500,000 housing starts a year.”
What that means to trucking is that, long term, a significant portion of its past revenue base won’t be recovering to full strength for years still to come. “The decline in the housing market is improving but it’s nowhere near over,” Perry said. “We’re unlikely to get back to the previous peaks for some time to come.”
The other big long term issue is growing government debt, he noted. “It’s highly unlikely we’ll get a smooth, rational solution to the problem, so the economy is going to be assaulted over the next 10 years by start-and-stop efforts to control deficits,” Perry pointed out. “What that means to trucking is that interest rates will go up as lenders recognize government is not a good risk.”
Rising interest rates contribute to a 27% reduction in GDP growth over FTR’s long-term forecast, and it also makes the U.S. economy more volatile. “That volatility means there’s less time between upturns and downturns, with the downturns becoming worse,” Perry explained.
In sum, he said that trucking must start preparing now for the next downturn, though he believes only 30% of the industry at most will do so.
“The outlook means that, as rich as we are now, you must start preparing now for the bad times to follow,” Perry stressed.
“But history tells us that it takes more than one economic cycle to change behavior, meaning I expect only 1/4 to 1/3 of fleets will have learned the lessons of the downturn that began in 2008 – meaning we will see new truck orders in excess of replacement demand in 2012 and 2013,” he noted. “So we don’t expect fundamental change in [trucking] market behavior until 2018-2019.”
