ATA Economist Predicts More ‘Slow Going’ for the Trucking Industry

by Amanda L. Gutshall October 2010
Although modest growth in the trucking industry’s future seems imminent, it still looks to be slow going and will be for some time, according to American Trucking Associations economist Tavio Headley. Echoing the hesitant estimates of growth that Bob Costello provided the Monitor with last year, Headley remains cautiously optimistic.
Tavio Headley
Tavio Headley Economist, American Trucking Associations

The trucking industry will continue to see growth through the end of 2010, however, American Trucking Associations (ATA) economist Tavio Headley, emphasizes that it will be a slow growth rate. “We saw pretty strong growth in the first half of the year in terms of tonnage and loads, but I think that growth rate is going to slow.” He sees this for a few reasons: first, the overall economy will grow at a slower rate. “We expect GDP to be around 1.5% in the second half of this year. We started off the first half of the year, and the economy had a lot of momentum, but by the end of the first half, things had slowed dramatically. This is one reason I see freight volume slowing.” It will grow, he says, just at a slower rate.

As far as tonnage volumes, Headley says, the ATA is still seeing very little evidence of an inventory rebuild. During the recession, the inventory to sales ratio increased dramatically because many companies were trying to cut their inventories, however sales were declining even faster. This, Headley says, is what caused the rate to remain so elevated. The inventory to sales ratio, he adds, “is one of the indicators we like to see falling and not increasing… As it goes lower, eventually these inventories need to be rebuilt and that tends to translate into more freight volumes. What we’re seeing now, the inventory overhang that we had experienced has been cleared out, and inventories are starting to pick back up but it’s nothing to be concerned about.”

Discussing he big picture with tonnage volumes, Headley says that: “They have improved, but they are still well below the highs that we hit prior to the recession and it’s not just tonnage volumes or trucking for that matter. When you look at manufacturing, which is one of our largest customers, we’re seeing steady improvement in that area as well, but it is still not up to the level that we experienced before December 2007.”

Consumer Spending Will Continue Lag
Last year, Costello stated that consumer spending is key to any type of trucking industry rebound because this spending represents about two thirds of GDP. This is also the main reason why Headley thinks although there will be some growth in trucking it will be slight. “Last year, consumer spending dropped 1.2%, and for this year we have it growing 1.5% annually. For next year, we have it growing at 2.2%. This is one of the contributing factors to why we see freight volume slowing in the second half of this year. It’s not going to be a strong rebound in consumer spending.”

He notes a variety of reasons, mostly that the consumer is still feeling the overwhelming pressures of the recession. “The consumer is still facing many headwinds,” most notably, the weak unemployment market and high debt levels, among other things. “The unemployment rate is still persistently high and that’s going to continue for a few years. Debt levels are still high. We all know about the housing market, which is still extremely weak. Credit conditions have eased but they’re still relatively tight and they’re easing gradually. It’s still not easy to go into a bank and get a new loan … or even get an extension on your credit limit.” He adds, “Despite all of that though, we’re still seeing sales are still positive on a year/year basis, so they haven’t retreated completely. In August, retails sales were up 3.6% from a year earlier. If you look at 2009, on a year/year basis, we were down double digits.”

Replacement Versus Added Capacity
Ward’s Automotive reported that year-to-date through July, heavy-duty truck sales were up 15.5%, but it was also suggested that this growth was due to replacement rather than added capacity. In turn, this shows that demand may not be yet up to the levels to motivate increased capital investment, something to which Headley agrees. “When I speak to carriers, they are saying they are not planning to buy new trucks until some time next year.” He offers two reasons: carriers don’t need them and they can’t afford them. “The newer trucks are much more expensive than they were just a few years ago. A lot of what is going on now, is that we’re seeing freight pick up, but … the freight is being absorbed by the existing fleet.”

If any new EPA standards do go in place to incite increased buying, Headley still doesn’t see it as being any more than replacement. “If you look at, on average, their normal replacement cycle, they would have started replacing trucks that were purchased say in 2005, they would have started replacing those in early 2010. But, since miles per truck per month were down so much … we’ve seen those replacement cycles extended. Instead of replacing that 2005 tractor in 2010, we’re seeing that time period shift to early next year. With the high prices and a little bit of uncertainty with the overall economy, you can see why they would be a little cautious.”

Banks Provide Added Pressure, Or Do They?
Although much has been written regarding banks’ reluctance to lend to companies except those that are the most credit worthy, coupled with the decline trucking companies have faced, it stands to believe that this may be a major obstacle for the industry. But Headley said this is only a portion of the problem. “We are seeing that [credit standards] are easing, but they’re still relatively tight and the improvement has been extremely gradual. But in terms of purchasing decisions, I think it does have an impact when you look at the price of a truck now versus the price of a truck in 2006.”

New trucks now, he says, are almost $25,000 more than they were in 2006, and at the same time, many used truck values have declined. “A three-year old truck in 2006 was probably worth about $50,000 and a three-year old truck is now worth around $30,000. And you’re looking at more expensive trucks now, and your used trucks that you would trade in have dropped in price so that means you’re going to have to finance more to get a new truck. With credit still relatively tight, that’s going to be a tough go.”

The Government Tries to Step In
Recently, the administration announced that it was proposing tax incentives to spur capital investment, a much-needed breath of fresh air in many industries, including trucking. Headley feels that this could provide much needed help to trucking companies and consumers alike. “Anything that boosts economic activity is good for trucking, in particular the capital investment side of things. The reason I say that is we’re hauling a lot of that freight. These are the types of things that would show up in our tonnage numbers, in our loads hauled index … so it is a benefit to the industry.”

Headley also agrees that much of the government stimulus already provided had an impact on the economy this year. “It definitely provided a boost to the economy.” And speaking specifically for trucking, he adds, “We always encourage spending on infrastructure and that’s because current infrastructure … is deteriorating rapidly.”

Putting It All Together
Given all the issues that affect the trucking industry, what can we look for to see how the industry will fare going forward? Headley would first look at manufacturing, because of the reliance the trucking industry has on that sector, as well as any additional hiring in the private sector. “I know people have been really down on the overall labor market, but we’ve still been adding private sector jobs… Going forth, that should eventually be picking up. One thing that’s positive in terms of what we’re seeing is that after the 2001 recession, we didn’t have an uptick in employment until the middle of 2003. We already saw an increase in overall employment and private sector jobs coming out of this past recession… But overall, I would say most of what’s going on now in the industry, it’s more supply side, meaning during the recession we had an historical drop in demand, but, at the same time, we had a huge reduction on the supply side, so that tells me demand doesn’t have to be all the way back up to pre-recession levels for capacity to really tighten up… Even smaller increases in demand are going to feel even better for motor carriers because so much supply was taken out of the industry during the recession.”

Amanda L. Gutshall is associate editor of the Monitor.

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