Bob Costello Chief Economist, American Transportation Associations

When asked for his thoughts on when the economy might turn around, Bob Costello, chief economist of the American Transportation Associations (ATA), says: “I would say the recession is over, but it will be slow going,” noting that he expects a “solid third quarter, but it will be just a blip — better, but for the trucking industry, it will be slow going as well.”

He explains that consumer spending will be the key to a trucking industry rebound since it represents two-thirds of Gross Domestic Product (GDP). However, he adds, “We have headwinds on consumer spending, which is a lagging economic indicator.”

With seven million people out of work in this cycle so far, the most significant factor, he says, is the employment situation. When you add falling wages, declining home asset values and higher debt levels, Costello says it’s not likely that consumer spending will rebound anytime soon. He notes a relevant example: a typical truck driver will drive fewer miles and/or fewer hours with the net result being that although still working, he’s making less money. This is also the case for many factory workers as well.

When asked about the “new normal,” Costello says that over the next five years consumer spending will grow a shade over 2%, compared with about 3% of annual growth for the period 2003-2007. Costello says the ATA is forecasting annual growth in consumer spending for the 2010-2013 period to be in the 2.2% range.

An analyst recently said, “Massive fiscal and monetary policy stimuli have had only a ‘muted impact’ on reinvigorating the economy.” Asked to comment on this, Costello explains that the government’s stimulus package did help, but it probably won’t have a meaningful impact until 2010. He notes that “shovel ready” was simply not the case so the expectation that was created simply wasn’t real. But he does think it will help. “The majority of the money will be spent in 2010,” he says. “This is a positive, but if not realized, my forecast for consumer spending may be less.”

On truck tonnage, Costello says he is optimistic that the worst is behind us, but adds, “I just don’t see anything on the economic horizon that suggests that truck tonnage is about to rise significantly or consistently.”

Costello says the good news is that most indicators have hit the inflection point and are trending positive, noting that he’s fond of telling his fleet members that 1.5% growth in GDP is a heck of lot better than where it’s been, even if it is slow from an historic perspective. “It’s kind of like we’re in purgatory, out of hell but not to heaven yet,” he says.

Truck Sales Still Falling
New Class 8 truck sales continued to sag in July, falling for the seventh consecutive month. According to WardsAuto.com, year-to-date sales were off 33.3% to 50,960 vehicles from 76,442 during the comparable period last year. And the forecast is for no substantial change likely until the second half of next year.

Costello is reluctant to predict that new truck sales will surge when the economy recovers because of aging truck fleets. Even with the age of the North American fleet reaching its highest average age in 15 years, Costello says, “that’s not necessarily a case for expecting an economic rebound to result in robust spending on new trucks.”

He says a counter to the average age premise is the fact that trucks are being driven fewer miles — off 15% last year and 20% this year — so he doesn’t expect to see a near term increase in truck purchases as a result of age. “The age of a truck doesn’t matter,” he says, “it’s the wear and tear that matters.”

Costello also says many of the ATA’s fleet members are using auxiliary power units that have extended tractor engine life. He also expects that credit will remain tight for carriers.

Costello says that truck sales are at their lowest level since the early nineties and predicts they will remain very muted until freight is solid and miles are back up; only then will fleets start to buy trucks again.

He adds that he is anticipating U.S. retail sales will be about 100,000 next year. “There’s just no reason to buy a bunch of new trucks any time soon,” he says.

With respect to carrier failures in the trucking industry, which declined during the second quarter, an analyst who prepared the data warned that bankruptcy improvement wasn’t a sign of better times. He said the decline was prompted by lenders that are waiting for an economic recovery, and “simply purchased a longer fuse in exchange for a bigger bomb.” When I asked Costello to comment on this he said that with the decline in used truck prices bankers have found themselves in a position where the gamble is to hold on versus liquidate. He feels that as freight volumes improve, absent a further drop in values, we’re likely to see more failures, even as the economy picks up.

Trucking: A Lagging Indicator
As far as the trucking industry goes with regard to the overall economy and a future recovery, Costello notes, “The trucking industry, for the very first time, will be a consequent, if not a lagging indicator in this cycle.” Historically, the trucking industry is a leading indicator for the economy. Costello says that this time it’s different because he doesn’t expect the level of freight volumes to improve until, “maybe by next summer or sooner, but with only modest growth over the next 18 months.”

He notes that about one year ago inventories surged, not necessarily in dollar value, but in relationship to sales. So, he says, the ratio of inventories to sales has increased, which means it won’t be any time soon that inventories will increase to the point where we can expect the typical increase in freight movements — particularly in the manufacturing and wholesale sectors.

When asked about the industry’s supply levels, Costello puts it simply: “There are too many trucks available for the level of freight that needs to be hauled. The reality is that the equation has been masked by the largest decrease in demand in the modern era — much larger than the drop in supply.”

And with more competition and revenues going down — about 30% for the industry in 2009 — we shouldn’t expect a change until 10 to 12 months down the road, he says, adding that truck capacity will tighten significantly once a recovery commences. Then, excess trucks are worked back into the fleet and utilization increases.

As an aside, Costello notes that about 50,000 used, Class 8 tractors came out of U.S. fleets in 2007-2009 — “never to return” — as a result of offshore export sales to places like Nigeria and Russia. Thus far in 2009, used heavy-duty truck export sales have declined significantly; sales to Russia, for example, are off 99%.

Conclusion
In summary, Costello’s commentary seems to suggest that consumer spending will continue to be the driver of the trucking industry, albeit at a slower annual growth rate over the next five years. This is the “new normal.”

Inventories in the supply chain, most notably in the wholesale and manufacturing sectors, will remain high. Costello expects freight volumes to be “very slow going, but maybe by next summer, or maybe sooner, we may start to see modest growth.”

The supply of trucks available to meet demand is currently out of balance, so we’re likely to see only a moderate increase in retail truck sales in 2010, Costello says. However, he points out, despite the wear-and-tear factor, which offsets the fleet-aging metric, more truck capacity has been taken out of the system — 9% over the past nine quarters and 5% since last July. What that means, Costello says, is that “freight doesn’t have to be back where it once was before supply starts to tighten up.”

So, as noted earlier, once a recovery commences and excess trucks are worked back into the system, utilization rates will increase, miles will go up, rates will go up and fleets will start purchasing trucks again.