The U.S. domestic trucking market is finely poised, with characteristics that could push it into no growth or capacity shortage, depending on which way the wind blows, according to Noel Perry, senior consultant of the transportation analyst FTR Associates.
Perry and fellow senior consultant Larry Gross gave a rundown of rail, trucking, and intermodal markets in FTR’s State of Freight webinar last week.
“We need to think about the relationship between truck freight and rail freight,” Perry said. “When GDP growth runs 2.5 percent or more, truck freight tends to grow more rapidly than GDP. In 2011, when GDP grew only 0.5 percent, truck freight went almost to zero. The economy is growing at 2 percent or more. But a little more trouble in the economy, and truck freight will drop back to 1 percent or zero percent growth. We’re on the cusp of a possible negative outcome, and it’s worth all of our attention.”
But if the wind blows the other direction, if the U.S. economic recovery gains steam, the market is on the verge of a capacity shortage that has already started to take root.
“We are 50 to 55 percent recovered from the downturn in terms of freight,” Perry said. “But it’s pretty clear that truckers have not hired proportional to the freight that’s come back. This is the first sign we’re in a tight capacity situation even though the economy ain’t growing that fast.”
Perry said that the situation has not been helped by the fact that trucking companies reduced numbers in their hiring departments during the downturn and haven’t brought that staff back either.
A more threatening portent of a capacity shortage is regulation.
“Regulation tends to drive productivity out and it tends to disqualify drivers,” Perry said.
FTR is rojecting that regulation could conceivably remove 400,000 drivers out of the industry if nearly a dozen planned regulations come into effect over the next four-plus years, out of a population of about 2.6 million drivers at present.
“The effects don’t really get bad until 2013, when hours of service come into play,” he said. “But the federal government tends to push these things back. Two to three years ago, we thought this issue would be peaking now, and it hasn’t happened.”
FTR estimates there is 95 percent truck capacity utilization, and a shortage of 90,000 drivers.
“These are normal for an upturn in the economy,” Perry said. “It’s less than we experienced in ‘03-‘04. You might wait a little extra for a shipment, or pay a little more on the spot market. But you don’t get to the place where there are supply chain failures until we’re twice or even three times the capacity shortage we have right now.”
But Perry said the calculations may underestimate the capacity shortage based on anecdotal information. It’s likely not the driver situation – or more specifically, driver turnover – that’s to blame though.
Driver turnover is around 35 percent for the whole industry, including long-haul, short-haul, LTL/parcel, and private fleets. But it’s about 80 percent for the less desirable long-haul jobs, and 10 to 15 percent for private and LTL/parcel fleets.
“If we have a big change in the long-haul market, you have to filter out the fact that private fleet hasn’t changed much at all,” he said.
So Perry theorized that trucking companies are not ordering as many trucks as they once did, purchasing equipment practically no more than needed for replacement when they previously added to their fleets beyond replacement.
“Truckers are ordering much more conservatively than in previous times,” he said.
On the intermodal side of things, Gross said there’s been a 7.8 percent improvement in domestic intermodal moves year to date, with 3.3 percent growth on the international intermodal side.
International intermodal volume is 15 percent below the record month in August 2006, “so there have been some pretty fundamental changes in the international picture,” Gross said.
FTR expects international moves to increase 5 to 6 percent from now to through October, and 11 percent increase on the domestic intermodal side, rises considered typical for the peak season.
“So we certainly expect to reach an all-time record (for total intermodal moves) maybe as soon as August,” he said.
But it’s all not rosy on the intermodal side. Domestic intermodal has actually stopped growing in the last couple months, when adjusted seasonally. International volume is up marginally from the first to second quarter. With each segment accounting for roughly half of intermodal volume, it means total growth was pretty much even from the first to second quarter.
“The growth numbers on a year over year basis are mostly a function of what happened last year,” Gross said. “Intermodal is now treading water.”
The picture is the same in terms of intermodal market share gains, which have increased over the last couple years, but more recently have flattened out.
“Lower fuel prices and not as tight capacity as expected on the truckload side appear to be combining to hold down gains of intermodal share that had been occurring,” Gross said. “We’re seeing at least a little pause, but I wouldn’t call it a trend at this point.”
FTR is projecting 4.7 percent total intermodal growth in 2012 and 4.5 percent growth in 2013.
As for the rail market, Gross noted that the industrial economy has been growing overall but that growth has been depressed by poor performance from the coal and grain sectors.
Rail growth, in terms of carloads, has been running negative since the beginning of 2012, and is only recently looking positive.
“It’s just edged into positive territory year-on-year,” Gross said. “Freight is not growing in any significant way, but the comparisons are getting easier because of what happened 12 months ago.”
“Grain continues to be a soft spot with the severe drought in the Midwest,” Gross said. “We can’t get any relief, and it continues to be a drag on carloads.”
Gross said grain carloads are down 8 to 10 percent year-on-year. Fracking in North Dakota, meanwhile, is leading to an uptick in movement of petroleum products, since pipelines don’t reach there. Lumber and wood products are up 10 percent due to gradual uptick in construction.
“The service side on rail continues to be strong,” Gross said. “Some of it is fewer unit coal trains, which happen to be slow, but speeds are 8 to 10 percent higher year-on-year. Dwell times also down year-on-year.”
FTR is projecting a decline of 0.5 percent in total rail carloads in 2012, with growth of 2.8 percent in 2013. But even at the end of 2013, rail will still be 7 percent behind where it was at the end of 2007.
“So obviously a lot of damage was done during the downturn and that damage is taking a long, long time to repair,” Gross said.
Taking a broader look at U.S. economic indicators, Perry alluded to an “intractable sovereign debt problem,” where the country commits more to defense, social security, welfare and pensions (the so-called untouchable spending categories) alone than it makes in revenue.
“That’s before we start arguing about things like Amtrak, or the farm bill, or your local library, or education, or crime support, we’re still short,” he said. “Neither party has a clear position that will solve this problem. The U.S. is going to have to pay the piper for this.”
Perry also said that the United States will face a long path back to lower unemployment figures.
“There was a permanent shift of jobs in the last downturn,” Perry said. “We got rid of a lot of jobs that we ain’t bringing back. The last time we had this type of wrenching change in employment was during the Depression."