Truckers in a ‘funk’ after softer-than-expected volumes, eye better times in 2017

Trucking executives are ranking 2016 as one of the more disappointing years for the industry after having high hopes that bulging volumes and profits of last year would continue.

They did not. The year started with bloated inventories that took longer-than-expected to work through. Then came disappointing 1.2% growth in Gross Domestic Product in the second quarter after predictions that it would rise 2.6%. Finally, the so-called “peak season” in the fall failed to significantly boost freight demand with third quarter earnings reports coming in less than robustly anticipated.

“Nothing to write home about,” says John Larkin, the veteran trucking analyst for Stifel. He said recently that trucking volumes went from “very weak to moderately weak” in late May or early June and never significantly increased thereafter.

“Freight volumes have moved roughly sideways showing no signs of breaking out of the more than year-long funk that has made life challenging for truckers,” Larkin said in a recent note to investors.

In a bright spot for shippers, Larkin called the current pricing environment “challenging” for carriers. Spot market prices hit a bottom in the first half. LTL carriers have fared better than their TL counterparts. That’s mostly because of pricing power—the top 25 LTL carriers control about 90% of that $34 billion market, according to figures compiled by SJ Consulting.

Some TL carriers are “tweaking down” their fleet size, Larkin said, somewhere between the 3 to 7% range. That has ominous meanings for 2017 and beyond when electronic onboard recorders may be mandated. Such recorders are projected to cost the industry perhaps as much as 3 to 4% loss in productivity, mostly because truckers now cheating on their legal hours of service will be hard pressed to do such under electronic logs.

“We believe regulatory drag from electronic logging devices will potentially materialize in mid to late 2017,” Todd Fowler, trucking analyst for KeyBanc Capital Markets, recently noted. “(But) our recent field checks indicate a greater number of small fleets have more capacity year over year than less. It may take several quarters for lower commercial truck production to work off excess supply from 2015 and early 2016.”

American Trucking Associations’ Chief Economist Bob Costello said at the recent ATA convention that the industry endured soft volumes this year due to bloated inventories and a weak manufacturing environment.

“The current cycle of larger than normal inventories has taken longer than usual to resolve itself,” Costello told trucking executives. “Coupled with weakness in the manufacturing sector, we’ve seen softer than typical volumes in both the truckload and less-than-truckload sectors. However, I am hopeful that we are nearing the bottom of this cycle and will soon expect a modest rebound.”

One bright spot has been exports. Costello noted that since 1995, the value of goods moved by trucks between the U.S., Mexico and Canada has risen 168% to $712 billion.

“It may not always be top of mind, but trade is an important part of the trucking economy,” he said. “In the post-North American Free Trade Agreement era, we’ve seen growth in exports moved by truck outstrip overall growth of domestic freight over the past two decades.

Privately, trucking officials say they are looking forward to 2017 when a new president may unleash infrastructure spending – the one thing that Hillary Clinton and Donald Trump appear to agree on – in an attempt to spur more economic growth.

Carriers appear more bullish on 2017. “Most carriers believe that the tide will turn on their supply-demand dynamic sometime in the second quarter of 2017,” Larkin predicts. “That’s provide the economy does no worse than to continue limping along at 1 to 2% GDP growth rates.”

Diane Swonk, CEO of DS Economics, recently said at the ATA convention in Las Vegas that the overall U.S. “economy has been running a relay race, with only one runner--the consumer-carrying the baton for too long.”

“Next year, there will be more runners in the race to grab the baton, but they won't be breaking any speed records,” Swonk predicted.

Fowler of KeyBanc said his October Key Freight Indicators remain “largely uninspiring” to start the fourth quarter. The third quarter exhibited “more seasonality,” he said, but the strength early in that quarter was not sustained. Trucking capacity is generally available heading into the end of the year, he noted,

In a bright spot for shippers, Fowler said the analysis of contract rates fell for the fifth straight month and are now 2 percent off their December 2015 peak levels.

However, he is predicting a “modest fall peak” largely driven by e-commerce sales, which primarily helps UPS and FedEx. He said the West Coast port disruption following the Hanjin Shipping Co. bankruptcy could potentially result in incremental demand and network tightening, particularly for expedited trucking

He summed up the trucking pricing environment currently in one word – lackluster.