The increase in job creation in Canada over the past two months and the decline in the U.S. unemployment rate to 7.9 percent (that was announced on Friday), paint a picture of a North American economy on the mend. John Larkin, transportation sector analyst with Stifel, Nicolaus & Company believes that America is in a flat, slow growth mode which is likely to continue. The natural tendency to grow faster than the 1-2% levels seen in recent quarters coming out of recession is dampened by a variety of factors, including the seemingly never ending financial woes in Europe, more tension on the Middle East, a slowing Chinese economy, high unemployment and low levels of labor participation in the US, and worries over the looming "fiscal cliff" approaching at year's end.
He noted that while retail sales numbers in general have looked reasonably strong, when backing out sales of gasoline and indexing for population growth and inflation, retail sales in the U.S. are right now just at levels seen in 1998 - hardly bullish for freight. Retail sales are still down 8.6% today from their adjusted peak seen all the way back in 2006, even though the number is up substantially more than the bottom in Q4 2008.
Larkin also indicated that sales growth at 10 of the largest US retailers was just 1.6% in Q2 - which exactly mirrored inflation, meaning real growth was flat. Housing markets appear to have turned the corner, but remain far from healthy. Recent increases in prices, building permits and home starts are from a low base.
A recent Statistics Canada report showed that Canada’s jobless rate rose to 7.4 percent, a seven month high. Maththieu Arseneau, senior economist at National Bank Financial in Montreal noted in an interview with the Globe & mail that the current pace of hiring will likely ease. Mr. Arseneau highlighted a slowing construction industry, global pressures that are impacting manufacturing and a trimming of public sector budgets. Two major Canadian retailers, Hudson’s Bay Co. and Shoppers Drug Mart announced plans to cut 210 and 80 jobs respectively, to trim costs in response to competitive (e.g. entry of target into Canada) and regulatory changes.
How is this all playing out with the transportation industry?
Mr. Larkin recently expressed the view that, at the moment, supply and demand are roughly in balance in the United States across the truckload, LTL and rail sectors, but that there are some looming issues that could move that balance in the trucking industry's favor over the next few years. "Carriers are not adding capacity as the . . . (U.S.) . . . economy remains relatively flat, used equipment prices go up and conservative equipment plans boost used demand," says Richard Mikes, TCP Partner. The number of carriers who expect to add little or no capacity in the next 12 months has remained fairly constant at around 70-74% for the last five quarters, according to Transport Capital Partners' Third Quarter 2012 Business Expectations survey. Nearly one-third of carriers do not expect add capacity at all. The number expecting to add 6-10% has decreased for the last three quarters.
"Long-term dedicated equipment is a win-win as shippers assure capacity and carriers can pass through current low interest rates, and hedge future costs through adjustment provisions," notes Mikes. "Indeed longer term (five year plus deals) are replacing some annual negotiations as the national truck fleet is stagnant." Carriers are also unwilling to add capacity when they can't find drivers to fill the seats, and 75% of the carriers surveyed are reporting unseated trucks. Of the larger fleets, 60% have between 1-5% of the trucks unseated, while 36% of the smaller fleets report 6-10% of their trucks lack drivers.
"Drivers are clearly a controlling input in equipment plans," says Lana Batts, TCP Partner. "Long term demographics still portend a shrinking driver pool, and current CSA and HOS regulations remove drivers and shorten effective hours (and pay checks) for existing drivers. Some runs that were doable in a day are requiring a sleep break."
FTR expects trucking conditions to improve in 2013, thanks to modestly better economics and a strong increase in capacity utilization stemming from added constraints on trucking from federal regulations taking effect in midyear. The transportation analysis and forecasting firm says its Trucking Conditions Index for August rose 1.4 points from July to a reading of 5.8. The index has been in mildly positive territory, but without clear direction, since the economy weakened in early 2011.
Any reading above zero indicates a positive environment for truckers. Readings above 10 signal that volumes, prices, and margins are in a solidly favorable range for trucking companies. "Setting aside the inherent economic risks at the moment, we expect the rate environment to improve for fleets as capacity tightens in 2013 when more stringent hours-of-service rules go into effect," says Jonathan Starks, director of transportation analysis.
This will also have the effect of worsening the driver shortage, moving the situation from the currently tight but manageable level towards a more acute shortage, similar to that experienced back in 2004, when the last major rule change went into effect. Truck fleets will also need to keep a keen eye on the economic environment heading into 2013, because a major downshift in growth would have major negative implications on margins just as new hours of service regulations go into effect.
The Ontario Trucking Association (OTA) reported recently that Ontario-based carriers continue to be skeptical about near-term growth prospects. In a Today’s Trucking report, the OTA's 3Q12 business survey is showing a 10 percent drop from the previous quarters in optimism about the industry’s prospects over the next three months, bringing it down to 57 percent. The growing pessimism is something that the OTA pointed to in its last survey. Uncertainty, too, has risen. Thirty-six percent of respondents said they were unsure what the next three months would bring, up from 22 percent.
The economy remains the biggest concern, said 38 percent of the survey's respondents, which overtook ‘capacity and rates’ as the top issue. A shrinking number of carriers in four freight markets (intra-Ontario, interprovincial, southbound U.S. and northbound U.S.) expect freight volumes to pick-up over the next six months. Again, most expect volumes to stay about the same.
Compared to the 2Q12 survey, there was a nine percentage point decline (21% from 30%) in carriers who felt the freight outlook for intra-Ontario volumes would improve — less than half of the 54% who expressed optimism just over a year ago in Q211. Similarly, there was nearly a 50% quarter-by-quarter drop in the number of carriers who expect interprovincial volumes (which had been a source of optimism in the 2Q12 survey) to improve. Of the U.S. markets, a third of respondents said they expected northbound volumes to improve over the next six months – still the best of the lot, but seven points below the results of the previous quarterly survey. The good news is that freight rates appear to be holding their own with the vast majority of respondents, at least in the Canadian markets, indicating that carriers are maintaining discipline in terms of capacity.