The wild gyrations in the stock market and the continuing bad economic news, particularly on U.S. unemployment and housing prices, make one wonder if we are coming out of a Great Recession, are experiencing a continuation of 2008-2009 or relapsing into another recession. Kenneth Rogoff, the esteemed Harvard Professor of Economics and Public Policy wrote in a recent paper that “the phrase ‘Great Recession’ creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold. That is why, throughout this downturn, forecasters and analysts who have tried to make analogies to past post-war US recessions have gotten it so wrong. Moreover, too many policymakers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts . . .

A more accurate, if less reassuring, term for the ongoing crisis is the ‘Second Great Contraction.’ This was based on  . . . (the)  diagnosis of the crisis as a typical deep financial crisis, not a typical deep recession. The first “Great Contraction” of course, was the Great Depression . .. The contraction applies not only to output and employment, as in a normal recession, but to debt and credit, and the deleveraging that typically takes many years to complete. . .

In a conventional recession, the resumption of growth implies a reasonably brisk return to normalcy. The economy not only regains its lost ground, but, within a year, it typically catches up to its rising long-run trend.

The aftermath of a typical deep financial crisis is something completely different . . . it typically takes an economy more than four years just to reach the same per capita income level that it had attained at its pre-crisis peak. So far, across a broad range of macroeconomic variables, including output, employment, debt, housing prices, and even equity, our quantitative benchmarks based on previous deep post-war financial crises have proved far more accurate than conventional recession logic.”

If Mr. Rogoff’s analysis is correct, it would explain why so many economic indicators appear to be stuck in neutral.  It suggests that truckers should be very caustious about investing in plant and equipment at a time when consumers are keeping their wallets in their pockets and the prospects for economic improvement seem so dim. The “Second Great Contraction” may take years to turn itself around.  For job seekers or even for people employed in the trucking industry, it also highlights the need to be flexible and to create options.    

Over the past several weeks, one of the trucking and logistics groups on LinkedIn has been capturing responses to the question, “How many loads are you turning down per week due to lack of trucks?” As of a few days ago, this question had received 448 comments. I thought it would be interesting to share some of the common themes with the readers of this blog.

Load Turndowns are not Tracked by all Carriers

The number of load turndowns by lane per week is an important KPI. This type of data can be very helpful in allocating capacity to those lanes that represent the best opportunity for strong yields. Some companies keep detailed statistics on this metric. A number of companies are not tracking this data and only have a “ballpark” estimate of the number of loads they are not able to handle. Data should be maintained on the type of freight, the lanes, the frequency of the loads and the rate to make sure that a company is optimizing the utilization of its fleet.

Load Turndowns are a Widespread Phenomenon

Many of the respondents are reporting load turndowns. Some are able to handle all of the volume that comes their way. This seems to be the case among LTL carriers. Among the respondents reporting capacity shortages, they range from a small number to hundreds of loads turned down per month for large carriers.

One sign of tightening capacity is the increase in loads being offered by load brokers. One respondent reported a tripling in the number of loads available from this source.

American Shipper released a new study on Freight Procurement Strategies on June 29, 2011. The study was sponsored by JDA. The results were based on research conducted in May of this year. Data was gathered from over 300 shippers in the manufacturing and retail sectors. Here are some of the key findings.

Freight Costs are on the Rise

Fifty-eight percent of the study participants indicated that their freight costs increased by over 5% in 2011. This compares to 48% in 2010 and 25% in 2009. Seventeen percent experienced a rate increase of less than five percent in 2011 while the comparable figures for 2010 and 2009 were 15 and 12%. The rest of the sample experienced no increase or a decrease in rates. Forty percent agreed to an increase of over 5% on their contract rates in 2011. This compared to 46 and 10% in 2010 and 2009 respectively. Thirty-one percent accepted a rate increase of less than 5% on their contracted rates this year as compared to 17 and 14% for the years 2010 and 2009 respectively.

More Protracted Rate Negotiations

This year rate negotiations are being extended over a longer period of time. Fifty-three percent of the respondents indicated that in 2011 their freight negotiations were completed in less than two months. In 2010 and 2009, the comparable figures were 63 and 70% respectively. Forty-four percent of the sample reported that their negations took 3 to 6 months this year. This compared to 32 and 27% respectively for 2010 and 2009.

I have long been a fan of intermodal transportation since the days I ran one of Canada’s largest IMCs. I continue to monitor developments in this sector with great interest. My sense is that the Intermodal industry, which consists primarily of the railroads, IMCs, shipping lines, draymen and truckers, is positioning itself to take the next big leap forward. Here are some developments to watch.

Shipper Knowledge

Despite all the media attention that intermodal service has garnered over the past 10 or 15 years, there are still a significant number of shippers that are hesitant to switch from truck service. In some cases they were “burned” by service failures in the past and are reluctant to give intermodal a second chance. For other potential users, it is a case of unfamiliarity. This will continue to change.

Some high volume shippers that move boxcars and do their homework will observe that the cost per ton or per pound of using intermodal service as compared to boxcar can be quite attractive on some corridors. While this can pose some challenges for companies on rail sidings that are accustomed to receiving their goods via rail, the economics can sometimes make the switch worth their while.

Diesel Fuel Costs

Beginning the week of July 5, Mexican trucks are being allowed to operate in U.S. territory under a new deal between the two countries. The deal was a result of an agreement between Mexican President Felipe Calderon and U.S. President Barrack Obama, putting an end to a decade-long trade dispute between the two countries. The original transportation chapter in the North American Free Trade Agreement between Mexico, the U.S. and Canada, allowed Mexican trucks to travel on U.S. highways starting in 1995. But the U.S. refused to allow this provision to take effect, citing security concerns over the Mexican trucks and drivers.

The agreement will provide several benefits to American business. U.S. exporters have pushed for a new agreement since Mexico imposed $2.4 billion in tariffs on U.S. goods after a Bush-era trucking project was shut down.Mexico will suspend 50 percent of its punitive tariffs within 10 days, and suspend the rest when the first Mexican carrier in the program receives operating authority. Mexican tariffs currently range from 5% to 25% on certain U.S. agricultural and industrial products.

The deal is expected to "significantly" improve the competitiveness of Mexico's transportation and export sectors, which target the U.S. as its main market. About 70 percent of Mexican exports are shipped by road. This will allow for much more options in transport that will make Mexico more competitive and at the same time reduce the transportation costs significantly. The expectation is that this should improve the flow of Mexican goods into the United States by making them more cost effective.

The first trucks enrolled in the program could operate within the U.S. as early as the end of August according to Federal Motor Carrier Safety Administration officials. U.S. Transportation Secretary Ray LaHood signed the agreements in Mexico City, infuriating opponents of an agreement that independent truckers and labour groups believe will bring lower-cost and poorly supervised Mexican operators into competition with American drivers.

The agreement will operate similar to the current U.S. arrangement with Canada. Mexican drivers will only be allowed to deliver into America and pick up loads going back to Mexico. They cannot pickup and deliver loads that are not international shipments for their own country.

American truckers see several problems with this arrangement. Many U.S. truckers may not want to go into Mexico as a result of the danger posed by the drug cartels. This could make this a Win for Mexican trucking companies and a Loser for American truckers. If, and when, American truckers decline the hauls going to Mexico, that pretty much gives the entire market to Mexican trucking firms.