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FTR: A Slow Recovery Is Not Concern For a Double Dip

While the economic recovery has been showing signs of slowing, this is not cause for concern that we'll see a double dip recession, FTR Associates pointed out during a webinar Friday.

During "The State of Freight" webinar, Noel Perry, FTR managing director and senior consultant, said that while a slow recovery is unusual, economies do not recover in a completely consistent way. We may be in an era where recoveries will be slow, as this is what occurred in the recent 1990 and 2001 recessions.

"It may be painful, but it is normal," Perry said. He emphasized that this does not mean we're headed for a double dip.

Nonetheless, the firm is concerned that the economy and freight could grow slower than their base forecast. According to Perry, GDP growth will stay in the range of 3 to 3.5 percent over the next two years, a point or two lower than their last estimate. This is a very conservative forecast, he said.

The Overall Economy

"At a time like this, economic analysis counts," Perry said.

Right now, economic analysis is indicating a slow recovery. Housing inventories are high, he said, and we need to get the surplus units off the market. Employment is also showing signs of slower growth, a phenomenon similar to the last three recoveries. On a positive note, incomes of those who do have jobs are going up, a sign people are working harder, and that money will funnel back into the economy, Perry said.

Manufacturing output has been expanding for a long time, but this section hasn't added jobs.

Another sign of a slow recovery is the U.S.'s sovereign debt, which is at 53 percent as a share of GDP. Consumer debt is still a problem as well, with change concentrated in the sub-prime segments. People are still having difficulties getting loans, Perry said.

What indicators should we look out for that things are getting better?

Consumption. Retails sales numbers are very important to the recovery and accounts for 70 percent of growth. Manufacturing. These figures have slowed some, but they're still strong. China. The country has been an engine of growth, Perry said. However, it's growth has fallen from 10 to 7 percent. And if the country's growth heads south of 5 percent, it will mean recession for them and will have serious implications for the U.S.
Truck

Demand for air freight is going up, and this is a good sign for trucking, Perry said. When people use more air freight, it means their inventory predictions were wrong and they're running out of stock.

However, the trucking industry still has a couple hundred thousand trucks not in use, and FTR has had to raise its forecast for total surplus vehicles. For the fourth quarter of 2010, the firm estimates there to be around 200,000 trucks parked.

In addition, FTR's forecast for trucking growth will stay close to about 5 percent through the rest of this year and next, Perry said.

Over the course of the recession, the industry had to cut its overhead by about 25 percent, Perry said. As demand for freight fell, companies had to lay off drivers they didn't need. Now, however, the industry doesn't have the same capacity to hire people; it went from having the capacity to hire 150,000 to now only 100,000.

In addition, legislation, such as the hours of service change, CSA 2010, and the proof of citizenship requirements, will reduce the driver hiring pool, further diminishing hiring capacity. Perry believes it will take several years to build up the capacity to hire.

Intermodal and Rail

While the intermodal segment has been on the rise, rail carloads are static, according to Larry Gross, senior consultant for FTR.

Overall carloads have dropped 2 percent over the last four weeks, compared to the prior four weeks. The industry has seen 32,000 fewer carloads over this same period, primarily due to a decrease in coal, Gross said.

However, international intermodal freight has seen a steady increase; it's up 5 percent from March through June of this year, Gross said. Seasonally adjusted revenue moves in international grew 9.8 percent from May to June, and it's also up 30 percent year over year. This is mostly reflective of goods coming in from Asia. Meanwhile, domestic intermodal has remained flat.

But Gross believes the growth in international will taper off. Industry projections indicate third quarter growth of 10 percent, falling to 7 percent growth in the fourth quarter.

Gross also indicated that intermodal's share of the freight market is moving upward; its share is now at 13.7 percent. "This story will continue into 2010."

Still, the trucking industry shouldn't be worried, as intermodal only accounts for 4.1 percent of dry van traffic and only 1.8 percent of trailer traffic. Even if intermodal shows an increase in share, "its ability to affect overall truck demand is very very limited."

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