A DEFLATED RECOVERY

FOR TRUCKING

By Peter Tirschwell

TO SAY THERE is a disconnect would be an understatement. On the one hand, evidence is mounting that a U.S. recovery would be accompanied by the mother of all truck capacity shortages — dwarfing earlier instances in which bankruptcies and equipment retirement amid a recession constricted capacity such that rates shot up like the Space Shuttle as soon as the economy re-engaged.

On the other hand, for that nightmare scenario to play out for shippers again, there must be a recovery, and we’re still waiting for it to show up.

That is why the story of a looming truck capacity squeeze seems old. All the factors that would contribute are in place, such as the 3,000 trucking companies that went out of business in 2008, taking with them more than 6 percent of national trucking capacity.

The last time this much capacity left the market was during the 2000-01 recession, when 1,100 carriers per quarter went out of business, according to Gary Girotti, vice president of Chainalytics’ transportation practice. That laid the groundwork for a runup on rates that lasted through 2006, when freight volumes began their current descent.

Girotti, writing on the JoC’s Roundtable blog ( http://www.joc. com/mublog/20090723), points out that in a downturn, trucking capacity tends to be efficiently adjusted downward in step with declining rates, but in an upturn, new capacity never re-enters the market so seamlessly. Consider any internal process of cost cutting versus investing: The former can always occur with lightning speed while the latter can drag on for months.

Another factor that could constrict capacity further is that many

more trucking companies can be expected to fail in the early stages of a rebound. Many truckers currently are being kept alive by their banks. With used equipment prices in the basement, the banks realize it’s less costly to accept every other — or every third — debt payment from an ailing carrier rather than force the company into bankruptcy and then try to liquidate its assets at bargain-basement prices.

“You have banks keeping companies afloat way longer than they otherwise would,” said John Larkin, managing director of the transportation and logistics equity research group at Stifel Nicolaus. He called the practice “very widespread.”

Larkin said the price of a 4-year- old Class-A tractor a year ago would have been $40,000, while a simi-lar-aged vehicle would fetch only $25,000 today. “The equipment has lost so much value in the aftermar-ket that it doesn’t make sense for the banks to liquidate the fleet at this juncture,” he said.

That means once asset prices start to rise in a recovery, there will be a final “catharsis” of bankruptcies that will constrict capacity further just as demand is building, an analysis Larkin credited to Ken Vieth of A.C. T. Research.

“The rate at which companies are failing has slowed even though the fundamentals in the first half of the year have gotten worse, and that is all a function of the collateral value declining dramatically,” Larkin said.

That gets back to the crux of the matter: A capacity squeeze is dependent on a recovery, and that prospect remains as cloudy as ever. Bright spots are on the horizon — the JoC-ECRI index, a leading indicator with a cult following among some economists — turned positive for the first time in a

year last week, for example, showing an uptick in demand for industrial commodities used to produce consumer goods.

But there is no consensus a recovery is imminent. June port statistics were horrible, and truck tonnage dropped sharply that month after rising in May.

“While I am hopeful that the worst is behind us, I just don’t see anything on the economic horizon that suggests freight tonnage is about to rise significantly or consistently,” said Bob Costello, chief economist for the American Trucking Associations.

The stimulus money, meanwhile, is slow in being spent, and banks may not be out of the woods, given rising delinquencies in credit cards and commercial real estate. Some believe unemployment, currently at 9. 5 percent, will top out at 11 percent next year, casting a long-term pall over consumer spending.

Until the numbers suggest otherwise, it’s a valid observation that the consumer has structurally down-shifted into more of a savings mode and that the go-go years of 2002-07 are history.

“This binge buying during the early and mid-part of this decade may be permanently a thing of the past,” Larkin said.

That means any recovery will be L-shaped, meaning it will be slow and gradual. As to when a “new normal” of consumer spending will be found, Larkin said, “The answer is nobody knows. We don’t know when things are going to tighten up, and anyone who tells you they know has probably made three or four wrong predictions already.” JOC

Peter Tirschwell is senior adviser for The Journal of Commerce. He can be contacted at 973-848-7158, or at ptirschwell@joc.com.