HOW THE CURRENT ECONOMY WILL AFFECT THE TRUCKING INDUSTRY IN THE LONG HAUL
By: Ben Leffler
The United States is standing at the edge of a significant economic downturn which, according to many experts, will get worse long before it improves. Initiated by the subprime mortgage fallout, Wall Street experienced its biggest losses since the Great Depression, culminating the week of October 10th in which the Dow dropped 18.2%. The week closed with an unprecedented Friday where wild swings caused the index to seesaw back and forth over 1000 points before finally settling 128 points under the opening. Branching out beyond the housing sphere, the plunge affected every industry, caused bank shake-ups worldwide and the largest bankruptcy declaration in US history, as industry giant Lehman Brothers Holdings filed for $639B worth of Chapter 11 protection. While the effects will continue to reverberate though all sectors of the economy, trucking companies in particular will feel the strain due to an overall drop in consumer spending and prior issues with rising fuel prices.
Several current factors combine to mean many fewer Americans will be purchasing as liberally as they have been in recent years, decreasing the need for shipping. The largest declines are already being felt in industries that have traditionally accounted for large portions of freight shipments. Automotive manufacturers are seeing huge losses, with GM, Toyota and Ford leading the drop-off. For the first month in 15 years, vehicle sales in the US dropped under 1 million, checking in at 964,873 for September. Furniture, another category that accounts for large portions of freight shipments, has experienced similar decreases in sales as result of the housing bubble burst and registered a 13.4% decline in September. Other sectors that saw sharp decreases included consumer electronics and apparel. MasterCard’s Spending Pulse, which calculates consumer spending, registered the largest decreases since its 2003 inception, finding an overall decline in retail purchases of 7.7% for September 2008 when compared to 2007.
While the recent drop in oil prices may seem encouraging, this is actually more indicative of a decrease in global demand than anything else and paints a bleak picture for the near future. As the recession pushes into foreign markets and economic activity slows, the demand for consumer products will continue to be negatively affected as Americans are forced to further cut back on luxury purchases. Additionally, the rising unemployment rate, intensified by massive layoffs in the financial, construction and retail areas, is estimated to reach 6.5% by the middle of next year, and the potential for many more job losses remains strong in the struggling automotive industry.
Even before the stocks began their epic slide many trucking companies were already experiencing difficulties as a result of the rapid rise in the cost of oil. While larger organizations are able to liquidate assets in the face of dwindling profits, it is the mom and pop operations with limited resources that ultimately suffer the most. According to the American Trucking Association, the number of trucking companies that have filed for bankruptcy has increased each of the last 6 quarters, with 970 failing in the second quarter of 2008 alone. This is a 130% increase from the same period during 2007. These failures can largely be blamed on the massive fuel price increases over the last year, with oil peaking at $147.27 per barrel on July 11th. Although the price per barrel has dropped nearly 50% and currently stands at $74.25, the cost of diesel remains a pressing issue for the industry. Even as the price has decreased over a dollar per gallon from the record high set July 14th, the $3.659 national average on October 13th was $.62 more than a year before.
While the severity of the world’s economic situation is yet to be determined, the fact that the market downturn will alter the trucking industry landscape seems undeniable. It is still unknown if the current situation will rival or surpass the “freight recession” that gripped the industry from 2001-03 and forced 10,000 companies under, but market factors dictate that the results could potentially be much worse because the industry has already endured a year of pressure due to rising fuel costs. What is safe to predict at this point is that the strains will be more damaging to smaller companies, and those companies will compose the majority of those that fail. The results will be increasing market share concentration in the hands of the surviving firms, and such companies will emerge from the wreckage in prime position to raise rates as the economy grows. Analyst Donald Broughton, in a report from earlier this year, goes so far as to predict an oligopolistic future where a few huge companies haul the majority of all loads. Thus, as is so often the case during economic turmoil, the current situation seems destined to further thin the shipping herd and disproportionately affect those with fewer assets to buffer themselves from market fluctuations. What’s worse is that such an outcome would result in higher prices of commodities for everyone.