Carriers' outlook positive despite economic uncertainties

On Sept. 12, Swift Transportation Co., the nation's largest truckload carrier by sales, took the unusual step of holding an analyst conference call before the end of its third quarter, rather than waiting until the quarterly results were made public in late October.

In the 10-minute update, Phoenix-based Swift said that its July and August truck volumes were following normal seasonal patterns, and that third-quarter traffic should rise 4 percent year-over-year. In addition, Swift held to its forecast of full-year pricing growth of 4.4 percent, and re-affirmed that it would meet earnings-per-share targets for the rest of 2011. It also said that most customers held a positive view of their traffic flows and were worrying more about the future availability of freight capacity than about anything else.

Swift's decision to schedule the call, and the comments the company made during it, were designed to show that the transportation sector was conducting business as usual—despite slowing global economies, a growing EuroZone debt crisis, Congressional brinkmanship over raising the nation's debt ceiling, and a summertime sell-off of transport stocks that was seemingly unrelated to the economic climate or a company's individual situation.

Swift is not the only member of the transport fraternity looking to convince observers that the world isn't coming to an end, at least as far as shipping volumes are concerned. "We polled our operations folks, and we do not see any general slowdown. Most of our customers' volumes are steady," Ben Cubitt, senior vice president of consulting and engineering for the Dallas-based third-party logistics firm Transplace, told DC Velocity.

According to Cubitt, the biggest concern for carriers is that all the talk about a slowdown or double-dip recession might influence business behavior and become a self-fulfilling prophecy.

UPS Inc., which tends to be cautious in its public statements and as recently as late August held a somber view of macroeconomic conditions, surprised analysts during its Oct. 25 conference call when it expressed optimism about the economy's fourth-quarter prospects, even as the Atlanta-based giant reported third-quarter earnings and revenues that hardly blew off the doors.

Scott Davis, UPS' chairman and CEO, said the U.S. economy has "stabilized" and is "showing modest growth." UPS' exports out of debt-strapped Europe rose 9 percent in the quarter compared to the same period a year ago, Davis said.

He added that retail inventories in the U.S. are so lean at this point—the ratio of inventories to sales is at its second-lowest level since the government began keeping records—that even an incremental pick-up in consumer demand heading into the holidays would be a tonic for both UPS and the economy as a whole. UPS moves the equivalent of 6 percent of the U.S. gross domestic product (GDP). The government reported Oct. 27 that third-quarter GDP had risen 2.5 percent.

Jim Young, chairman and CEO of Union Pacific Corp., echoed Davis' comments, noting that inventory ratios "are as low as they've ever been." Young told Dow Jones News Wires in late October that the railroad's customers "are really keeping their inventories tight. So for us, if you get any kick of consumer demand, you will see a jump in production."

For his part, Davis said UPS would not know if the U.S. consumer has a buying pulse until mid-December, a reflection of how late and compressed this year's peak season is expected to be, if there is one. Meanwhile, the company has cut airfreight capacity from Asia to the United States by 10 percent due to slowing Asian export volumes.

William D. Greene, lead transport analyst at Morgan Stanley & Co., said the change in UPS' public tone was "particularly bullish." Greene acknowledged that UPS only offered an "incrementally more positive outlook" on the U.S. economy. Still, given how bearish its stance was just a few weeks ago, even a moderate change in the company's view bodes well for the transport sector because of its "size and status as an industry bellwether," Greene wrote in a research note.

To be sure, not everyone holds a positive view of the near-term outlook. A monthly index of economic activity based on truckers' real-time swipes of their fuel cards continues to show persistent weakness. The "Pulse of Commerce" Index (PCI) declined at a 4.3-percent annualized rate from July to September, the second-steepest decline the index has reported outside of the 2008–09 recession. Since trucking generally leads the economy, the weakness in the index does not paint a rosy broader picture, according to its authors.

Ed Leamer, the PCI's chief economist, said he wouldn't put much stock in anecdotal evidence from shipper and carrier executives. Leamer noted that most businesspeople work on a year-over-year basis and are "generally oblivious" to trends within those intervals.

For the most part, analysts believe the trucking industry will hold its own through the sluggishness. In 2006, truckers entered what would become an ugly freight recession with significant overcapacity, and as a result were at the mercy of shippers for an extended period of time. Today, truckers—less-than-truckload carriers in particular—operate in a much leaner fashion. In the past year, carrier pricing has become more rational and, with capacity tightening, they are shedding marginally priced freight and imposing rate increases that are, for the most part, sticking.

John G. Larkin, managing director and lead transport analyst at Baltimore-based Stifel, Nicolaus & Co., said feedback from privately held companies—who Larkin said are the most accurate barometer of the industry climate because they don't have to worry about public backlash—has revealed a "disconnect" between their views of business conditions and what the prevailing wisdom holds.

Based on their comments, Larkin surmised that "freight volumes, at least relative to downsized capacity levels, are looking rather good at the moment. The sky is not falling."

Larkin predicted that the U.S. economy would grow at a 1-percent to 2-percent rate through the 2012 elections. "Slow growth is probably the best we can hope for, and I would not rule out a mild, double-dip recession. But it would be mild due to the existence of lean inventories," he said.

Few analysts expect a return to recession because the U.S. economy has already fallen back from what is now being recognized as a relatively short and shallow recovery from the 2008–09 financial crisis.

"You can't fall 20 feet from a four-foot stepladder," Thom S. Albrecht, transport analyst for BB&T Capital Markets, said at a recent industry conference.