Addressing the first general session of the Truckload Carriers Association annual meeting in Las Vegas, Nevada, March 3 to 6, 2002, Stuart Varney, a commentator for the Wall Street Journal on the CNBC cable network, said that the US economy was just completing the shortest, shallowest recession in history. He spoke before figures were released showing strong growth in the first quarter. While Varney predicted robust growth by the end of 2002, he simply did not anticipate a growth rate of 5% in the first quarter.
Varney said that the shallow recession spread unevenly across the economy. Certain economic segments felt the downturn much more sharply than others. For instance, trucking suffered through a triple-threat with rapidly falling value for used equipment, much higher insurance premiums, and sharply higher fuel prices. Trucking suffered far worse than the general economy, he said.
The economy as a whole has recently seen three phenomena that are unlikely to be repeated, Varney said. The first was the bursting of the NASDAQ bubble. The second was the rapid globalization of national economies that was wonderful while all were expanding but is less enticing when contraction sets in. The third issue is the impact of the terrorist attacks in 2001, which resulted in radical changes in the military and political environments as well as the financial communities, he said.
US outpaces competitors
Until the middle of the 1990s, conventional opinion held that the US was in economic decline, Varney said. In contrast, Japan was viewed as a growing giant, and France and Germany were seen as prime examples of successfully running a social economy. By the mid-90s, the US had an economy that no other nation could get near. For instance, for most of the 90s, the unemployment rate was near 5% with a low of 3.8%. Compared to that record, Western Europe has been running double-digit unemployment rates for the better part of the last 20 years, he said. “Wall Street doesn't seem to care about unemployment, but Main Street does,” Varney noted.
Low unemployment was made possible by an economy that created 220,000 new jobs every month for nine years from 1991 to 2000, Varney said. No economy had ever done that before. For contrast, in the past five years, Western Europe has been able to generate only one million new jobs — not many in comparison to the 23.8 million created in the US since 1991. That's one million new jobs every five months, he said.
Growth was possible, because the US dominated all the key industries and technologies necessary for the future, Varney said. Computers provide a good example. The top computer companies in the world are American with the single exception of NEC of Japan, which uses Intel processors.
Computers and the associated Internet began their great expansion in 1995. With the advent of Netscape and the first Internet browser, the Internet bubble began, Varney said. Profit was seemingly foreign to the Internet when companies that never made a penny had market values in excess of that of General Motors and Ford combined when those companies were making net profits of $1 billion or more a month. A good example of the Internet bubble was Webvan, an online grocer, he said. Webvan raised more than $1 billion, spent it all, and went bankrupt, all without a single dime of profit. “We are living with the results of that bubble still, because more than $4 trillion of private wealth simply disappeared,” Varney said.
Global trade doubled
At the same time that the Internet bubble was expanding, global trade doubled, something that had never happened before in such a short time span. Globalization is wonderful as economies expand, because all economies benefit from the momentum of rapid growth, Varney said. Money almost seems to slosh across borders from one country to the next building factories, improving infrastructures, and raising the standard of living everywhere. The downside of globalization is the crushing weight of contracting economies all happening at once, he said.
While mostly military and cultural, the terrorist attacks had a substantial financial impact, Varney said. The US economy stopped dead for five days. Business quit traveling for a week. Investment stopped. The stock markets were closed until the following Monday. A recession was waiting to happen, and the events of September 11 pushed the economy over the edge of the pit, he said.
The US provides the only model for running an economy, Varney said. That is free market capitalism, open with limited regulation. The socialist model of Europe is a dead-loss failure that cannot provide the goodies of American capitalism.
Although the American economy leads the world, it also provides a rising tide of anger about the legal business. “I'm told I should call it the legal profession, but that implies a concept of ethics, which seems sadly lacking among many lawyers,” Varney said. “In America today, a company that does not stop something from happening is viewed as financially responsible for whatever actually happens. When this anger spills over, we will get serious tort reform.”
A positive sign is reduction of inventory held by manufacturers, Varney said. In addition, the government issued tax rebates in 2001 and has lowered marginal income tax rates for 2002. That will support growth in the future. On top of all this other good news, the economy contains no inflation. Businesses can plan capital expenditure much more accurately in an economy with no inflation, he said.
Vast truckload carrier volume
Truckload carriers are a true economic force in the United States, Robert Costello told the association. He is chief economist for the American Trucking Associations. In 2001, truckload carriers handled 4.1 billion tons of freight. That much freight constitutes 31% of all freight volume including highway, rail, air, water, and pipeline modes.
With all that volume, truckload carriers began seeing a slowdown of their activity in early 2000, well before other parts of the economy felt any part of the recession, Costello said. Truckload volume slowed before it was felt by LTL carriers. Small truckload carriers, defined as those with less than $30 million in annual revenue, have been hit hardest by the slowdown.
A few large carriers have failed, but the vast majority of trucking closures have come from the ranks of small truckload carriers, Costello said. While small carriers have been hit hardest, some of the larger truckload carriers have benefited from motor carrier consolidation and saw a slight increase in volume toward the end of 2001. These increases were not the result of market growth, but of large carriers taking on freight from departed competitors, he said.
Refrigerated carriers remain consistent
Refrigerated freight has slowed, but has remained more consistent, because of its nature, Costello said. Volume for refrigerated carriers dropped later and less than it dropped for other truckload carriers. Typically, recovery from an economic downturn is slower as well. Consumer buying habits change slowly so refrigerated freight volume rises slowly.
Carriers with short or medium length traffic lanes experienced less damage than carriers with long lanes. Part of this can be attributed to fairly consistent consumer spending, Costello said.
Although high, diesel prices have fallen from record levels posted during the past 18 months, Costello said. For most carriers, fuel is the second highest operating expense, exceeded only by labor costs. The winter of 2001/2002 was fairly mild, which helped keep prices in check, because carriers did not have to compete with the home heating market for a limited supply of fuel.
The bad news about fuel is that price volatility remains high, making it difficult for truckload carriers to project operating budgets, Costello said. Tension in the Middle East always has the potential to increase fuel price volatility. Unfortunately, the correlation of fuel prices to trucking bankruptcy is high. A price increase of 10 cents per gallon can be expected to cause 1,000 bankruptcies in fleets with five trucks or more, he said. That bankruptcy number does not include fleets of fewer than five trucks that fail as fuel costs rise, he said.
Insurance premiums rise dangerously
Increases in insurance premiums pose a constant danger to truckload carriers, Costello said. A recent ATA study shows a 32% increase in premium prices during 2001 for primary insurance coverage, usually the first $1 million in coverage. This was much higher than the 17% increases experienced in 2000. The same study shows average increases of 35% for primary coverage for truckload carriers. These increases do not reflect the true cost of insurance, because many carriers have raised deductible levels in an attempt to limit rising premiums. “We have heard reports of truckload carriers paying increases in the 300% to 500% range,” he said.
The ATA study shows a worse situation for umbrella or excess coverage, Costello said. The average increase for umbrella coverage in 2001 was 87%, much higher than the 33% increase experienced in 2000. Among truckload carriers, the average premium increase for umbrella coverage in 2001 was 97%. Since September 11, many carriers have seen increases in the 120% range for umbrella coverage. “Some carriers have reported increases as high as 1,000%,” he said.
Egregious personal injury awards are a major factor in these cost increases, Costello said. Until the country gets civil justice reform, an insurance crisis such as carriers now are experiencing will be a recurring phenomenon.
Driver turnover continues to be a significant problem for truckload carriers, Costello said. For the fourth quarter 2001, large truckload carriers, those with revenue of more than $30 million, reported driver turnover at a 100% annual rate. Reports say that driver turnover has become worse for large carriers during the past few quarters. Smaller carriers seem to keep drivers longer, but they report having a harder time finding and recruiting drivers, he said. The lower turnover rate at smaller carriers does not offer much good news, because the annual turnover rate remains at 80% or higher.
The cost of turnover is astronomical with the average running $5,000 to $8,000 to recruit, screen, and train a driver, Costello said. As the economy improves and more jobs become available, the outlook for driver turnover becomes worse, he said.
Although performance among truckload carriers may never return to levels seen before the current recession, the future looks fairly promising, Costello said. In the years between 2001 and 2007, tonnage for truckload carriers is projected to grow 2.2% per year. Those same projections suggest improvement of 2.7% annually between 2007 and 2013. This will result in truckload carriers handling 5.4 billion tons of freight per year.