Welcome back and thanks for reading The Bottom Line! Today I wanted to share some interesting statistics on our industry. We’re growing and it’s great!
Recently I’ve read several articles talking about trucking industry growth. I’ve copied and pasted two of them below.
The first – Trucking Industry Points to Strong Economic Growth by Dirk Van Dijk – can be reached by clicking HERE.
The Second – Work Truck Industry Growth Expected to Continue into 2016 by Steve Latin-Kasper – can be reached by clicking HERE.
Both authors articulate the better-than-expected growth in the transportation sector all together, but specifically in trucking because of healthy freight counts. These indicators suggest an economic up-tick on the horizon.
At The Hoffman Group we consult on insurance so I’d be remiss if I didn’t mention it here! Economic growth and extreme losses over the last few years coupled with expected low interest rates and rates of return over the next several years, is causing the insurance market to harden and harden quickly.
I personally estimate that transportation premiums will increase 5-8% annually for the next few years before stabilizing. Sorry to be the bearer of bad news, but truckers have gotten all to used to expecting a decrease in premiums. The ‘perfect storm’ of factors causing that marketing pressure have subsided and it’s prudent to build into your budget a few percent increase regardless of your own performance. There are of course exceptions to this rule, but an average trucker should expect increases.
You can mitigate some of those increases with some creative deductible options and maybe a rating basis change (click HERE to see which rating basis makes sense for you). Call your agent to discuss this and make sure you’re looking around if you don’t have confidence that your agent has the tools or the insurance carriers to help you weather the storm. It was pretty easy to get a trucking account written over the last few years, but it requires a pro from here forward.
See the articles below and enjoy.
Trucking Industry Points to Strong Economic Growth
By Dirk van Dijk CFA01/25/2012
“America Moves on Trucks” is the trucking industry’s slogan, and there is a lot of truth to it. Trucks account for 67.2% of all the freight tonnage in the U.S. Since much of the freight moved by rail is low value per ton stuff, the Trucking industry collected 81.2% of all the freight transportation revenues. Given that when something is produced, it then has to be moved to the consumer, the trucking industry thus serves as an excellent barometer of the economy, particularly the domestic economy. That barometer is now pointing to extremely sunny skys.
The American Trucking Association (ATA) index rose by 6.8% in November, a huge acceleration over the 0.3% gain in November. It is now up 10.5% year over year. In November it was showing a 6.1% gain. The total tonnage moved in all of 2011 was 5.9% higher than for all of 2010. That is the biggest annual gain in 13 years.
Some of the gain appears to be from trucks taking market share from the rails, but not much. Total rail traffic was up 7.3% year over year in December (as measured by the American Association of Railroads, or AAR). Intermodal traffic, which is the most directly competitive with the truckers (containers moved long distances by train then carried to their final destination by truck) was up 9.4% year over year. The month to month gains though were more subdued, with a total traffic gain of 1.8% and an intermodal gain of 0.4% in December.
Thus, the transportation indicators are strongly suggesting that the economy is headed in the right direction.
Source: Zacks
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Work Truck Industry Growth Expected to Continue Into 2016
By Steve Latin-Kasper
NTEA Director of Market Data and Research
U.S. Economy
Bloomberg News announced in the second week of December that its forecast panelists had increased their prediction of U.S. gross domestic product (GDP) for the fourth quarter of 2011 to 2.7%, a 0.4 percentage point increase from the November consensus. The improved forecast was attributed to better-than-expected economic growth in the third quarter and less uncertainty about financial conditions in the Euro Zone. The forecast for 2012, however, was barely changed, with first-quarter predictions increasing slightly and second through fourth-quarter estimates declining by 0.1 percentage points each. The net result was an average forecast of 2.2% GDP growth in 2012 — the same as predicted in November.
Economists are reluctant to ramp-up forecasts for GDP in 2012 primarily due to consumer confidence. The University of Michigan’s Consumer Confidence Index has improved markedly since reaching its recent historic low of about 57 in 2010. However, it’s important to note that consumer confidence didn’t begin waning as a result of the 2007–2009 recession — it has been trending down since 1999, from a level of about 112. In the second quarter of 2011, it climbed to a recent high of about 75 and then fell back into the mid-60s again as Euro Zone uncertainty led to extreme volatility in stock markets around the world.
So, the big question for 2012 is: Will consumer confidence continue improving? The likely answer is yes — but not due to substantial improvements in the labor market or gains in real income (which probably will not occur). What is happening, and what will continue to happen, is a decline in the debt-to-income ratio. As of the third quarter of 2011, the Financial Obligations Ratio (which relates consumer debt to personal disposable income) was at 14.42. In other words, the average American consumer was using 14.4% of his/her income for loan payments. The Ratio, which was down from a high of 17.55 reached in the third quarter of 2007, hasn’t been as low as 14.42 since the first quarter of 1995. This means that more consumers can afford to spend again.
Since banks are still exercising caution on issuing loans to consumers and businesses, a higher level of creditworthiness likely won’t contribute to increased consumer spending. This is negligible, however, because while consumers were paying down debt, the rate of savings increased. As such, many consumers and businesses have additional funds entering 2012. On that note, November sales of automobiles and holiday season retail sales both seem to indicate that consumers are starting to feel like spending again.
The chart above, which depicts the difference between two- and 10-year maturity treasury bill rates (the yield curve), indicates that the U.S. economy is nowhere near a level that historically has proceeded a recession. So, even if consumers don’t increase expenditures enough to push U.S. GDP back up to its historic trend level of about 3.2% in 2012, the U.S. economy will not likely slide back into a recession.
Work Truck Industry
The work truck industry is more volatile than the U.S. economy, so when economic growth is at or near trend, U.S. commercial vehicle sales have historically been much higher. (Unfortunately, that is also true during recessionary phases of business cycles.) What’s occurring in this business cycle fits the historic relationship. While U.S. GDP grew roughly 2% through September, retail sales of truck chassis grew more than 25%, according to the NTEA’s OEM/Body Manufacturing Monthly Statistics Survey.
Since the U.S. economy is expected to continue growing in 2012, retail sales of truck chassis will likely continue growing as well — but it’s not quite that simple. In addition to expected growth in the economy as a whole, numerous application markets for trucks are expected to fare well in 2012. In fact, the only significant truck application markets that are expected to perform poorly in 2012 are the construction industry and state and local governments. This doesn’t mean that construction companies and governments won’t buy any trucks in 2012 — it means that sales in those markets will be about the same as in 2011, or slightly better.
As will apply to most truck application markets in 2012, the relatively high average age of trucks will once again lead to many being replaced. As shown in the graph above, conventional cab-chassis dominate the market for straight trucks, and the trend in that market segment is expected to extend through 2012. However, the current trend indicates continued excess capacity in the industry, which means that the high sales volumes experienced in 2006 may not be reached again until 2016 or later.
Commodities Prices
Currently slow global economic growth has allowed for metals prices to stabilize (and even fall slightly) in the second half of 2011. As shown below, prices for steel sheet started declining in the second quarter, and prices for plates, bars and structural shapes followed in the third quarter. However, prices haven’t fallen enough to indicate that the long-run upward trend has changed.
The aluminum market currently has a similar pricing environment. From 2010 through the second quarter of 2011, aluminum prices grew at the long-run trend rate established from 2004–2007. Prices spiked in 2008 and then crashed as a result of the recession. During the economic recovery, prices began increasing but then stabilized as the global economy slowed slightly in the second and third quarters. Going forward into 2012, whether metals prices return to trend (which will eventually take them back to 2008 levels) depends on economic growth in Asia, the BRICS (Brazil, Russia, India, China and South Africa) countries and the U.S. Current expectations are that global growth will pick up again in 2012, which will likely lead to increases in metals prices at some point during the year.
In the meantime, as shown in the figure above, the price of oil remains volatile. After climbing rather quickly back to $100 per barrel in the futures markets in November 2011, announcements from OPEC and the U.S. Department of Energy on Dec. 15 pushed it down about $7 per barrel. Both organizations indicated that demand for oil was unlikely to increase as much as expected in 2012 because of slower growth in Europe, which will likely affect China and the U.S. In the same announcement, OPEC leaders suggested they expected production to continue increasing in Libya and Iraq, but that the price of oil would probably remain around $100 per barrel in 2012 as Saudi Arabia cut its production to maintain the OPEC at desired levels. Oil prices of $100 per barrel means that diesel and gasoline costs will continue to put pressure on profit margins in 2012, and truck owners will continue looking for ways to save on fuel. Therefore, interest in alternative fuel and hybrid truck technology will likely continue expanding in 2012.
Leading Indicators
The leading indicator of U.S. economic activity has been positive for the last six months, the rate of inflation remains under control, the unemployment rate is declining and the Federal Reserve continues to keep interest rates at historic lows. Consumer and business expenditures have been increasing, while debt-to-income ratios have been declining. On the down side, the construction industry is still holding the U.S. economy back from reaching its historic average rate of growth, and Euro Zone uncertainty remains. In other words, continued slow U.S. economic growth is expected.
What this means for the work truck industry is that 2012 may be very similar to 2011. The heavy-duty segment is expected to continue growing faster than the medium-duty segment in the first half of 2012, and in the second half, growth rates are forecast to be about the same. As shown above, the forecast for housing starts is positive for 2012. What isn’t shown, however, is that the optimistic forecast extends to 2015, which translates into industry growth through 2016.
The PRIME (average prime rate of interest inverted) tells the same story in the chart above. For the last two business cycles, the PRIME has provided about two-and-a-half years of lead-time at turns in the heavy-duty business cycle. Given current statements by the Federal Reserve, it is unlikely that rates will start rising significantly until the second half of 2013. This means the PRIME is also indicating work truck industry growth into 2016 (albeit, the rate of growth may slow after 2012).
If you have any questions or comments about this article, contact Steve Latin-Kasper at (414) 294-3408 or e-mail stevelk@ntea.com.
The Bottom Line: Overall it’s a great sign that the economy is picking up. It’s even better that we’re producing goods in the US and we need to move freight.
Hopefully you’ll check back soon to see our weekly updates. And always, if you have any questions for the Truck Insurance Pro…please just let us know and we’ll get back to you ASAP!
Keep on Rollin’!
Jason Stevenson, MBA, CPIA
Truck Insurance Pro
The Hoffman Group–Transportation Services
800.826.4006
jstevenson@thehoffmangrp.com
