For this year's "outlook," we asked four recognized experts to share their views on the economy and trucking. On the general issues, they more or less agreed. The economy will continue to grow, but growth will be much slower the rest of this year and into 2007. The expected pattern for freight is much the same: slower growth, but still relatively strong. And while our experts tend to agree on other issues, such as fuel prices (they'll stay high) and the global economy (generally good for trucking), each brings a unique perspective that underscores the many facets of our industry.
BOB COSTELLO, CHIEF ECONOMIST AND VICE PRESIDENT OF THE AMERICAN TRUCKING ASSOCIATIONS
When the questions concern trucking economics, the industry and the news media routinely turn to Bob Costello. As ATA's chief economist, he manages the collection, analysis and dissemination of trucking economic information, including monthly trucking economic indicators, motor carrier financial and operating data, an annual freight transportation forecast, driver wage studies, weekly diesel fuel price and economic reports and a yearly trucking almanac. He also conducts economic analyses of proposed regulations and legislation affecting the trucking industry. He has testified at congressional hearings on trucking issues and is often cited as an expert on trucking economics by the Wall Street Journal, Business Week, CNBC and National Public Radio.
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In general the economy will continue to grow, but at a much slower pace – somewhere in the 2.5 percent range versus the 5.6 percent growth we saw in the first quarter of 2006. Higher interest rates and energy prices are cutting into the ability of consumers to spend. Manufacturing is still solid, but growing at a slower rate. Business investment is good but that, too, has eased some.
Still, Costello isn't worried. "If the economy is growing at a rapid pace, that typically means the pace is unsustainable," he explains. "Slower growth rates – as long as they're not plummeting – are usually more sustainable, which is a good thing. I'd certainly like to see something a little higher than 2.5 percent GDP growth in the second half of the year, but I don't think there's any reason to panic."
High fuel prices are not only a problem for the trucking industry, but for economic growth in general. "It acts as a tax on consumers," he says. "If you and I are spending more money to commute to work, that's less money we have to spend on other items." Moreover, there's less "trickle down" from buying fuel than, say, buying a new house or car. "If I buy a new washing machine or a car, a lot of components go into the manufacture of that item, so a lot of economic activity is generated from that purchase. You don't see the same amount of activity generated from buying fuel."
The demand for consumer durable goods such as cars and appliances isn't as strong as it was even a few months ago, but U.S. manufacturers have two things working in their favor: a weaker dollar that is helping to boost exports, and continued business investment in capital assets. As Costello points out, U.S. industry doesn't compete in the world marketplace on the basis of labor costs. Instead it competes on the basis of efficiency and productivity, and the way to increase efficiency and productivity is through investment in new technology, more productive assembly lines or more efficient machinery.
The freight outlook is very similar to the outlook for the rest of the economy: growth – but at a slower rate. ATA's July for-hire Truck Tonnage Index was 1.6 percent lower than a year ago, but volumes are climbing back steadily from a big first-quarter drop. The index was up 0.7 percent from June – the third increase in four months – and has gained 2.7 percent since the large declines in February and March. All are very positive signs, says Costello, and the long-term outlook for trucking is very good.
"We're in a unique situation, because capacity is so tight that we don't need a lot of increase in volumes to get an even better increase in truck revenues," he says.
The shortage of qualified drivers is the major reason capacity is so tight, and it's a problem that won't go away anytime soon. Driver wage increases are inevitable. "As an economist I can tell you that when demand exceeds supply – which is the situation we have today with drivers – prices go up," he says, "but that doesn't solve the entire problem."
Most notably, there's a lifestyle issue that has to be addressed. "Certainly this is an industry where people without a college degree can make a better than average wage, but in the long-haul sector we still have a hard time attracting people because they have to be away from home a couple of weeks. In the short-haul sector, it's much different. They have problems finding quality drivers in some markets, but there isn't the acute shortage that's prevalent in the long-haul market."
Some of the long-haul trucking companies are looking at operational changes such as more use of intermodal for long hauls or simply working more closely with drivers to get them home more regularly. Some of the big carriers are talking about relays where drivers swap trucks in order to get home every night, but Costello says that's not a solution for most carriers because it requires very high-density lanes.
This year's red-hot heavy truck sales were driven by concerns regarding the 2007 emissions changeover, not carrier expansion. "Many fleets are just trying to get the average age down as low as possible so they can stay out of the new truck market for the first part of 2007 or even all year, if necessary," he says. Because of the price premium, that pull-ahead buying would have occurred even if fleet managers knew for sure that new trucks will be just as reliable and fuel efficient. However, good reports regarding the new engines might bring some fleets back into the market a bit sooner than expected.
Despite the currently favorable capacity and revenue situation, carriers will need to keep a tight rein on costs. That may be especially difficult for smaller carriers who don't have the buying clout of big fleets. High fuel prices and slightly slower growth in freight volumes could nudge a few carriers out of the picture – especially if they're on the edge already. But Costello says it will be a mini-shakeout, nothing major. We won't see anywhere near the number of trucking company failures brought about by skyrocketing fuel prices and an economic slowdown in 2000.
Trucks move about 70 percent of all domestic freight, including wholesale and retail goods, so what's good for the economy is generally good for trucking – including international trade. It's true that an item produced here typically involves more truck moves than something produced overseas, but cheaper imports have also led to greater economic growth, Costello notes.
"Without international trade and cheaper consumer goods, the economy may not have grown as fast as it has in recent years, which could have reduced truck volumes. If you and I pay less for our clothes or electronics because they're made in China or India, we have more money to buy other products."
Moreover, free trade opens the doors for exports of goods made here. He also points out that our two biggest trading partners are Mexico and Canada – and most of that cross-border freight moves by truck.
To address the needs of shippers dealing in global markets, many large carriers are now opening offices in Asia, Europe and South America. "The U.S. trucking industry is probably the most efficient trucking industry in the world, and they're looking to take that expertise global," Costello says. "So instead of fighting it, I think you have a lot of people saying, 'We're going to work within the current parameters of international trade and see what else we can do.'"
JOHN G. LARKIN, CFA, MANAGING DIRECTOR AND HEAD OF TRANSPORTATION CAPITAL MARKETS RESEARCH FOR STIFEL, NICOLAUS & CO. INC.
Larkin is widely recognized in the trucking industry as one of the country's most knowledgeable transportation analysts. Clearly, Wall Street agrees. He has been recognized five times by the Wall Street Journal as an all-star analyst – twice when he was with Alex. Brown and Sons and three times since joining Legg Mason, which was acquired by Stifel, Nicolaus late last year. He has also been recognized twice by Institutional Investor magazine as an all-star analyst. In 2003 the Forbes Starmine survey rated him the No. 1 stock picker in both the Rail & Road and Airfreight & Logistics categories. Larkin is former chairman and CEO of RailWorks Corp., and held various planning and economic analysis positions with CSX Transportation.
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After 17 interest rate hikes by the Federal Reserve Board, the U.S. economy appears to be slowing, but there's still plenty of steam to keeps trucks rolling, Larkin says. The Fed's efforts to cool inflation have had a dramatic effect on many once-hot residential housing markets, but he discounts worries that the bubble has burst – it's more like a pinhole that is letting out some air. Nevertheless, higher interest rates have slowed home buying which, in turn, means lower sales of related goods such as building materials and appliances.
Higher interest rates, coupled with high gas prices, appear to have slowed consumer spending on high-ticket items, but they're still buying food, clothing and other goods that account for the preponderance of U.S. freight. Moreover, non-residential construction markets continue to show solid gains and the industrial sector "is still cooking along at a pretty good rate," he says.
"Most corporate balance sheets are so strong that I don't think you're going to see companies tail off on investment much," he explains. "As a manager you need to stay one step ahead of everybody else's productivity enhancements, and the way to do that is to keep investing in the business. That's one reason flatbed loads have remained relatively strong, even with slowing in the residential housing sector."
The freight markets will still experience the ebb and flow of seasonal demand. Expect the customary fall pre-holiday pickup, followed by deceleration in first quarter and into the second quarter when consumers typically shop less and businesses make inventory adjustments. The big question is how freight demand – and revenues – will fluctuate around tight transportation capacity.
"In the past we had more cyclicality, because supply would grow dramatically as interest rates were declining," he says. "Basically, the capital markets made more money available to the transportation industry, and the transportation industry tended to take advantage of that money supply by adding too much capacity just before the Fed put the brakes on the economy."
That hasn't been the case this time around. The persistent driver shortage, coupled with highway, rail yard and port congestion, have hampered expansion to a point where transportation capacity is fixed or growing only slightly. As long as the economy stays in the 2 percent to 4 percent growth rate – well within most forecasts for this year and next – the U.S. freight transportation industry is likely to be sold out during seasons of peak demand. "What you end up with is seasonality but not as much cyclicality," he says.
Larkin doesn't see much let-up in the capacity squeeze. Last year's highway authorization bill focused on rebuilding the infrastructure, not adding capacity. Revised driver hours of service rules cut into productivity. Later this year the U.S. Department of Transportation is expected to propose new mandates for on-board recorders. That won't have much effect on trucking companies that run legal, but it will reign in those that push productivity by bending the rules.
High fuel prices haven't devastated the trucking industry as they did a few years ago, but the highly volatile oil market makes it hard for truckers to keep up. "Fuel surcharges are perfectly adequate when prices are stable," Larkin explains. "What makes it difficult is the lag in the surcharge system. When fuel prices are rising at a rapid rate, you end up losing a bit on the way up because you're billing your customer at last week's fuel prices, but filling your truck at today's fuel prices."
That volatility is bound to continue. Supply and demand still play a significant role in today's oil prices, but market speculation and conflicts in the Middle East add a significant premium to the price of crude oil. As Larkin notes, the fighting between Israel and Hezbollah caused oil prices to rise even though neither Israel nor Lebanon is an oil-producing country.
Driver pay will likely continue to climb – probably at 1-3 cents per mile per year into the foreseeable future. But that won't do much to ease the shortage for long-haul operations. Along with better pay and benefits, carriers are tackling the problem by shifting some of their focus to building better relationships with their drivers. Quoting well-known retention expert Dan Baker, Larkin points out that "a dispatcher who treats drivers like human beings may have a 30-40 percent turnover. A dispatcher who isn't as personable, who focuses on moving the load and doesn't really get to know the drivers, may have a turnover of 120 percent."
Big mergers or acquisitions within the truckload industry will be rare because it's too difficult to meld cultures and philosophies. Truckload carriers looking to expand are instead moving into niche markets such as dedicated carriage, intermodal, regional or short-haul freight, where they can offer more consistency and/or home-time to their drivers and more services to their customers.
"In this fundamentally tight supply/demand environment, the trick is to provide very good service with the fleet you have rather than mediocre service with a fleet that's growing," Larkin says. The high-service carriers have been able to command prices that meet or even exceed rising costs. Considering the capacity constraints, that favorable pricing position should hold unless demand drops off dramatically.
Smart carriers are also learning to operate in a global economy. Manufacturers and retailers are sourcing all over the world and often find that lower prices across the country or across the ocean more than offset higher transportation costs. U.S. truckers need to know how to handle at least the domestic portion of those international loads.
Much of that freight coming here via West Coast ports is moved inland by rail at contract prices negotiated with the railroads years ago. As those contracts expire over the next several years, shippers will probably find that it's more economical to sort freight at the ports – and shift at least some of it to trucks.
Some less-than-truckload carriers are establishing relationships with trucking companies in China so they can offer international service for "big box" retailers here. "If you have a 1,000-pound pallet that needs to go from the interior of China to Columbus, Ohio, the carriers want to be able to handle the whole move in a seamless fashion," Larkin explains. In the past, non-asset-based logistics companies have coordinated many of those shipments, but the asset-based carriers are now stepping into that role. "Once you've relinquished the customer relationship, I think you've relinquished a lot," he notes.
If the economy and freight do fall off significantly, it will likely be the smaller fleets that feel it most. New emissions requirements plus higher materials costs have significantly driven up the price of equipment. Smaller operations don't get the volume discounts their larger counterparts enjoy on equipment, fuel or other operating expenses. Some have carved out well-defined niches with established customers that are willing to pay decent rates, but even then they often must rely on brokers or third-party intermediaries to fill empty miles. Rates to the trucker are usually lower for brokered freight, and it's often more difficult to collect 100 percent fuel surcharge and compensation for unloading or delays.
Smaller fleets contracted to larger fleets seems to be a fading trend, but many carriers are still trying to create owner-operators through equipment lease programs. "A guy with a good head on his shoulders who knows a good load from a bad one and how to keep his costs under control might be able to make it on his own," Larkin says. "But a lot of people don't have the business acumen to be a successful owner-operator. Although, if they stay in the carrier's system, they might be OK."
JIM MEIL, CHIEF ECONOMIST, EATON CORP.
Neil has been recognized as a leading industrial sector economist for 20 years. As Eaton's chief economist, he is responsible for domestic and international forecasts of general economic conditions and for the many markets Eaton serves. He is a contributor to Blue Chip Economic Indicators, Consensus Economics, USA Today and The Wall Street Journal economic surveys, as well as the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters. He received first-place recognition in the Wall Street Journal panel of 50 forecasters for 2004 and ranked among USA Today's "Top 10 Economic Forecasters of 2003" for accuracy. He has also been recognized for contributing "Best Overall Economic Forecast" and "Best Car and Light-Truck Forecast" at the Federal Reserve Bank of Chicago's Annual Economic Outlook Symposium.
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If economists handed out report cards for economic performance, Meil says, the U.S. would probably get an A-minus for the past three years and a B-minus or C-plus for the rest of this year and into 2007. The economy will continue to grow, he explains, but not at the pace we've experienced over the past few years.
One concern: rising interest rates. The Federal Reserve Board has bumped short-term rates 17 times over a little more than two years. The objective is to hold down inflation, but Meil recalls 2000 and 2001, when too much tightening is now blamed for weakness in the economy and, ultimately, in trucking. The problem, he says, is that a rate adjustment may not be felt for as long as a year. "It's sort of like operating blind," he notes. "The things you put in motion today don't really play out for three or four quarters."
Energy prices are another worry. Consumer spending has softened in two key areas: housing and auto sales. Both tend to be impacted by interest rates but also by gas prices. "People make mortgage payments with disposable income," he explains. "Therefore if higher gasoline prices are carving a slice out of their purses or wallets, there's less money to go around for things like housing and related consumer durables like furniture and electronics." Retailers such as Wal-Mart that cater to lower- and middle-income households say higher gas prices also affect demand for some non-durable consumer goods, like clothing.
Largely because of weaker consumer spending and housing, the manufacturing sector won't be as robust as it was in 2004 and 2005. Industrial production at the end of this year and the start of 2007 could have two or three quarters with growth as slow as 1 percent to 2 percent, down from 4 percent to 5 percent growth the last couple of years. For all of 2007, Meil forecasts about 3 percent manufacturing growth, citing a few positive developments for manufacturing.
Many of the country's world trading partners are strong or getting stronger. China's economic growth over the past few years would earn an A-plus on Meil's report card. Next year its GDP is expected to rise 10 percent and industrial production will increase 15 percent to 16 percent. For many years during the past decade Japan has barely managed any growth at all, but in 2007 its GDP is expected to rise 2.5 percent and industrial production will be up 2 percent. Other parts of Asia, Western Europe and Latin America are also experiencing economic pickups. Those are all potential customers for U.S.-made goods. A relatively weak U.S. dollar makes those goods very attractive in overseas markets.
U.S. manufacturing could also be buoyed by business investing here. Data from the Commerce Department indicates that business capital spending is growing at an inflation adjusted rate of 7 percent to 8 percent. Higher interest rates might slow that some, but the popularity of U.S. exports coupled with the need to increase worker productivity – especially in today's tight labor market – could keep business investment at its current strong pace.
There were a lot of factors that played into this summer's gas price run-up. The starting point is high crude oil prices, as benchmark sweet crude oil topped $70 a barrel. Additionally, summertime gasoline blends are required to eliminate the oxygenate gasoline additive methyl tertiary-butyl ether (MTBE) this year. The most popular replacement is ethanol, and ethanol was in short supply, another factor driving up price. Gas prices were also affected by concerns that another big hurricane like Katrina or Rita could again disrupt supplies.
Gas prices dropped around Labor Day, but diesel prices didn't. The likely reason: the ultra-low sulfur mandate, effective at the retail level on Sept. 1. Meil says he wouldn't count on any big erosion from $3 per gallon prices until the major oil companies get ULSD rolled out through their distribution systems. In fact, ULSD could cause diesel prices to go up, even if crude oil stays at late summer's $69-$70 a barrel.
Meil is generally optimistic about freight demand, but admittedly baffled by some of the data. Ordinarily, good growth in the overall economy and in industrial production leads to growth in truck freight. But he notes that, beyond month-to-month ups and downs, the American Trucking Associations' Truck Tonnage Index has basically been on a slight declining trend for the past year and a half. "It's a real puzzle to us because, at least from the publicly traded trucking companies, we haven't heard anything about freight weakness until maybe the last two or three months," he says.
The pace of freight growth over the next few quarters becomes especially important, because the industry is likely to roll into the new year with excess capacity. The push to buy new trucks before the 2007 emissions changeover will mean record Class 8 production and sales for 2006. Eaton is forecasting Class 8 NAFTA production at 363,000. In 2007 that's expected to drop more than 40 percent, to approximately 208,000 trucks. Class 6 and 7 truck and bus production, impacted less by the pre-buy, is forecast at 188,000 units this year, dropping a little over 15 percent, to about 159,000, in 2007.
Some of those pre-buys are additions, not replacements. Thus Meil estimates that excess Class 8 heavy truck capacity at the end of the year might be as high as 60,000 to 70,000 units. That won't be a problem if truck sales drop as expected in early 2007 – and if there's some growth in freight demand next year.
Capacity is also affected by the ability to find and keep qualified truck drivers, and that remains a challenge. Today's tight labor market is one problem for recruiters, but the longer-term issue centers on changing demographics. Despite efforts to recruit more women and retirees, the majority of truck drivers are still men between the ages of 30 and 60. That pool is shrinking as the leading wave of the baby boomer generation reaches the age of 60. "For the next 15 years the baby boomers will be falling out of the prime demographic for truck drivers," he says, "and there aren't enough 20-year-olds moving into the 30-plus group to replace them."
Looking ahead 5 to 10 years, Meil sees a very bright future for trucking. In part, that's because of U.S. manufacturing's role in the global economy. "Here in North America we do a darn good job of producing high-value, highly engineered, value-added manufactured goods," he says. "The thing that trucking does well is deliver the kind of high-end service that is particularly valuable in this just-in-time world." Years ago, many people worried about the impact of imports on domestic freight, but over the last 40-50 years trucking has steadily grown at an average annual rate of about 4.5 percent. Going forward "it's going to be a high-cost world," he says. "Drivers will be expensive. Fuel will be expensive. But the trucking industry will be dealing in a very favorable market environment because, compared to the alternative modes of transportation, trucking delivers a significantly powerful value proposition."
ERIC STARKS, PRESIDENT OF FTR ASSOCIATES
Nashville, Ind.-based FTR Associates offers a broad menu of transportation research, analysis and forecasting services related to U.S. freight and equipment demands. Its products include the U.S. Freight Mode analysis, based on more than 200 commodity groups, and the FTR Driver Labor Market Indicators Report. Starks has spent his entire career in the freight transportation sector and is a leading researcher in freight modal share analysis and forecasting. His background includes research in both rail and truck freight movements and asset equipment purchases. He is considered to be one of the industry's leading forecasters on transportation equipment demand for rail cars, commercial trucks and trailers.
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The economic outlook is a bit of a mixed picture, Starks says. Two key growth drivers – residential housing and the automotive market – are going to be sitting on the sidelines for the short term. The most likely possibilities for continued expansion are in the manufacturing sector and export markets.
He is generally optimistic but admits to being a little nervous. If the Federal Reserve Board has to move aggressively to curb inflation, it could put a damper on business equipment purchases which, right now, seem to be the bright spot for manufacturing. Moreover, there are some things in this economic cycle that seem to confound traditional forecasting molds.
For instance, rising interest rates have recently pricked the residential housing bubble, but haven't impacted consumer or business spending as they might have in the past. One possible reason is that credit is easier to come by for the many people who now pay with credit cards. "They don't pay attention to interest rates," he says. "They just spend."
Another reason: Even after more than two years of steady increases, interest rates are still relatively low. "Businesses are investing in facilities and equipment because they can afford it," he notes. "There's a lot of cash out there and if they have to borrow, interest is still at a rate they can handle."
Auto sales probably won't contribute much toward economic growth in the short term, but the reason has more to do with marketing than interest rates. Incentives offered by manufacturers lured people into the market that otherwise might have waited. Incentives also helped push sales to high historical levels, which makes further growth a tough pull. "You hit ceilings," he says. "Once you break through to the next level you're fine, but they just can't seem to break through."
The slowdown in residential housing has been anticipated for two years. As Starks notes, the market far exceeded what most people expected and is now dropping to something closer to normal. Residential construction will continue to be strong, but non-residential construction is where we'll see the most growth – unless nervous businesses decide to pull back on expansion.
It's a pretty safe bet that high fuel prices will be with us for a while. "You're going to see some jumping around, but $70-plus per barrel for oil is going to be the norm," he says. "I don't think we'll get back to $2 per gallon for fuel in this cycle. There would have to be a world slowdown in demand to get us back there."
Unfortunately for anyone trying to make predictions, oil prices are not based solely on simple supply and demand. Starks figures that as much as $20-$25 of that $70 for oil is due to uncertainties in the marketplace, or what some economists call the "risk factor."
"There are so many issues out there affecting the price of oil," he says. "The Middle East, Venezuela, Russia. All those big players are starting to try and manipulate the market in some fashion. Each has its own agenda and they all play into that additional pricing." Oil prices rose with the Israel/Hezbollah conflict, but the fact that they didn't stay at those levels is a good sign, he says. "But if something happens with Iran I think all bets are off."
As for freight, he predicts "nothing crazy, but decent growth" through the end of the year. "One thing that's interesting is that we're really not getting freight growth from traditional sources – food, for example, or other traditionally big sectors like pulp, paper and allied products or stone, clay, glass and concrete." Instead additional volume seems to be coming from a variety of miscellaneous sectors.
Freight volume is at record levels. FTR estimates 636 million tractor-trailer loads this year. Trucking capacity is tight, at least in part because carriers are trying to manage their growth. "A lot of carriers have said they don't want unproductive freight so they haven't expanded into certain areas," he says. "Some truckload guys haven't been adding capacity. They're happy hauling the amount of freight they're hauling. If they get incremental increases from core customers, great, because that's the kind of freight they want to move."
Because of the capacity squeeze, most carriers should be able to maintain current rates or even push through additional increases this year. "The shippers will grumble, but carriers are much more willing to play hardball than they've been in the past," he says. "Before, they didn't feel they had any pricing power. Now they do."
Starks frankly admits that the driver shortage issue has them scratching their heads. "We have two statistics that say different things," he explains. "One says we're short 100,000 to 150,000 drivers. Another says all the freight is getting moved. So if you're short drivers but all the freight is getting moved, who cares?"
He does acknowledge that some capacity issues are exacerbated by a driver shortage or, more accurately, a shortage of new drivers coming into the industry. One reason could be pay. From the first quarter of 1997 through the fourth quarter of 2005, driver wages increased about 27 percent, or an average 3 percent per year. That's a bit above the inflation rate, but not the kind of pay raises you'd expect in such a tight labor environment. That, too, has a possible explanation. Starks says their data shows that only about 20 percent of truckload drivers are job hunting because they want more money. The rest are relatively happy where they are – and with what they're making. But if carriers raise driver pay to satisfy that 20 percent, they also have to give the contented 80 percent a raise. "I think some would rather deal with the headaches of high turnover," he says.
Most fleets that don't buy new trucks ahead of the 2007 changeover say they'll wait until late next year, when any bugs have been worked out of the EPA '07 engines. Therefore just about everyone, including FTR, is forecasting a fairly significant drop in Class 8 sales early next year. But Starks says he's becoming less and less convinced that fleet managers who need equipment early in 2007 will actually delay purchases – especially if the economy stays strong. If the new engines get good reports from fleets that are testing, carriers will go ahead and buy what they need. If reports indicate fuel economy degradation or other cost issues, incentives from manufacturers may still bring buyers in.
Owner-operators are still a big and important segment of the trucking industry – in part because of the capacity flexibility they provide. However, they may not be the force in the equipment market they once were. "In the past when they needed a truck they would go to the dealer. Now they're also talking to the fleets they haul for," he says, noting the many truck purchase and lease programs now offered by carriers. "In a sense, the fleet is the buyer even though it's the owner-operator who is paying for the truck."
Outsourcing and the rise of imports has caused some minor ripples in U.S. freight transportation, but hasn't really hurt business. Manufacturers are outsourcing final assembly of many products but keeping subassembly here. Thus raw materials and core products – the big drivers of freight – still need to be moved domestically. Products assembled offshore still require at least one domestic move when they came back into this country. Moreover, U.S. exports are relatively strong – which bodes well for the economy and for domestic freight.
The growth of international trade does mean that freight movement in general is tied more closely to the world economy, so when the world economy slows we may see U.S. freight slow some, too. "But we'll probably see it most in railroad traffic," Starks says. "Right now the largest business sector for the railroads is intermodal, and 60 percent of intermodal is international freight."
By and large, the railroads face the same capacity constraints as trucking, although Starks says it wouldn't take a whole lot of productivity enhancement to turn things around.
"If they could increase their velocity by even 1 mph it would be significant." In days gone by that might have posed a threat to trucking, but these days a little more rail capacity can be a good thing. "It's not the competitive situation it has been in the past," he explains. "Truckers and railroads are working together, trying to find ways to move freight most efficiently."