Speaking at Thursday's luncheon meeting at the McLeod Software User's Conference in Birmingham, Ala., Costello noted that holiday retail sales are forecast to increase at their slowest rate since 2002. However, he said, there's a more "structural change" at work here.
For the past two years, Costello explained, shippers have made a concerted effort to spread their holiday shipping out over a greater length of time. In the past, between 1995 and 2004, October saw an average 6 percent jump in freight tonnage from September. That tonnage then plunged an average of 10 percent from October to November. But in 2005 and 2006, the October bump has only averaged 2.2 percent, and the November decrease has only averaged 5.4 percent.
"It's not just shippers that have done this," Costello said. More people are buying gift cards, so retailers don't need as much merchandise on the shelves in the fall, but they will need more after Christmas. As a result, we now are seeing a larger January increase in freight - 4.2 percent over the last two years, compared to less than 2 percent in the previous 10.
"Structurally that tells us we'll have a muted fall freight season," Costello said.
Costello also said that in the last few weeks, the economic forecast has become more pessimistic than it was during the spring and early summer.
"The outlook has worsened in recent weeks," he said, noting that the economic indicators prompted the Fed to cut interest rates. "At this time recession is not expected, but the probability of a recession has increased in recent weeks to 40 percent." Economic growth will be slow through at least the first half of 2008. And, of course, we have seen overcapacity in the industry due to the 2007 pre-buy coupled with the slowing economy.
Freight tonnage is down overall, especially among flatbed carriers. And it's not just trucking - it's down in the rail and air freight business as well, he said. For-hire trucking revenue is largely flat for the first seven months of the year.
The good news, Costello said, is that capacity changes turn around faster in response to the economy than they used to. "Once the economy turns around, the right trends are in place to improve capacity in the industry fairly quickly once freight volumes improve. The underlying fundamentals - i.e., the driver shortage - still supports tight capacity, and truck sales are expected to be significantly lower this year." (In fact, Bear Stearns reports that preliminary September sales numbers show that Class 8 and Class 5-7 net new orders were lower than expected.)
"I want everyone to remember that in the long haul, there is a lot of potential in this industry," Costello said. "I really believe one of our biggest challenges is not the slowdown, but will we be able to haul all the freight coming to us in the next 10 years? By 2017, we will be called on to haul 31 percent more freight than in 2005."