It's been a steep downhill slide, the worst in decades, and recovery will be slow, but there are indications that we are approaching the bottom, says Bob Costello, chief economist for the American Trucking Associations.

"We are just starting to see signs of economic life," Costello said Thursday by way of introduction to a Web-based overview of the outlook for the economy and trucking in particular.

"We think the economy is going to hit bottom here pretty soon, if we haven't already."

Big picture: real gross domestic product will be down almost 3 percent this year, the worst economic performance in a generation, but Costello is projecting a return to a modest 1.5 percent growth next year and a gradual climb to a more normal growth rate of 3.1 percent in 2011.

The upturn will start in the third period of this year and pick up in the fourth period, he forecast.

Being an economist, he has a caveat: there's about a 20 percent chance that this predicted growth will not come to pass and we'll suffer a double dip.

Costello's forecast is based on the status of key indicators in the consumer and industrial sectors.

Consumer spending, which was the driving wheel of economic growth before the recession hit, is going to be hampered for some time by the employment situation. The country has lost 6.5 million jobs in the past 18 months and is likely to lose another 500,000 or more. The national unemployment rate was 9.5 percent in June, highest since 1983, and Costello believes it is likely to top 10 percent before it starts to go down.

As jobs disappear, so does household net worth. It has fallen by almost 25 percent in the past 10 quarters.

Compounding the problem is the bursting of the housing bubble. Before 2000, housing prices generally rose on the order of 4.4 percent a year. Between 2000 and 2005 prices were skyrocketing at 15 percent a year. Since 2007 they have dropped almost 10 percent, and Costello thinks that market will hit bottom later this year.

Another problem is consumer debt. The ratio of debt to income jumped from 11 percent in 1994 to more than 14 percent in 2007. That is starting to come down but Costello said it has a long way to go.

All of these pressures on the consumer have driven spending deep into negative territory. And even when it starts to come back next year it will remain lower than it was.

"At the end of the end of the day," Costello said, "our government overspent and we as households overspent, and we can't do that anymore."

On the plus side for the economy, if not for spending, consumers are saving more than they used to. The national savings rate that was less than 1 percent in 2005 jumped to almost 7 percent by last May. That 7 percent may be the peak but it won't fall back to where it was, Costello said.

"For the long-run viability of the U.S. economy, this is a good thing."

He referenced two key indicators from the industrial sector. Manufacturing production has dropped more than 17 percent from its high at the end of 2007 and is continuing to slide, and manufacturers' use of their capacity is the lowest it has been since the Federal Reserve starting tracking that statistic in 1948.

"There is a lot of spare capacity out there," Costello said.

Another drag on recovery will be the continued overstocking of inventories at the retail, wholesale and manufacturing levels. The inventory to sales ratio fell steadily from 1992 to 2008, a reflection of improvements in the supply chain, but then jumped to levels not seen since 1996. The problem is that even though inventories have been reduced they are chasing a rapid decline in sales.

The result: "For the first time in memory, trucking will not lead the U.S. economy out of recession into recovery," Costello said. "In fact, we are going to be more of a coincident indicator."

There is good news: Costello is not worried about inflation in the near term. And, the federal stimulus has begun to help. Most of the spending will kick in later this year and next year.
"I think we have just started to see the impact of the stimulus," he said. Without it, the decline in GDP would have been steeper and the projected growth in 2010 would be less.

All of this has had a profound effect on trucking. The number of loads in the truckload sector has dropped an unprecedented 21.2 percent since May of 2008. Employment in the for-hire sector is the lowest it's been since 1995. Last year carriers cut more than 79,000 jobs - mostly drivers but administrative personnel as well - and in the first half of this year they cut another 75,000.

"It's not surprising considering the drop in volume," Costello said.

Within the truckload sector, tankers, dry vans and flatbeds have been hit the worst - flatbed loads are down about 30 percent since January of 2008 - while refrigerated operations have not suffered as badly. Overall truckload average revenue per mile is down 14 percent from May of 2008.

Less-than-truckload is down as well: 25 percent in May compared to a year earlier, and the average revenue per ton is down almost 21 percent from May 2008.

This leads to the question everyone asks: what will happen once business starts to pick up? Costello's read is that truck capacity will tighten significantly but only after the trucks that are now parked are put back into service. And there are a lot of them: he estimates that 5 percent of the national fleet is against the fence.

The capacity issue is not straightforward. Some note that fleet bankruptcies are not as numerous in this recession as they were in the last recession, but Costello says that statistic misleads. The number of bankruptcies may be lower but, more important, the number of available trucks is on a par with the last recession due to fleet downsizing.

Fleets exported more than 40,000 Class 8 tractors in 2007 and 2008, mostly to Russia and Nigeria, Costello said. That number is much lower now - down about 60 percent in the first part of this year - in part because Russia has stopped buying imports.

Costello predicted that Class 8 sales are going to lag the recovery, for several reasons. One, many trucks are parked. Two, miles per truck are off almost 20 percent year-over-year. Three, many fleets are using APUs, which extends the life of the main engine. And four, he sees no pre-buy in anticipation of next year's new engine emission regulations.

Long-term, the outlook for trucking is strong, Costello said. He predicts 30 percent growth for the industry over the next decade. Trucks haul 68.8 percent of the freight now, and they'll be hauling 70.9 percent in 2020, he said.