Economic growth and freight volumes have been decelerating and will likely move sideways for the next few months, until a hoped-for change in the composition of Congress in November reassures businesses enough to start investing and hiring again. But truckload capacity is tight and will continue to tighten, and we're on the cusp of improved pricing. That was the message of transportation analysts with Stifel Nicolaus in its annual "Shaking the Sand Out" conference call Thursday.

Peak freight for this year may already have occurred.

Retail sales, a crucial figure for the publicly traded transportation sector, have seen "an awfully nice rebound" from the trough experienced at the end of 2008 and beginning of 2009, "but we seem to have stagnated," said John Larkin, Stifel Nicolaus transportation analyst. Real retail sales increased 5.89 percent year over year in July, but the rate of growth seems to be decelerating when you look at May, June and July numbers, he said. It's a similar story when you look at the Institute for Supply Management's index of manufacturing. The July index suggested growth for the manufacturing economy for the 13th consecutive month, but gorwth was slower compared to the previous three months.

New and existing home sales plummeted in July, thanks to the expiration of the $8,000 first-time home buyers' credit.

When you look at inventories, Larkin said, it looks like the inventory to sales ratio has been bought down to where most in the business world would like to see it. In June, however, it began to move up a little, possibly indicating that inventory ordered back in March and April when the recovery looked stronger is now starting to pile up in warehouses. "That does not bode well for a strong finish to the year," Larkin said. "We think we'll be more likely to move sideways rather than seeing the traditional September/October/November peak."

Sideways is also the term used by American Trucking Associations chief economist Bob Costello in looking at truck tonnage, Larkin noted. "We've seen a nice rebound here coming out of the trough at the end of '08 and '09, but we do seem to be starting to move sideways," he said. "We have essentially recovered about half of what we lost." July truck tonnage numbers from ATA showed the eighth positive year-over-year comparison since September 2008, and increased 1.6 percent from June. But, he said, truck tonnage is still running below the 7 year average.

Intermodal is "the shining star in transportation," Larkin said, with several weeks of record-setting volume levels. Again, he said, a lot of that probably has to do with retail products that were ordered in the spring, when the economy looked stronger and retailers were concerned about capacity shortages in the container ship world. "What it did was pull the holiday intermodal peak forward," he said. "It's not like we expect intermodal volumes to drop off the edge of a cliff, but they're not going to grow to a massive crescendo in November."

Capacity Crunch

Nevertheless, Larkin said, truckload capacity is tightening and will get even tighter in 2011. Stifel Nicolaus analysts estimate the industry has lost at least 20 percent of capacity. Small fleets continue to downsize, and some large fleets as well. Many larger carriers are redeploying trucks to less seasonal, less cyclical, less driver-intensive niche markets such as dedicated and drayage. While anecdotal evidence suggests some of those trucks that were parked on the fence for the recession are now back on the road, new purchases are still well below replacement rate.

Industry regulation will play into the capacity crunch. CSA 2010 will be fully implemented by mid-2011. Experts estimate that 5 to 10 percent of the driver workforce will be effectively eliminated from the industry as the new enforcement system makes carriers unwilling to hire drivers with less than stellar records.

Revised hours of service rules could cut capacity even tighter. The number of hours a driver can drive in a day may drop from the current 11 to 9 or 10 -- safety groups are pushing for eight -- and the restart period could be increased from the current 34 hours to something more like 48.

Other changes, such as newly revamped drug testing rules, a broader electronic onboard recorder mandate, and potential changes in areas such as maximum truck speeds and driver health requirements, could further exacerbate a capacity shortage -- maybe another 5 to 10 percent, Larkin said.

Rising Rates

Pricing is poised to turn. Shippers are granting contract price adjustments in selected lanes, and across-the-board increases are likely next year as capacity gets tighter. The truckload capacity constraints in 2011 should drive improved earnings in truckload, and across other sectors where the truckload capacity shortage will help drive more freight.

"After five years of a freight recession, it seems to me that this is really the time when supply and demand will be sustainably tightened," Larkin said.

"I don't think any of these regulations are going to go away," he explained. "It's very easy for Public Citizen and the rest of the safety lobby to point to truck-related to fatalities. Stricter regulations are going to constrain capacity. Shippers who have been following this realize the next time they negotiate contracts, they're going to see their prices go up."

Larkin's group built in a 4 percent average increase in mid-2011 and another 3 to 4 percent in 2012 in building their projections for trucking stock performance. "The reality is, it could easily be more dramatic than that," Larkin said. "It wouldn't surprise me to see 6 to 7 percent increases next year and the year after. The price of transportation is going to grow, and instead of logistics costs representing 7 or 8 percent of GDP, you may see them moving up more towards 10, 11 or 12 percent. Which by the way is way below where they were before deregulation, when they sat at 18 percent. The smart shippers are already lining up their favored carriers and beginning to discuss that now."

"We're going to have a gradual recovery, which should resume we think after November 2," Larking said. "Once we have a more pro-business Congress in place, the likelihood of the private sector starting to hire and invest in the future goes up. We think economic growth will resume once the uncertainty regarding the regulatory and legislative environment is resolved."