TL rates staying soft in Q2

We do not expect a continuation of the first quarter’s disappointing rate increase. Signs of stress in some driver segments and reports of strong rate gains in the last month support our forecast of higher rate increases for the remainder of the year. Truckload pricing was revised upward for March after initially showing a dramatic drop. Likewise, our anticipated growth in April didn’t occur, but neither did it fall. After dropping in February, pricing has essentially maintained that level the last two months. After dropping 1.5% in February, rates inched up 0.1% in both March and April. Year-over-year growth has continued to slow, up just 2.0% in April. Our forecast for the rest of Q2 moved modestly higher, but recent data and anecdotes indicate that Q2 is likely to show a year-over-year growth rate of ~2%. This is down significantly from the 5%+ growth that we have seen for the last year or so.

Outlook
The surprise of this recovery was the ability of the industry to sustain increases well above inflation despite the slow growth in freight demand in 2011. After dropping 10.9% in 2009, industry rates (excluding fuel surcharges) rose 4.4% in 2010. The rebound continued in 2011 with growth of 5.8%. Growth will slow in 2012 but remain positive, up 3.6%. We then get stronger growth in 2013 and 2014. Year-over-year rate growth should get back above the 5% mark in early 2013. We anticipate seeing growth of 5.7% in 2013 and further acceleration to 9.2% in 2014. The strength in 2013/2014 is due to the inclusion of the HOS rules. That will help move pricing higher until at least mid-2014.

Analysis
First quarter data shows soft pricing. Given continued strong cost inflation in equipment and labor inflation above consumer inflation fleets suffered modest margin compression. We expect this situation to reverse in the second half of 2012 as capacity again tightens. Anecdotal reports of tightening truck and driver capacity strongly support this forecast.

On highway diesel prices are down 7% from over a month ago with further reductions possible. This reflects even greater reductions in crude prices, driven by strong supply and weak demand. There is still risk of a price run up should the Iranian political stress reignite.

Rate increases are currently low due to the delayed reaction to soft freight volumes in late 2011. Despite the Q2 bottom, rates will grow stronger for the balance of the year.

Slow freight growth in 2011 and early 2012 has kept recent increases below those of the last recovery, but conservative capacity management has kept pressure on the market. Renewed economic growth, or an increase in regulatory drag, would push rate restraint over the edge, returning us to the double-digit levels of the previous recovery.

Excepting early 2011, fuel prices and freight growth have not moved together during this upturn. As one slows, the other accelerates. This is, so far, in contrast to the situation during the last upturn when freight growth, fuel prices, and regulatory drag all moved upward together in 2004 and 2005.

NOTE:
Our truckload rates data is based on publically-available data from security analysts and trade organizations. We then forecast the cost and margin elements, factoring in inflation and industry conditions. The figures are for rate-per-loaded-mile (less fuel surcharge), seasonally adjusted and are indexed to 2003Q1.