Whoops, There Goes the Second-Half Recovery Theory

Implications:   The American Trucking Associations advanced seasonally adjusted Truck Tonnage Index fell 3.3 percent after being unchanged in February. This is the largest month-to-month contraction since August 2006.   This is not a good sign for those anticipating a second-half economic recovery in freight. Trucking, which hauls 70 percent of tonnage in this country, long has served as a barometer of the overall U.S. economy.  

Analysis:   The thinking has always been that the 20-month trucking recession that began in August 2006 would end this spring, volumes would pick up during the summer and a solid peak season would return profitability to the sector by the third and fourth quarters.
   Oops.
   A combination of reports is indicating otherwise. First, UPS lowered its earnings guidance for the remainder of the year due to poor economic conditions. UPS says shippers continue to "trade down" in service to save money, which UPS says is "a tell-tale sign of a worsening economic environment."
  Now comes what arguably is worse news. The monthly truck tonnage index compiled by the American Trucking Associations dropped 3.3 percent in March, the largest one-month contraction since August 2006 when this freight recession began.
  Along with UPS's reduced guidance, the ATA report suggests that in fact the economic downturn might be getting worse, not better. Consumers seem to be pinching back on spending in light of $4-a-gallon, or close, gasoline. There's even one report by a CIBC economist predicting $7-a-gallon gasoline on $200-a-barrel crude oil by 2012. Who knows?
  The total tonnage decline caused Bob Costello, chief economist at the ATA, to remark: "I've been concerned that the recent run-up in tonnage (in December and January) might not be sustainable, and clearly March's figures confirmed that apprehension."
  This is borne out by some of UPS's internal numbers. Freight shipments at UPS Freight, the former Overnite Transportation unit, declined for the first time since UPS bought that company in 2005. UPS Freight posted a solid 94.8 operating ratio, however, thanks to better yield.
  That suggests that UPS is making a conscious decision to haul better-paying freight than Overnite did. But how long it can continue this strategy while battling the likes of FedEx Freight, YRC Worldwide and Arkansas Best's ABF Freight System unit in the embattled long-haul LTL sector is questionable.
  Except for FedEx Freight, all those carriers are unionized, which means they're paying an additional 3 to 4 percent annual on labor costs. This comes on top of $4.50-a-gallon diesel, which is being partially subsidized by fuel surcharges. But sooner or latter, these companies are going to start cutting rates -- Yellow and Roadway seem most active in that area, according to shippers -- and if that happens, yields will worsen.
  All in all, it seems the hope for a second-half trucking recovery may have been too optimistic. Wall Street has rallied behind some trucking companies already -- Arkansas Best is trading near its 52-week high -- so the built-in recovery premium means this stocks are no bargain right now.