1Q GDP slowed to crawl, but freight carriers? prospects could brighten

1Q GDP slowed to crawl, but freight carriersÆ prospects could brighten    The U.S. economy, burdened by slow home sales, a large trade gap and lackluster business spending, performed even worse than originally thought in the first quarter as the Commerce Department Thursday revised its initial estimate of 1.3 percent growth to an anemic 0.6 percent for gross domestic product.
   Economic activity is now at its slowest pace in four years.
   Trucking executives at last month's Bear Stearns investor conference on global transportation echoed the feeling that the economy is limping along, but two leading industry economists said they expected productivity to pick up in the second half of the year.
   'We don't see the economy picking up in any major way,' said David Congdon, chief operating officer of Old Dominion Freight Line.
   The trucking industry was blindsided last September after more than two years of robust business when freight tonnage fell off the cliff. The Old Dominion, the Thomasville, N.C.-based piece shipment carrier, saw its tonnage and shipments per day plunge 6 percent last fall.
   Normal seasonal trends have since followed, with better business in April than March, Congdon said.
   'The economic pace feels slower than a year ago, but it's sustainable,' said Douglas Stotlar, chief executive of San Mateo, Calif.-based Con-way, which also operates a major less-than-truckload carrier. 'But I don't see a catalyst for any big change.'
   'We're seeing some choppiness in the economy. February was disastrous. March and April were strong,' concurred Steve O'Kane, president of A. Duie Pyle Cos., an eastern regional LTL carrier based in West Chester, Pa.
   Total tonnage has been off 6 percent to 7 percent since Oct. 1 at ABF Freight System, a large national LTL carrier, and sister operations. 'We don't see that getting worse, but I don't see that getting better at all,' said Robert Davidson, CEO of parent company Arkansas Best Corp. Freight volumes have been softer in the northeast and the central part of the country, compared to the West Coast, he added.
   The current down cycle is not the most severe in the past 35 years, 'but it happened quicker than any other we've ever seen,' Davidson said   
   Yellow Transportation LTL subsidiaries suffered a 4 percent tonnage drop last fall, said William Zollars, CEO of Overland Park, Kan.-based parent company YRC Worldwide. 'It certainly doesn't seem like the economy is very robust at this point.'
   Business in the Midwest may have bottomed out, he added.
   The goods distribution sector has been more bearish than other parts of the economy because it has large exposure to the housing and auto industries, which are suffering severe production downturns in North America, said Gene Huang, chief economist for Fed Ex Corp., the world's largest express delivery company. Much of the housing activity was pulled forward into 2004 and 2005 by low interest rates at the time, analysts say.
   The economy is likely to continue worsening through late summer compared to last year, but an up tick in shipments of manufactured goods is one indication that the economy will begin to improve in the second half, he said.
   Davidson said the improvement in manufacturing numbers appear to be based on dollar value, and trucking companies 'don't haul dollars we haul weight. And weight-based manufacturing is softer than you otherwise might think.'
   Huang said he is closely watching the inventory situation for signs of growth. Companies stuck with excess stock when the economy cooled down last fall have since been working to burn off inventories and ordering fewer goods. Now, with inventories at low levels again, production is expected to increase.
   The inventory-to-sales ratio is about 1.33 — meaning that at the end of the month companies have about 1.3 months of inventory — which is slightly higher than the low of 1.3 registered in January 2006, but significantly lower than the peak of 1.43 during the 2001 recession. In real terms the inventory-sales ratio is about 1.44, higher than the low point of 1.33, but much lower than the 1.66 figure six years ago.
   'I think we're in a mid-cycle adjustment' and the first of several inventory adjustments likely in the next business cycle, Huang said. Another promising sign of business sales is that non-defense goods orders have improved during the past three months.
   David Malpass, Bear Stearns' chief economist, said a 4.5 percent growth quarter is possible if there is a widespread perception that companies are light on inventory and need to rebuild stocks.
   Malpass said he is bullish about the economy in the short term because of the amount of cash available for spending from central bank money production, low global inventories, strong tax receipts and consumer spending, rising job growth, high corporate profits, and the Institute of Supply Management survey of purchasing managers.
   Other strong indicators of future acceleration are rising stock prices, credit spreads, and commodity prices. Malpass noted that there is often little correlation between high oil prices and economic growth.
   Companies that are more exposed to global trade tend to do better because they are more insulated from risk as global growth in some parts of the world is running at 6 percent to 7 percent. Cross-border trade is growing two to three times faster than the domestic economy and the trend is expected to continue, Huang noted.