Reply #27: The mysterious trouble in the trucking industry. [View All]

[54anickel]

http://www.slate.com/id/2158873/

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Even though GDP growth in the 2006 fourth quarter was much better than expected, the stocks of trucking companies, usually an important leading indicator for the economy overall, are mysteriously struggling.

Transport stocks are canaries in the coal mine for the Dow. Here's a very long-term chart of the Dow Jones Transportation Average against the Dow Jones Industrial Average. Since they move the goods, a slowdown in transport companies' business usually previews an overall slide. But here's where it gets weird. In theory, the fortunes of all the components of the Transport Index, which include shippers, truckers, railroads, and airlines, should move somewhat in tandem. Most goods that are sent by ship, rail, and air have to go on a truck at some point. It would be strange for one link in the freight chain to be doing well while others are dragging.

And yet that's precisely what seems to be happening. Truckers, who carry 70 percent of all domestic freight, are doing poorly. The American Trucking Associations' Truck Tonnage Index fell through 2006. And in the fourth quarter of 2006, the index was down noticeably from the fourth quarter of 2005, even after accounting for the temporary post-Katrina spike.

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But even as truckers encountered speed-checks, railroads closed the books on a record-breaking year. The fourth quarter was the occasion for particular chest-thumping from the big railroads. On Jan. 25, Union Pacific reported excellent fourth-quarter earnings: Operating income soared 52 percent from the 2005 fourth quarter, and metrics like car loads and average revenue per car were higher. Norfolk Southern reported record fourth-quarter revenues and earnings. In its 2006 fourth-quarter earnings report, Burlington Northern Santa Fe clocked record earnings on a 4 percent increase in freight volumes.

The results describe a slowing economy for truckers and a growing one for railroads. How can that be?

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There's another, less cyclical, explanation that might account for truckers' travails. The U.S. economy is remarkably dynamic. From year to year, the sectors that make the largest contributions to growth can vary. In the late 1990s, telecommunications and information technology were hugely influential. In recent years, housing emerged as a major contributor to growth. And housing is an industry that requires the movement of huge amounts of physical goods—lumber, cement, Home Depot merchandise. But in 2006, housing slowed down, and financial services firms—enormously profitable hedge funds, private equity funds, and investment banks like Goldman Sachs—made outsized contributions to growth. These companies move money around the globe, not goods. Whether Goldman Sachs makes $10 billion or $2 billion trading currencies, it probably ships the same amount of goods by truck: none.

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