The economy's message is: Keep on truckin'!
Or maybe not.
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.
The earnings report of several firms in the Dow Jones Transportation index also point to trucking struggles. In December, YRC Worldwide reduced earnings guidance, and yesterday it reported 2006 fourth-quarter earnings fell more than 30 percent from the year before. The culprit: lower volumes. Earlier this week, trucking company J.B. Hunt reported that trucking revenue fell 16 percent, on a 4 percent decrease in the number of loads hauled in the 2006 fourth quarter. Last week, Arkansas Best announced that fourth-quarter net income was sharply down, with the total tonnage per day at its main trucking unit falling 6.8 percent between the 2005 fourth quarter and the 2006 fourth quarter. In October and November, which are usually great months for truckers (all that pre-Christmas shelf-stocking), "ABF experienced a sudden and dramatic reduction in business that mirrored conditions throughout the trucking industry," the company noted.
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?
For starters, the two sectors are operating in slightly different economies. Railroads are benefiting from economic trends that don't particularly help truckers. Coal, an increasingly popular energy source, is hauled almost exclusively by trains, as John McPhee documented in his elegiac book Uncommon Carriers. The Association of American Railroads reported that in 2006, coal accounted for 42 percent of "total non-intermodal U.S. rail carloadings." And industrywide coal carloads rose 5.9 percent in the fourth quarter of 2006. Indeed, Norfolk Southern noted that fourth-quarter coal revenues were up 13 percent between 2005 and 2006. At Burlington Northern, coal revenues were up a whopping 22 percent, thanks to heightened activity at the Powder River Basin.
A second rapidly growing energy source also helps rail companies while doing nothing for truckers: ethanol. As the Wall Street Journal reported this week, ethanol can't be pumped through existing oil pipelines. And it makes far more sense to ship the fuel in 30,000-gallon tank cars than in tanker trucks. Ethanol shipments tripled between 2001 and 2006 and are expected to rise 33 percent in 2007, the Journal reported.
Another large, but seemingly irrelevant, economic trend appears to be hurting truckers: gift cards. American Trucking Associations Chief Economist Bob Costello noted that "the fall freight season is changing." With the proliferation of gift cards, the holiday shopping season is spilling over into January. So, retailers aren't moving as much merchandise to stores in October and November as they have in the past.
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.