Thursday, April 26, 2007

Freight Slowdown Hitting Transportation Companies

From the WSJ:

In addition to UPS's profit decline of 14%, railroad operator Norfolk Southern Corp. said its first-quarter profit fell 6.6%, hurt by continued weakness in the automotive and housing sectors. Trucking carrier Arkansas Best Corp., Fort Smith, Ark., saw its profit shrink by 22%, but said a cost-cutting program begun last fall helped it offset weakened freight demand.

The stubbornly persistent freight slowdown that began last year has been particularly tough on trucking companies, which are facing overcapacity and pressure to cut prices because they increased truck purchases before stricter engine-emission standards took effect. Railroad shipments fell nearly 5% in the first quarter, but tight capacity has helped railroad operators maintain their pricing power so far. Norfolk Southern, of Norfolk, Va., said pricing remained strong in the first quarter.

Here's a graph of total rail traffic's year-over-year percent change. It confirms the transportation slowdown:

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When people aren't shipping goods, it indicates the economy is slowing. Additionally, businesses are in a difficult position. If they are anticipating a slowing economy they will order a smaller amount of goods. If they order too much, their inventory will rise which will hurt profits. If they order too little they may make the situation worse.