Over the past twelve months, there has been much discussion of the economic problems currently being faced in the United States and to a lesser extent in Canada. The rising cost of fuel, food shortages, sub-prime mortgages, the downturn in the housing and automotive sectors and the credit crunch have all made front page news. As we come out of this economic recession and “freight recession”, we will be facing a new set of challenges. Here is what is happening.

Trucking company failures accelerated in the first quarter in the United States to their highest level since the 2001 recession. According to Donald Boughton of Avondale Partners, trucking company failures rose to 955, up from 595 in the fourth quarter of 2007 and 385 in the third quarter. Boughton commented that “fuel is driving this again”. These 935 carriers, that left the industry either through bankruptcy or going out of business, operated 42,000 power units, or 2% of the nation’s 2 million class 8 tractors according to American Trucking Association statistics.

Boughton commented that “shippers pushed back on fuel surcharges during the first quarter of this year. Carriers were so desperate for loads they would give in on fuel surcharges”. Two other leading stock analysts, Jason Seidl of Credit Suisse and Thom Albrecht of Stephens Inc., expect a continuing decline in truckload capacity through the end of the year.

Those carriers that are still in business are trimming their truck fleets. Truckload carriers are cutting capacity at the highest rate in a decade to create a better balance between supply and demand. Bob Costello, chief economist of the American Trucking Association has supplied data that showed a 3.6% drop in capacity in January and February, “the largest since we began collecting the data”. J.B. Hunt Transport Services, the largest publicly traded truckload carrier and Werner Enterprises, both said they made year-over-year cuts of 9%. Dan Einwechter, CEO of Challenger Motor Freight, one of Canada’s largest truckload operators commented this week at the SCL Conference in Toronto that he has trimmed his fleet by about 4%. As truck fleets are being reduced, fewer drivers are being hired.

While trucks are being removed due to bankruptcies and fleet size reductions, truck production and truck purchases are also being scaled back dramatically. Steve Russell, CEO of Celadon Inc. commented at Truck World two weeks ago the truck production is being reduced from a norm of 250,000 units annually to a forecast of 120,000 trucks this year. As an example, OEM’s sold 10,419 big trucks in the United States in March 2008 as compared to 16,090 in March 2007. Quarterly sales fell to 30,248 from 51,116 last year.

One interesting component of the truck capacity situation is the used truck market. An unprecedented wave of demand for used trucks, mostly from Russia, is driving supplies of two and three year old trucks overseas. This is taking even more capacity out of the market.

While capacity is shrinking, demand is on the way up. In February, truck tonnage as reported by the ATA showed an increase for the fourth straight month. Several industry analysts are taking this as a signal that there are better times ahead. Thom Albrecht noted that increases in freight volumes can be a leading indicator of an upturn in the economy.

However other indices, notably the latest manufacturing index from the Institute of Supply Management showed a continued weakness, particularly for auto and home sales and for factory and durable goods ordered. We may not be “out of the woods” just yet. The good news is that there were 2.9 million more loads available on Transcore’s load board than were posted on their load board in the same quarter of 2007.

We may be near bottom. “Perhaps we are seeing a repeat of the last recovery,” said Bob Costello. Costello said the association’s tonnage index began to rise eight months before the end of last recession that occurred in 2001. If that pattern is followed this year, U.S. economic activity would turn positive in June.

So what does this all mean to shippers? As demand increases, there will be a lot less truck supply than at the start of this freight recession. While some parked trucks will be put back into service, it will take time to ramp up truck production, hire and train drivers and replace the trucking companies that have gone to “trucking company heaven”.

This will certainly drive up rates. Commenting at this week’s SCL conference, Einwechter predicted that truckload rates will increase by 10% over the next year. Some of the larger shippers can see this coming. Wal-Mart recently concluded a two year arrangement with its carriers while Target Stores has signed a three year deal. Smart shippers should now be locking up capacity and firming up rates with their quality core carriers to ensure they will be able to meet the demand in better times. This is also a wise strategy to buffer your company from “rate shocks” that will come into play as supply and demand begin to move in different directions.