Stifel, Nicolaus & Company, an equity research firm, predicted a good future for the freight transportation industry, despite the bad economy, in its Transportation and Logistics Outlook for 2011 and Beyond.

First the bad: There is no question the economy is still awful, with the recovery progressing at a snail's pace from the worst economic downturn since the 1930s and an unemployment rate seemingly impervious to stimulus.

The economy isn't doing nearly as well as hoped. Manufacturing began to recover earlier this year, but has slowed, and retail spending follows a similar pattern; housing can barely manage a limp. Fear seems to be on the rise again recently, with the first national credit downgrade in history and financial meltdown looming in Europe.

As a result, volume is barely holding onto growth in most sectors. The Ceridian-UCLA Pulse of Commerce Index is down 5.4% relative to its peak in the middle of last year. LTL tonnage was growing, but is beginning to flatten out. Rail has also flattened out, as has ocean freight.

In the wake of the recession, trucking lost about 20% capacity. Moreover, it faces still more shrinkage. According to John Larkin, managing director of the Transportation and Logistics Group at Stifel, the government is playing a large part in that. The new CSA enforcement regime, he says, is reducing the driver pool, and hours-of-service regulations threaten to take out 3-6% more capacity. Additionally, trucking fleets continue to age, which further threatens capacity. Large-scale fleet replacements are not expected until 2013.

In Larkin's words, we're facing "the mother of all capacity shortages," although that has been delayed somewhat due to slow economic growth. Seeing as there is already a shortage with unemployment north of 9%, Larkin fears that if manufacturing and construction were to suddenly boom, the industry might face a crisis.

There is a bright spot here for trucking. Precisely because capacity is tight, rates are going up, and will continue to go up. Less-than-truckload has already seen general rate increases this year between 4.5% and 6.9%. Truckload revenues per mile have been climbing steadily since the bottom of the recession and are expected to continue to do so, gaining 10% by 2013.

Other segments are faring similarly. Rail pricing, which was solid throughout the recession, is expected to continue rising. Intermodal prices, which declined during the recession due to lost capacity to trucking, are coming back as trucking capacity tightens.

The Next Decade

Although the next five to 10 years are expected to be good for the transportation industry, they come with challenges and are sure to be interesting. In the near term, the 2012 elections will be of major importance to the industry and will be a significant force in shaping policy - including the hotly debated infrastructure bill. But no matter the outcome, stricter regulations on safety and fuel efficiency will almost certainly be a challenge driving up costs and decreasing capacity.

Fuel prices are a huge question mark. The past few years they have been all over the map. Looking forward, oil is likely to become more expensive, and will probably continue the wild ride of ups and downs.

Some significant structural changes to the industry have already begun. A shift in manufacturing from overseas to near-shoring and re-shoring is becoming a reality as countries like China lose their price advantage.

"Mexico is cheaper than China right now," said Larkin, who claimed that manufacturing to the south will grow at a very rapid rate. Some manufacturing will even return to the United States.

A more important change will be to the supply chain. In the wake of supply woes following the earthquake and tsunami in Japan, companies are looking to shorten supply lines, and diversify source countries. Shippers are also redesigning products as well to make them easier to ship. This will reduce transit volume, which is bad for trucking, although perhaps good for the world.

Finally, there is big growth in 3PLs, and that trend will continue. Companies are moving away from in-house logistics operations as pooled freight allows for cheaper rates.

Overall, carriers should expect to keep improving, but should be ready for a changing future: more regulations, more costs and a shifting face of the industry.