With the financial problems in Europe, the world stock markets in freefall and the gulf oil spill, it makes one wonder if we are heading into a double dip recession. Despite these troubling events, there is enough positive news to suggest that we in the midst of an economic recovery.
GDP is on the rise this year. Consumer spending is inching up and manufacturing gains continue – as evidenced by the most recent Institute for Supply Management PMI index coming in at 60.4 percent, showing growth for the ninth straight month. The U. S. Commerce Department’s recent report indicated that factory orders were up 1.3 percent in March (and up 4.7 percent year-to-date). Clearly there needs to be sustained growth for multiple quarters to declare that the economies of the United States and Canada are on solid footing. But at the same time economic conditions and key indices continue to move in the right direction.
A variety of transportation indices are also in positive territory. The ATA Tonnage Index, the Rail Traffic index and the Cass Freight Index are all showing positive year / year trends. The spot market for North American truckloads increased 291 percent in April compared to the same period a year ago, according to a freight index published by the transportation trend analysis firm TransCore. The index is based on the millions of truckloads and available trucks in TransCore’s DAT Network that is fed its information from shippers, third partly logistics firms and carriers throughout North America. April’s spot market volume was the highest for any month since November 2005, a record year for spot market freight.
ATA Chief Economist Bob Costello said in a recent statement that he is getting more optimistic about the motor carrier industry’s recovery. “Freight is moving in the right direction and I continue to hear from motor carriers that both the demand and supply situations are steadily improving,” he said, adding that this growth is due in part to the growing economy and to a slight inventory build after some sectors slashed inventories by too much in 2009. “For most fleets, freight volumes feel better than reported tonnage because the supply situation, particularly in the truckload sector, is turning quickly.”
These events beg a few questions. Will the growth in demand, coupled with reduced capacity, translate into higher rates and how quickly will freight rates return to pre-recession levels?
Truckload volumes and rates started to decline in late 2007 and throughout 2008, then took a nose dive as the Great Recession took hold with the financial collapse in fall of 2008, with many carriers pricing during 2009 at or below their variable operating costs. While things have modestly stabilized, shippers are still driving hard bargains in contract rate negotiations, even as the economy recovers, with the supply and demand equation likely to stay strongly in the favour of shippers into 2012. This is the view of John Larkin, the respected transportation industry analyst at Stifel Nicolaus, based on a variety of recent conversations with shippers and carriers.
Larkin sees the following current market dynamics at play. The continued increases in the sophistication of shipper bidding techniques and technologies are still yielding meaningful rate reductions. Contract truckload rates will probably not move up until 2011, at the earliest, and that will simply reflect underlying carrier cost increases. While there is likely to be some modest rates increases in 2011, those will simply reflect increases in driver pay and costs associated with 2010 (and beyond) EPA compliant engines. The implication is that significant truckload rate increases likely will not occur until 2012, Larkin says.
Capacity is tight, however, in certain geographic sectors of the US. “Capacity tightness has been “bouncing around” from one geographic region to another and has not been homogeneous across the US,” according to Larkin.
Shippers keep knocking down “pockets” of exceptionally high rates that have existed for years. Larkin says one carrier he spoke to cited a large East coast shipper that recently was able to knock down rates by 30-35%. “This phenomenon has been particularly noticeable in lanes historically viewed as backhaul lanes,” Larkin says. “With backhaul lane pricing under pressure, carriers must endeavour to price headhaul lanes adequately, in effect to make up the difference. This would seem to be “easier said than done” in this environment, however.
Some customers are again willing to pay for expedited/high service capabilities. In markets such as the auto assembly markets, “shippers are now willing to consider rate increases in exchange for expedited, time-definite truckload services (especially when driver teams are involved),” Larkin says.
IHS Global Insights analyst Charles Clowdis has a slightly different view, saying rates may in fact rise more rapidly and quickly than many current projections. Clowdis believes that the number of carriers and owner-operators that have left the market has decreased total available US trucking capacity to the point where continued economic growth could lead to constrained capacity in the fairly near term, and therefore push rates sharply higher. “Many carriers, both truck load and less-than truck load, have not replaced their fleets on a schedule that puts the most fuel-efficient equipment requiring less maintenance into service,” meaning fewer trucks will be available on any given day.
Overall, Clowdis predicts TL and LTL rate hikes in the 7-10% range, “as capacity decreases and becomes more valuable to serve the released consumer demand.” Of course, even rate hikes in those ranges would still leave shipping costs well below rates in 2007, but from a current year perspective, if Clowdis is accurate, it could lead to sharp year-over-year cost increases that could affect a shipper’s bottom line and ability to meet transportation budgets.
My own view is that freight rates will begin to migrate upward but less quickly that what is predicted by Mr. Clowdis. There is still too much capacity in the LTL sector for rates to increase in a meaningful way. More capacity reductions, industry consolidation and growth in demand is required for any significant upturn in LTL rates. Even in the truckload sector, with some exceptions, there will be a steady but bumpy upward movement in freight rates as supply and demand remain in reasonable balance. Freight rates are on the rise but it will take some time to return to pre-recession levels.