October 29, 2019 Odyssey North America Logistics Update As we enter the final quarter of 2019, we understand the importance of finishing the year strong to meet & exceed your yearly objectives and set yourself up for success as we look ahead to 2020. In order to make sure you are positioned to achieve this we have put together the following “North American Logistics Review.” This page will provide both a macro and micro level look at the economy and industry trends impacting the logistics and supply chain world. We will provide updates on everything from the current GDP and key economic indicators to the ongoing driver shortage, international tariff war and IMO 2020. If you have more specific questions or would like to speak with an industry expert, visit our contact page here. An Odyssey expert will gladly continue the conversation and find a solution that fits your needs. Read below for Odyssey’s most recent North America Logistics Update.The Economic Factors Strong economic conditions continue, but there could be headwinds in the picture: Economic Expansion Slowing Down: The U.S. economy expanded by 1.9% during the third quarter of 2019, this comes after only a 2.0% increase in Q2 and a 3.1% expansion in the first quarter, which largely was buoyed by lower imports and higher inventories, JOC reports. U.S. gross domestic product (GDP) slowed to 1.9% in the third quarter of 2019, but beat expectations thanks to strong consumer spending, CNBC reports, which notes that: GDP was down from 2.0% in the second quarter and 3.1% during the first quarter The growth was better than Wall Street was expecting Consumer expenditures rose 4.3% Business investment decreased by 5.5% Consumer and government spending helped propel GDP in the April-to-June period, while a pullback in business investment negatively impacted the measure. Personal consumption expenditures rose 4.3%, the best performance since the fourth quarter of 2017. Government consumption expenditures and gross investment rose 5%, the fastest pace since Q2 of 2009 (when the economy was coming out of the Great Recession). Industrial Production & Manufacturing Output: Industrial output 1.0% over last 3 months +1.6% Q2 2019 vs. Q2 2018 +2.2% 1st Half 2019 vs. 1st Half 2018 Manufacturing output rose 0.2% in May and 0.4% in June After a 10 year high in December 2018, manufacturing outlook had fallen 1.6% Industrial Output Index is 75% manufacturing Other components = Utilities (11%), Oil & Gas Extraction (10%), Mining (5%) Chemical Activity Barometer: The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), was up 0.1 percent in September on a three-month moving average (3MMA) basis following a 0.1 percent decline in August and gains averaging 0.2 percent per month during the second quarter. On a year-over-year (Y/Y) basis, the barometer was flat at 0.0 percent (3MMA). “Although one month does not make a trend, the positive September CAB reading and upward revisions in the data are encouraging signs,” said Kevin Swift, Chief Economist at ACC. Freight Volume American Trucking Association (ATA) Tonnage Index (Seasonally Adjusted): ATA Truck Tonnage Index Rose 0.2% in September, 2019 – 3.5% Higher than September 2018 “This was the first month in 2019 that we did not see a significant increase or decrease in tonnage,” said ATA Chief Economist, Bob Costello. “For the entire third quarter, the index was up 1.2% over the previous quarter and 4.5% from a year earlier, both are nice gains.” Compared with September 2018, the SA index increased 3.5%. The index is up 4.1% year-to-date compared with the same period last year. It is important to note that ATA’s tonnage data is dominated by contract freight, which is performing significantly better than the plunge in spot market freight this year. Rail – Carload & Intermodal Units: Carloads (Excluding Coal) Total originated U.S. rail carloads (excluding coal) fell 7.0% in September 2019 from September 2018, their eighth straight year-over-year decline. In the third quarter, total carloads were down 5.4%; for the year through September, they were down 3.8% Intermodal Units: Total U.S. intermodal units were down 5.9%in September 2019. Down 4.1% year-over- year compared to 2018 Freight Rates U.S. Producer Price Index (“PPI”) Freight Index: All transport modes showed 2018 historic inflation, due to strong demand after July 2017 All modes in Q2 showed some sequential increases after falling in Q1 2019: The PPI is a family of indexes that measures the average change over time in the selling prices received by domestic producers of goods and services The price collected for an item included in the PPI is the revenue received by its producer PPI is not a labor cost index (despite being published by the Bureau of Labor Statistics) Has an index for each major transport mode (truck modes, rail, etc.) Cass Truckload Linehaul Index: The Cass Truckload Linehaul Index remained below 2018 levels in September: Down 2.0% year-over-year, after August’s 2.6% drop Rates increased 2.3% sequentially, however, as would be expected based on seasonality. With spot pricing still well below contract, spot pricing should continue to grow as a percentage of the mix, causing realized pricing to continue to decline, staying below 2018 levels DAT Freight Index: Spot market slows during the first week of October after surge to close quarter: September 2019 Spot Rates inclusive of FSC vs September 2018: -14.0% Vans -13.9% Reefers -14.1% Flatbeds U.S. DOE On Highway Diesel National Index: -3.5% 2019 diesel price change vs. 2018 The U.S. average for On Highway Diesel for the week of 9/19 = $3.05 per gallon Down -$0.34/gallon vs. 1 year ago Industry Trends & Regulations Abrupt Carrier Closures: The first three quarters of 2019 saw its fair share of both smaller and high-profile carrier closures across the country causing a significant ripple effect through the entire industry. A sample of significant closures in 2019 included NEMF, HVH Transportation, Falcon, Terrill Transportation Inc, Williams Trucking of Dothan, Alabama, Indiana-based A.L.A., Starlite Trucking, and LME. While there are macrofactors such as the stress of HOS & ELD regulations impacting these all these carriers, each case has its own specific sub-set of reasons that lead to the closures. Regardless of the reason, each closure of 2019 created a moment of stress for the shippers who’d once relied on them. Especially when the carrier served a specific region, such as LME or NEMF, the shippers felt a significant strain throughout the region until the result of supply and demand works itself out with new carriers filling the need. Shippers who had the support of a larger logistics company weathered this disruption much faster than those without. ELD & AOBRD Update: The final phase of the ELD mandate in the U.S. requiring trucks using older-style Automatic On-Board Recording Devices (AOBRDs) to switch to ELDs takes effect on December 17, 2019. While most carriers have already made the switch since the mandate was first announced in December of 2017, few experts expect this final phase to cause much disruption. However, in the event that more carriers are impacted than expected, it could be enough to decrease productivity, which could lead to higher rates. Back in December 2017, ELD mandate reduced capacity and contributed to a boost in rates that lasted through 2018. Canada is following suit and will also require the use of ELDs beginning in June 2021, making official a long-sought regulation of the commercial transportation industry. Key points for Canada include: ELDs will need to be certified by a third party. The process for certification is expected to take 12 months. Transport Canada will maintain a listing of ELD providers and their certified devices on its website The 24-month phase-in period is to allow the certification process to take place and to allow carriers to implement ELDs Exemptions for the use of ELDs are limited. Exemptions for using ELDs apply to vehicles that are subject to rental agreements for a term of 30 days or less and commercial vehicles that were manufactured before the year 2000 Transmission to enforcement will occur by the officer providing an email address to which the driver will send the ELD record. Local transfer by Bluetooth or USB is an option but is not a mandatory function of an ELD The ELD mandate in Canada becomes effective on June 12, 2021 IMO 2020: The International Maritime Organization (IMO) has ruled that starting January 1, 2020, the marine sector will have to reduce the current maximum fuel oil sulfur limit of 3.5 weight percent (wt%) to 0.5 wt%. There are a few ways currently being discussed that vessel operators can comply to the new low-sulfur regulations: Transition to low-sulfur fuel This seems to be a viable option for vessel operators but there is limited capacity to produce this type of fuel. High demand plus low supply will drive prices up considerably. Use alternate fuel such as liquefied natural gas (LNG) While LNG could be a major fuel type for ocean going ships in the future, it is not as suitable of an option currently due the fact that this fuel type is currently considered “difficult to handle”. Install exhaust gas cleaning systems or commonly known as “exhaust scrubbers” While experts point to this method helping in the short term, many do not see scrubbers as a viable long-term solution. Potential Impacts of IMO 2020 are projected to go well beyond just ocean freight: Container lines potentially facing an estimated $12 billion in additional fuel costs and the shipping industry in total an estimated $50 billion to $60 billion increase in annual fuel costs Goods may take longer to traverse shipping lanes as container lines slow vessel speeds to burn less fuel Off the water, the impact could be felt as on-highway diesel prices could increase as much as 30%, driving up the costs to move goods Driver Shortage: According to the latest 2019 American Trucking Associations (ATA) truck driver shortage analysis, the shortage of truck drivers was 60,800 at the end of 2018, which was a record high and up more than 10,000 from the prior year. By the end of 2019, the ATA expects the shortage to decrease to 59,500, slightly below its highest level in 2018. The forecast for a minor decrease this year is due primarily to slower economic growth and a small bump in supply when compared to last year. However, the combination of a tight labor market and an aging truck driver population is expected to keep the shortage as a main concern as we move into 2020 and beyond. The driver shortage is a problem for not only the trucking industry but for the entire supply chain as 71.4% of all freight tonnage is moved on the nation’s highways. Current ways the issue is being addressed include: Potentially lowering the driving age from the current age minimum of 21 to tap into the 18-21 year old segment Transitioning military personnel to careers as truck drivers Expanding the number of women drivers, just 6.6% of truck drivers in 2018 were women Further increases to driver pay and focus on improving the quality of life of drivers International Tariff Tension: For over a year now, two of the world’s largest economies, the United States and China, have imposed tariffs on billions of dollars worth of one another’s goods, across several key industries. Due to the uncertainty, shippers are trying to minimize the impact for their end customers by bringing in as much merchandise as they can before a new round of tariffs could potentially take place and drive up cost. The month of August brought a 1.8% annual increase in import volume to major US ports, according to the most recent Port Tracker Report. In preparation, some cargo owners are also evaluating their supply chains and investigating alternative sources outside of China to meet their needs. Partnering with a logistics company to navigate this uncertainty is advised. More negotiations are scheduled to continue in Washington, but on October 11, 2019 the U.S. and China agreed on the outlines of a partial deal that could potentially be signed next month. This agreement marks the largest breakthrough in the 18-month trade war which has impacted both nation’s economies. The agreement outlines that China will increase their purchasing of U.S. agricultural commodities, agree to certain intellectual-property measures and concessions related to financial services and currency. In return, the U.S. has delayed the October 15 tariff increase, however the increase for December hasn’t been canceled yet. Phase two of the trade deal is to be considered after phase one has been finalized. 10 Tips to Help Shippers Finish 2019 Strong As 2019 enters the critical fourth quarter, shippers are under pressure to maximize efficiency and finish on a profitable note. Here are 10 recommendations for achieving a successful end of the year. Develop Accurate Forecasts — Approach end of month forecasts with solid understanding of CPU conversion. Consider Intermodal — If you don’t currently ship intermodal, investigate its viability as a long-haul solution. Maximize Payloads — It sounds simple, but confirming loads are at or near capacity can yield immediate bottom line savings. Revisit Lead Times — Confirm your lead time planning is in line with current market conditions: 2-3 days for truck loads, 5-8 days for tank trucks. Add Flexibility for Truck Reloads — Ship “off peak” and consider delivery windows instead of appointments to accommodate variability in reload times. Don’t Over-Require Unnecessary Equipment — Check that customer order literals are up-to-date and accurate. Get In and Get Out — Utilize trailer drop and hook at high volume locations. Get Back on the Road — Make loading and unloading quickly a priority, especially at peak times and busy locations. Be Carrier Friendly — Allow shipping facilities to have as wide as possible truck loading/unloading hours. Carrier Invoices Management — Check with your carriers about early pay discounts and pay on time to avoid service disruptions.