Odyssey North America Logistics Update

In 2018, the truck driver shortage, capacity issues, and rising rates all converged to create a challenging logistics environment in the US, with these trends continuing, though almost universally to a lesser extent into 2019. In the wake of a year full of record volumes and rates, 2019 looks to be a cooler, yet generally healthy year. While both retail sales and overall economic growth are projected to slow in comparison to 2018 levels, exacerbated by market volatility derived from trade uncertainties and GDP decreases through the APAC and European markets, 2019 looks to be a slight return to normalcy across the U.S. logistics market.

Read below for Odyssey’s North America Logistics Update.

The key factors impacting U.S. logistics right now include:

The Economy Remains Steady

The economy advanced an annualized rate of 3.4% during the third quarter of 2018, slightly below earlier estimates of a 3.5% growth. This follows a 4.2% expansion in the previous period (which was the highest since the third quarter of 2014). Fourth quarter GDP growth settled at 2.6%, as reported by the Commerce Department’s gross domestic product report.

There could be clouds on the near horizon. According to a Reuters poll of economists, there is a one-in-four chance of a U.S. recession in the next 12 months. “There is a lot of uncertainty and there are some good reasons to forecast a slowdown in 2019 as compared to in 2018,” said High Frequency Economics’ Jim O’Sullivan.

It’s a Mixed Bag for Manufacturing

U.S. factory production unexpectedly contracted in January, shrinking the most in eight months on weakness in the automotive sector and indicating a weak start to the year as headwinds including a trade war with China weighed on factories. Manufacturing output fell 0.9%  after a downwardly revised 0.8% increase in the prior month, according to the Federal Reserve.

  • The data points to cooling across the manufacturing sector, consistent with analyst forecasts for a broader moderation in the U.S. economy this year.
  • The trade war with China is putting some investment on hold and raising costs for factories, potentially overshadowing wage gains and a strong labor market.
  • The decline was driven by an 8.8% drop in motor vehicles and parts, with assemblies falling from the best pace in more than two years to the weakest reading since May.
  • Most industries were little changed while information processing, construction supplies, and defense equipment posted losses.
  • The report contrasts with the Institute for Supply Management’s survey showing measures of new orders and production snapped back in January following steep declines the prior month.

High Demand for Trucking  

We saw record-setting levels of freight-hauling demand and driver pay in 2018 as tonnage levels reached a 20-year high. The trucking industry is expected to remain strong in 2019, but could also undergo a bit of a cool-down. Other key trends include:

  • In the third quarter of 2018, the U.S. Gross Domestic Product (GDP) expanded at a 3.5% rate, and the December jobs report from the Bureau of Labor Statistics showed the economy added a robust 312,000 positions.
  • According to ATA, through November the total freight hauled by for-hire truck drivers was 7.2% more than the first 11 months of 2017.
  • In an industry that ATA estimates is short more than 50,000 drivers, many carriers increased driver pay, improved bonuses, and offered other benefits last year.
  • In December, FTR Transportation Intelligence projected that freight growth will start the year at more than 3% and then drop to 2% in the second half of 2019.

Capacity is Loosening Up

Capacity is becoming more available, according to DAT’s most recent report, which says that small fleets have mostly adjusted to electronic logging devices (ELD) and strict enforcement of the Hours of Service rules. Driver pay has risen steadily in the past year, so large fleets are able to attract drivers and keep more trucks on the road, effectively increasing capacity. Driver turnover remains high, so retention continues to be a pressing issue, especially for large fleets.

The number of available trucks on the spot truckload freight market jumped 77% during the week ending January 12, well ahead of the 9% gain in available loads, according to DAT.

The surge in capacity and less urgency on the part of shippers knocked down national average rates for dry van, refrigerated, and flatbed freight:

  • Van: $1.89/mile
  • Flatbed: $2.34/mile
  • Reefer: $2.22/mile

The average price of on-highway diesel was $3.07 per gallon on Mar. 4, up 2 cents compared to the previous week.

Van Trends

Van truck posts on DAT load boards for available trucks surged 83% while load posts for available orders declined by 5%. The van load-to-truck ratio dropped 48% from 8.9 to 4.6 loads per truck.

Flatbed trends

According to DAT’s most recent report, flatbed load posts for available orders increased 44% while truck posts for available trucks surged 94%. As a result, the national flatbed load-to-truck ratio fell 26% from 33.7 to 25.1 loads per truck.

Reefer trends

Reefer capacity bounced back as truck posts for available trucks jumped 57%. The number of load posts for available orders declined 3%, however, which caused the reefer load-to-truck ratio to fall 38% from 9.8 to 6.1 loads per truck.

Average spot rates were down on 62 of the top 72 reefer lanes, and average outbound rates fell sharply in many major markets, including:

U.S. retail sales in December were down 1.2%, the biggest decline since September of 2009. The tumble shocked economists, who were expecting a 0.2% increase, and raises new fears about the state of the economy. The numbers were delayed because of the government shutdown, which drove some to believe that the report may have been inaccurate (the bets were still out at publication time).

At the same time, e-commerce sales continue to expand. According to a new American Transportation Research Institute (ATRI) report, e-commerce has been rising from 13-16% annually over the past five years, outpacing the 1-5% annual growth in traditional retail sales observed during the same time period.

E-commerce now represents about 10% of total retail sales, depending on how that share is calculated. This is pushing retailers to create more flexible logistics and transportation arrangements, including new “logistics hubs” across the U.S. that are strategically positioned in close proximity to customers. Other impacts include:  

  • Retailers/e-tailers working hard to reduce shipping costs in the face of consumer demand for free shipping.
  • Continued reduction in delivery need times, hence the growth of more widely-distributed distribution models, urban warehouses, and more.
  • Expanded delivery locations to reach consumers where they happen to be at any particular time.

Tank Truck

  • Compared with January 2018, U.S. chemical production was up by 4.1% on a year-over-year basis. Production growth for the specialty chemicals segment will hit 2.2% in 2019, spurred on by improvement in oilfield chemicals, electronic chemicals, coatings, adhesives, cosmetic chemicals, and flavors and fragrances are fueling growth in specialty chemicals. The ACC expects demand for specialty chemicals to grow in sync with gains in industrial and construction sectors in the years ahead. While capacity is still tight, Odyssey reports a significant decrease in turndowns for bulk-tank loads when comparing the current period in 2019 to that of 2018.

Truckload

  • Truckers are charging higher fees for shipping services, but much of the increase is going to cover rising driver wages, which leaves many companies still struggling to make sufficient profit. Truckload (TL) rates are expected to rise from 5% to 7% in 2019, with less-than-truckload (LTL) rates rising in the mid-to-high single-digits. The TL market is experiencing generally looser capacity than the LTL market.

LTL

  • In February, New England Motor Freight, Inc. (NEMF), announced without warning that it and 10 related entities had filed for Chapter 11 bankruptcy protection, and that it would commence an orderly wind-down of the business. The demise of this LTL carrier could have an impact on rates and capacity over the next few months in the Northeast LTL market.

Rail

  • Trucking’s capacity constraints have been beneficial for both rail and intermodal, says Tioga Group’s Frank Harder. “Railroads made a lot of money in 2018, as we predicted in last year’s forecast,” he says. “The same holds true for 2019, as coal transport had a significant uptick and steel manufacturing strengthened.”

The economic outlook is not as rosy as it was a year ago, according to the ATA. This is the second longest economic expansion in U.S. history, and American Trucking Associations Chief Economist Bob Costello says there’s “no reason it shouldn’t be the longest.” He notes that economic expansions “don’t die of old age; they die of something else.”

The driver shortage continues to be the top challenge for fleets. Expect driver wages to go higher in 2019, predicts the National Transportation Institute, which tracks driver wages. Driver pay conditions are even more favorable today for drivers than they were a year ago; expect upward pressure on wages to continue.

“We should see continued efforts to find ways to allow younger drivers to operate in interstate operations, and continued efforts to reach out to a non-traditional labor pool, including women and minorities,” Deborah Lockridge writes in TruckingInfo. “In some parts of the country and in Canada, for instance, Indian-American Sikhs have entered the driving force in significant numbers.”

By December 16th, 2019, all “grandfathered” AOBRD devices must be transitioned to a mandate-compliant ELD. During the 2017 ELD implementation, many companies and owner-operators who decided to delay getting an ELD by installing AOBRDs are now facing another transition.

Other regulations that could impact trucking this year include the OT Drug & Alcohol Clearinghouse Rules (approved but now in a holding pattern); proposed changes to the Hours of Service (HOS) rule; and the proposed Speed Limiter Rule, which would require trucks to be equipped with an operating speed limiting device.  

The U.S. economy may cool somewhat in 2019, but the need for good internal processes, reliable logistics partners, and good rate management continues. Here’s how shippers can prepare themselves for success this year.

The record high volumes of 2018 created a rich environment for brokers. The leveling of the industry and freight demand is causing some brokers to become more aggressive to maintain satisfactory business levels. In these situations, brokers will begin to reach out to shippers to sell capacity at a rate savings.

When the market constricts, brokers need to increase their rates to cover bottom lines. Choosing to forego the rates of your long-time carrier in favor of short-term price cuts from a broker may create pressure should the market shift in a less-than-favorable direction. Odyssey suggests that shippers exercise caution in accepting these offers as they can be disruptive as capacity fluctuates.