Shippers and truckers may be speeding toward a collision over pricing. Carriers, pinched by rising operating costs and a shrinking driver pool, are pressing for higher rates, while customers, facing lackluster demand for goods they ship, wonder why transportation costs as much as it does.
Lately, trucking and intermodal rates have been rising more slowly than carriers hoped for 2013. Truckload rates increased 1.4 percent year-over-year in May, but slipped 2.4 percent from April, according to Cass Information Systems, which maintains truckload and intermodal pricing indices. Intermodal rates, closely linked to truckload pricing, dropped 0.5 percent from a year earlier and 3.8 percent from April, Cass reported.
According to load-matching service DAT, spot market dry van rates were down 1.1 percent year-over-year in May, though they rose 3.4 percent from April. Year-over-year, spot market capacity — a measure of trucks available for transactional business — was up 24 percent.
That’s because there was less freight to load in trailers. Although the DAT North American Freight Index — a measure of spot market volume — rose 5.6 percent from April, it dropped 13.3 percent year-over-year in May, the fourth monthly decline. The U.S. average spot market dry van truckload linehaul rate rose 3 percent in May from April to $1.33 per mile but was flat year-over-year, according to DAT.
Economists aren’t offering much hope for the type of freight surge that would significantly tighten capacity and send truck prices higher. The Federal Reserve Bank of Philadelphia’s latest survey of forecasters projects 2 percent GDP growth in 2013, 2.8 percent in 2014 and 3 percent in 2015. That follows 2.2 percent GDP growth in 2012, 1.8 percent in 2011 and a 3 percent bounce back from recession in 2010.
That’s four years of GDP growth below 3 percent during an economic recovery. In the short term, at least, economic growth alone likely won’t be the lever that lifts truck rates.
Carriers are basing their push for higher rate hikes on three factors: the need to cover their own rising costs, continued cuts in capacity and the impact of tighter regulations on the truck driver market and truck fleet utilization — especially changes to driver hours of service rules that took effect on July 1.
Even in a freight market that one trucking executive called “pretty doggone flat,” those factors are pushing carriers to seek higher rates. The largest less-than-truckload carriers signaled their intent to raise pricing through general rate increases of 4.5 to 5.9 percent on average in June.
Shippers with standing orders to keep costs in line amid weak demand don’t plan to pay big price hikes. Companies surveyed by Wolfe Research in the second quarter expected truckload and LTL rates to rise 1.6 percent year-over-year in 2013, far lower than what carriers say is necessary to recover capital costs and reinvest in their businesses.
“While most carriers seem focused on improved pricing, we believe strong LTL pricing gains are tougher to sustain after the past couple of years (of) strong yield growth and given relatively muted tonnage levels,” Wolfe Research said in its report.
Shippers shouldn’t get complacent about comparatively weak truck pricing. Although rate increases are likely to stay in low- to mid-single-digit percentages for now, they will increase eventually, transportation investment analyst David Ross said
Truck “rates could easily go up by double digits again sometime in the next two years, but the timing is hard to pinpoint,” Ross, managing director of global transportation for investment research firm Stifel Nicolaus, said at SMC3’s Connections 2013 conference last month.
Why is the timing so hard to pinpoint? The sluggish economy. With slow growth, “It’s been hard for carriers to push through higher rates,” Ross said. Despite rising equipment costs and the much-publicized driver shortage, “Truckload rates aren’t doing much more than inflation.” LTL carriers are doing a bit better, increasing rates 3 to 4 percent, he said, which is in line with other analysts’ projections.
Pricing and yield in the LTL market, where Ross said demand already exceeds active capacity, measured in terminal doors in use, “should continue to grow faster than tonnage,” he said. “We’re looking at 3 to 4 percent growth in LTL pricing,” he said. “We’ve heard of a ceiling of 4 percent recently, but that’s only because of the slow growth environment. In this environment, we don’t think it can get any better than this.”
Ross forecast trucking rates would rise between 0.5 and 6.5 percent over the next two years, depending on how quickly the economy expands. Unexpected economic contraction could send rates into “negative” territory, but faster growth could cause a capacity crunch and send rates soaring, he warned.
A large-scale capacity crunch, something shippers have feared since the recovery began, looks unlikely. Early expectations for a stronger second half were tamped down at the SMC3 conference. Speaking at the conference, economist Donald Ratajczak forecast second quarter GDP growth of about 1.8 percent, with GDP growth rising above 3 percent in the fourth quarter.
The private sector economy “is doing reasonably well,” he said, despite weak consumer purchasing power. “The trucking industry is improving faster than the economy, but from a weaker base. They’re still a long way from where they need to be.”
To get where they need to be, carriers are likely to postpone investments in capacity until they see better returns. They will have to work harder to prove to shippers that rate increases are needed — sharing more of their books than some may like.
And shippers may face the choice of paying a little more today, or a lot more tomorrow.