If truckload capacity is getting tighter on America’s highways, it’s not pinching XPO Logistics. The fast-growing freight brokerage and logistics business sees truck capacity pretty much in balance nationwide, despite warnings that trucking’s supply-demand “equilibrium” is getting closer to its breaking point.
“From a brokerage perspective, the market is steady and balanced,” Bradley S. Jacobs, chairman and CEO of the Stamford, Conn.-based company, told The Journal of Commerce recently. Although XPO has seen pockets of tight supply in certain parts of the country and at certain times, “if you look at the (truckload) market nationally, you can’t really say capacity is tight,” he said. “It’s balanced, it’s efficient.”
As 2014 gets under way, the big question is whether trucking supply and demand will remain balanced, or whether a long-predicted truck and driver shortage will disrupt supply chains and raise costs as the economy accelerates.
Since the end of the Great Recession in June 2009, transportation analysts, journalists and trucking executives have predicted the crunch to top all capacity crunches, when freight demand would fast outstrip depleted truckload fleets. Demand, they worried in 2010, would grow faster than motor carriers could add trucks. Truckload rates would skyrocket, walloping shippers operating on thin transportation budgets but benefiting carriers paying higher costs for Class 8 tractors, qualified truck drivers and a host of other operating needs, all while making pennies on every dollar of revenue.
Four years later, those predictions are still predictions. Truck rates did rise in 2010 and 2011 after plummeting during the recession, but truckload and less-than-truckload revenue and pricing increased slowly in 2012 and 2013, hampered by an economy not firing on all cylinders.
U.S. GDP, however, expanded 3.6 percent in the third quarter, after rising 2.5 percent in the second quarter and 1.8 percent in the first. That 3.6 percent increase in GDP was much higher than the Commerce Department’s first estimate of 2.8 percent and largely was the result of a surge in inventories as retailers prepared for the holiday shopping season.
In 2012, national GDP increased 1.9, 1.3, 3.1 and 0.4 percent on a quarterly basis — disappointing numbers for the third year of a long-term economic recovery.
The growth rate in 2013 was less choppy, but still too slow to overtake truck capacity. In 18 quarters following the end of the recession, U.S. GDP has grown faster than 3 percent only four times. The last time the U.S. saw a sustained period of economic growth higher than 3 percent per quarter was from 2003 through 2005, when national GDP grew faster than 4 percent in five out of 10 quarters. That recovery was so strong that shippers were caught short as motor carriers raced to add trucks and expand fleets. The resulting capacity crunch is a yardstick transportation analysts use to cajole shippers and carriers today.
The “day of reckoning” has only been delayed, Larry Gross, a senior consultant for FTR Associates, said at the JOC Inland Distribution Conference in Kansas City last September. “We’re a little bit like Chicken Little, because we said it’s going to happen, but it hasn’t happened yet. But the weak freight environment has postponed, not eliminated, the threat of a capacity shortfall.”
Some shippers, understandably, aren’t impressed. In a recent post on his 10x Logistics blog, Kevin O’Meara, senior vice president for supply chain effectiveness at Breakthrough Fuels, accused carriers of pursuing a “fear premium, making shippers fearful that truck capacity is magically disappearing. For sure, I am not saying to ignore capacity,” the former Whirlpool and Schneider National executive wrote. “If you claim the world is going to end and you live long enough, sooner or later you will be right.”
How strong and sustained would economic growth have to be to trigger that shortfall? “Expansion in the high 2 percent range, maybe 2.8 or 2.9 percent, might be enough,” said Bob Costello, chief economist for the American Trucking Associations. “But it would have to be consistent, not choppy, inconsistent GDP growth.”
That means at least sustaining a higher GDP growth rate across several consecutive quarters. “We’ve seen GDP rise one quarter and fall back the next, and that’s reflected in what fleets will tell you about their business — that freight demand is choppy even on a week-to-week basis,” Costello said. “Sometimes they’ll see double-digit growth one week and see freight fall by that much the next.”
The 3.6 percent third quarter surge in GDP would tighten capacity quickly, if it were sustainable. Final numbers for the year, however, should show the pace subsided in the fourth quarter, as retailers worked down inventories and as concerns over the fiscal debate in Washington sapped some confidence from consumers, JOC Economist Mario O. Moreno said. “The consumer is really willing to spend, but we have political gridlock contributing to high uncertainty,” he said.
Economists surveyed by Bloomberg in November expect 2 percent GDP growth in in the fourth quarter of 2013 and 2.6 percent in this year’s first quarter. Bank of America Merrill Lynch in October cut its first quarter GDP growth forecast to 2.8 percent from 3.3 percent, citing “confidence shocks” from the shutdown.
“Without the interruptions from Washington, this economy would be more prone to grow than stall,” economist Donald Rataczjak said in a recent commentary for investment banker Raymond James. “The only real economic drag is coming from Washington. Whatever long-term battles Washington hopes to win, they will be much harder at 2 percent growth than at 3 percent. Get growth moving first, and then determine what government we should have in the future.”
What happens to shipping if 2014, or 2015, finally delivers more sustained, solid economic growth, in the range Costello cited or even higher? Trucking capacity might lose its “equilibrium,” shifting pricing leverage to motor carriers and sending rates up, but by how much depends in part on how strong that sustained economic growth might be.
“We need to see a huge inflexion point where things move more quickly, rapid movement over a quarter, and that will push dynamics on the rate side,” FTR Associates President Eric Starks said. “When you start looking at underlying numbers, there are inconsistencies in commodity data, such as automotive and housing. Basically, nothing happens at the same time. Automotive will peak and then soften and then housing activity will rise. You really need to see everything clicking at the same time. If that happened, we would have a different situation.”
Last year, “the shippers held fast” when it came to rate increases, because demand just wasn’t high enough. This year could be different, Starks said. “I wouldn’t want to be a shipper in the next five years. It’s going to be difficult.”
Shippers are preparing for some tightening of supply. Fifty percent of shippers surveyed by Wolfe Research in the third quarter said truckload capacity was balanced in mid-2013, compared with 60 percent a year earlier, but 68 percent said they expect truck capacity to tighten by this year’s third quarter.
A more moderate pace of growth may not lead to the severe, costly type of crunch some expect, however. That’s because shippers and trucking companies, working with third-party logistics companies and non-asset brokers, have become more adept at managing and sourcing capacity, often using technology they didn’t have a few years ago. 3PLs now can reach into pools of capacity that weren’t easily accessible during the 2003-07 economic expansion.
That technology benefits carriers, 3PLs and shippers and helps maintain supply and demand balance, said Ben Wiesen, vice president of products for Carrier Logistics, an enterprise-level freight transportation software company. “Carriers try very hard to grow organic volume, but it sure is nice to be able to reach out into a volume pool to achieve balance and attune things, not just on a macro level but to make micro adjustments on a particular lane or a particular day,” he said. “It used to be that carriers saw the 3PL as the enemy that would drive down rates. Now they can collaborate to drive down costs.”
Carriers and shippers also are making better use of capacity, fitting more freight into high-cube trailers. “We’re shipping a lot less air,” Costello said. “For one, we’ve taken all this water out of laundry detergent” and other liquid products, which means they can be shipped in smaller packages and packed more tightly to create additional space in trailers. “Shippers have done a lot of this already, and that really stemmed from the last period of tight capacity. And it’s probably why we haven’t seen tighter capacity yet.”
Absent stronger economic growth, capacity may stay relatively balanced longer than some analysts expect. John Larkin, managing director and head of transportation capital research at Stifel Nicolaus, doesn’t expect to see significant tightening of capacity until electronic logging devices are required by federal law on every tractor-trailer.
“The much anticipated capacity crunch is unlikely to materialize until 2017,” he said in a Dec. 6 investor note. “Shippers are tired of carriers crying wolf. They will instead increasingly collaborate with carriers to improve equipment utilization, improve load factors, reduce empty miles and create a more driver-friendly work environment.”