US economic uncertainty clouds outlook for shippers, truckers

US economic uncertainty clouds outlook for shippers, truckers

Shippers and truckers are traveling a bumpy road in the second half of 2015. Heightened economic anxiety, largely driven by events overseas, political uncertainty and the faster pace of regulatory activity all make forecasting truck capacity and freight demand more difficult, speakers said during a Journal of Commerce webcast on the trucking outlook today.

With the recovery entering its seventh year, shippers and carriers need to consider and be prepared for “a wide variety of outcomes,” including a long-expected capacity crunch and driver shortage or another recession and slump in demand when planning for the next few years, said Larry Gross, partner and senior consultant at transportation research firm FTR.

Shippers will have to consider more complex and sometimes radical solutions to supply chain problems, including increased use of “integrated” fleets using contract or spot market and dedicated or private trucks, said Dan McHugh, vice president of business development at Ryder Dedicated Transportation Solutions. Their solutions will have to be flexible and “dynamic.”

That uncertainty and increased need for dynamic and changeable supply chains should drive more shipper-carrier cooperation and could create more capacity in the long-term. But deploying new technology, from electronic logs to autonomous trucks, will take time.

“What happens with the economy will have a dramatic effect,” Gross said. The problem is, that’s increasingly difficult to predict. “The market is so turbulent right now. A few days ago we were extremely concerned with the future course of the economy,” thanks to the slowdown in China.

“Today we learned U.S. gross domestic product increased 3.7 percent in the second quarter, 1.4 points higher than the U.S. government’s previous 2.3 percent estimate,” he said.

“That’s an indication the economy is cooking along pretty well,” he said. Overall, 2015 has been a year of mixed messages on the economy, as growth slowed from 4.6 percent and 5 percent in the second and third quarters of 2014, a post-recession peak. That makes year-over-year comparisons tough, though most economic measures show improvement over 2009-2013.

If the U.S. economy expands at a gradually faster pace, as the Commerce Department’s revised GDP figures may suggest, the trucking market may be enroute to a tipping point. “We think the most likely situation is that we’re in a bit of a calm period before a potential storm we see out there on the horizon,” Gross said. If it comes on track, things are going to get very turbulent.”

That calm period in part comes from significantly lower fuel prices. The retail price of diesel is down more than 30 percent year-over-year, according to recent Energy Information Administration figures. Fuel surcharges paid by shippers have been slashed, lowering the total landed cost of transportation for many businesses, despite increases in contract truck pricing.

“For my entire career, the cost of fuel has been a huge issue,” Gross said. “Now the fuel crisis is over,” though “you’re still going to see volatility in prices,” he said. Over time, lower fuel costs will create additional transportation activity, as transportation becomes cheaper in the scheme of things. “I think that will encourage more transportation of smaller items,” said Gross.

Low diesel costs also make it more difficult to shift freight from roads to rails. “Fuel prices are making it a little more difficult for intermodal to grow right now,” Gross said.  As a transportation service provider, McHugh said an advantage Ryder gains from lower fuel costs is “we don’t get called in by the customer as often to explain why costs are going up year-over-year.”  

Gross expects truck loadings to continue to increase, with total truck loadings rising in the 2.5 to 4 percent range year-over-year, and dry van truck loadings growing a bit more slowly. “By length of haul, loadings in the 349- to 550-mile range is growing a little bit faster than longer hauls,” he said. “At 550-miles plus growth is actually very modest in the coming year or two.”

Barring a recession, as truck loadings grow, shippers will come up against a capacity roadblock.

The for-hire trucking industry is operating at about 95 percent of its fleet capacity, compared with a 100 percent utilization rate a year ago. Slower freight demand, the suspension of parts of the hours-of-service rules that truckers said sapped productivity, and the addition of some capacity contributed to the improvement, creating a “feeling of relative abundance,” Gross said.

It won’t take much additional economic activity to consume that additional 5 percent, however, especially if new federal safety regulations requiring drivers to use electronic logs and mechanically limiting the speed of trucks hit the rulebooks as scheduled over the next two years. “We expect utilization to go back to 100 percent in 2017 or 2018,” Gross said.

That means shippers will need to make better use of all available capacity. McHugh said dedicated trucking will be an important part of their toolkit. Ryder’s dedicated transportation revenue rose 6 percent in the second quarter to $176.8 million, and other carriers, including J.B. Hunt Transport Services, reported strong demand for dedicated trucking services.

“Fleet flexibility is a big need currently, and it’s traditionally been hard to achieve with private fleets,” McHugh said. But shippers aren’t simply looking to hand privately owned fleets to dedicated operators; more often they want to build “integrated” surface transportation networks that make use of private and dedicated operations as well as for-hire trucking companies.

Blended network is a balanced network between dedicated and private and common carriage.

“A lot of companies have this model today, but it’s very static,” McHugh said. “The way it’s worked in the past is you predetermine what lanes you’re going to run with the private carrier and then what lanes you’ll give to contract carriers.” Technology is rapidly changing that blended model. “Now we can dynamically find the right balance of carriers” by load and lane.

That type of sophisticated, technology-driven solution is becoming more critical as shippers and their customers demand more detailed, responsive levels of service. “A lot of companies have migrated to a perfect order metric,” McHugh said. “They’re not just measuring order and delivery time, they’re measuring (how your performance affects) their customer’s experience.”

Contact William B. Cassidy at bill.cassidy@ihs.com and follow him on Twitter: @wbcassidy_joc