Shippers may have edge over truckers in current cycle
The national shortage of trained and qualified truck drivers will hurt the industry in the current freight transportation cycle, according to analysts with Morgan Stanley.
The global banking company reports that barge and rail capacity are set to see the greatest expansion in the short term.
“When freight volumes reached prior peaks, there were usually 1-2 years of additional growth before volumes started to decline, a lead indicator of recessions,” said analyst William Greene. Greene said that meant roughly a year to two years after a peak in U.S. freight cycles there would be a contraction. According to data from Bloomberg, truck drivers are at shortage levels, truck loads have increased and the price-to-shipping (excluding fuel) has remained elevated since the 2009 dip.
To make matters worse for trucking is the heavily utilized active truck population used to move freight. If truck shipments increase, trucking companies will need to put out money to train new drivers or push the legal limits of what the current drivers are able to do.
Current federal regulation makes it very difficult for drivers to earn money, according to some analysts. A driver under U.S. law is allowed a 14-hour work day limit and an 11-hour daily driving limit, according to the Federal Motor Carrier Safety Administration.
Should a driver be forced to wait to unload/load at a yard, that wait time eats into hours and leads to further delays in deliveries, which is not optimal for outlets shipping goods. This means instead of making new hires, some companies will more likely push the limits of existing drivers already on the books. This could result in more tired drivers and non-compliance with FMCSA safety rules.
Michael Zimm, a trucking industry analyst with GE Capital, sees the trucking landscape in a more positive light.
Zimm says profit tailwinds, strengthening freight trends, pricing leverage due to tight capacity and declining diesel prices are helping to keep trucking in a strong position in freight negotiations with shippers.
“Additionally, GE economists remain optimistic that the domestic economy will continue to gradually improve and expect real U.S. GDP growth to accelerate from 2.1% in 2014 to 2.6% in 2015,” he added.
Zimm did acknowledge that the industry has its challenges as well.
“Historically high driver turnover, hours of service and other regulatory related operating inefficiencies, driver shortages plus upward pressure on driver wages are likely to remain headwinds for the industry,” he said, pointing out that LTL carrier Con-way is planning to spend $60 million in 2015 to boost driver wages and benefits.
Still, the economic metrics seem to be aligning to the benefit of the U.S. freight transportation industry, based on what GE Capital is seeing. Here are some leading indicators, according to GE Capital.
- Retail Sales and Food Services continue to rebound strongly from a January low. Year-to-date through September, retail sales increased 3.8% from the same timeframe a year ago yet remained below the 4.4% growth during all of 2013. Nonetheless, looking at the six months through September alone, retail sales were up 4.5% compared to the same timeframe a year earlier.
- The Cass Freight Implied Rate Index rebounded in September and is just shy of the cyclical peak reached in December. While freight shipment declined 1.4% in September from August, total expenditures incurred to ship those volumes increased nearly 1%.
- Looking ahead, Zimm said the upward trend in the rate environment could begin to moderate as upward pressure from labor costs and pricing leverage from tight capacity are somewhat offset by a reduction in fuel surcharges.
- The Purchasing Managers Index (PMI), which is a measure of near-term business conditions in the U.S., has rebounded strongly since a sharp drop in January. The September PMI of 56.6 was down compared to a multi-year high in August but still well above the 12-month low of 51.3 in January and went up again in October. “Those trends include pent-up demand amongst small and medium fleets, superior new truck fuel economy, improved economic activity in key freight sectors, and most importantly, rising freight rates and fleet profitability,” said Kenny Vieth, ACT’s president and senior analyst.