July 2018 The Roemer Report
July 2018: Red, White and BOOM!
Another American summer is off to a sizzling start and across the contiguous USA our roads are humming with travelers going on vacation and commercial freight truckers moving this great nation’s freight – and economy - to new and very prosperous places. And that means independence and liberty for everyone.
The Fireworks Started Popping Off Early
The fireworks in the U.S. trucking economy started popping off well before the Fourth—just like the ones you would sneak from your Dad’s stash in June when he wasn’t looking. It only takes a single flame to light an M-80, but for the summer of 2018 there are three hot economic sparks lighting things off with a bang: Tightening Capacity, Demand for Trucks, and our ineradicable Driver Shortage.
As the current administration’s efforts to cut taxes and deregulate business continue to skyrocket the U.S. economy like a brilliant firework filling the night sky, the President’s policies are sending disposable income and consumerism ever skyward. Just as fireworks must be handled with care, a sparking summertime economy can elevate inflation as demand increases for everything and things are clearly starting to get hotter, especially in trucking.
Somebody has to deliver the rising demand for fireworks, toys, watermelons, sunscreen and beer everybody wants for summer fun and naturally it’s the trucking industry job to bring it. Demand for the capacity to haul all this freight has driven the over-capacity margin to new lows. That means Whiiiiiiiiiiz! Up go rates and Pop! Goes that sweet rate you usually had no trouble getting two years ago to ship lawn chairs for Mom and popsicles for the kids.
Less Bang, More Buck for Shipping
It is no secret freight rates have been rising and shippers and others are reacting in different ways to the market’s recent dynamics; and it is clear temperatures are rising, prompting rate inflation, deferred or delayed shipments, and sweating how to get goods from point A to B this summer.
Manufacturers, retailers and other producers are looking for new ways to beat the heat, seeking alternative strategies to keep rising shipping costs contained and assure that whatever needs to be shipped and delivered gets there when its needed and expected.
Citing companies like Hormel, Dollar General, The Wall Street Journal reported June 17 that the squeeze is making it tougher to book fleet capacity. According to the editors, demand is usually lighter this time of year but in May U.S. spending climbed 17.3% (Cass Information Index figure) compared to the same time last year.
The economic heat wave is affecting how companies are ordering their supply chains to cope, including shopping for better rates, reducing the frequency of deliveries, better coordination of inventory and production and building out their own truck fleets.
During an investor call in May, the WSJ reported Hormel Chief Executive James Snee explained to investors “We’re thinking about minimizing miles, maximizing weights, how many days a week do you need delivery,” Snee said Hormel is working with customers to reduce shipment frequency after the company’s per-unit freight costs by double digits first quarter, concluding “Our customers are very open to those discussions.”
The News and trucking industry data portal FreightWaves just published the Logistic Manager’s Index (LMI) and the numbers reveal just how severe the weather might get this summer. Six times per year, researchers from Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University, and the University of Nevada, Reno join the Council of Supply Chain Management Professionals (CSCMP) to crunch the data they collect from professionals in the logistics industry. Their mission? “Identifying trends and developments in the logistics industry over time.”
According to the March-April 2018 LMI, transportation capacity has decreased somewhat with the trend, say researchers, predicted to continue in the next 12 months. At 30.1%, the data point is the lowest level registered so far on the index. “It would appear that transportation industry is still struggling to keep up with demand and excess capacity is still historically low,” according to researchers. Transportation utilization is at 75.5% which is “the second highest rating ever recorded” on the LMI. The transportation prices index, which is currently at 95.8%, “constitutes a very strong upward trend in transportation prices.”
Logistic Manager’s Index researchers offered this assessment: “The dramatic contraction in transportation capacity, combined with the steep, continuing growth in transportation prices indicates that demand is high and the industry is healthy. The increase in inventory levels and warehousing price are further evidence that the demand for available logistics capacity remains high, while available supply seemingly struggles.”
New Trucks, New Capacity
As mentioned, those who need freight shipped, and those who ship freight for a living are expanding their own capacity to do so and buying trucks to meet rising demand. Trucks.com’s headline “Heavy-Duty Truck Orders Hit Highest Level since 2006,” topped their recent coverage of economic boom hitting the trucking industry and truck manufacturers. Orders for Class 8 trucks where the highest for any quarter according to industry research firm FTR Transportation Intelligence, reaching some 134,000 units for the first quarter.
In a recent report to investors, research analysts at Stifel Financial Corp., find the improving economy, combined with changes to tax law that encourage investment by business owners has contributed to the strong truck order growth. Class 8 orders exceeded 40,000 trucks for the third straight month, and trucking consulting firm ACT Research estimated orders of 136,307 Class 8 trucks were taken in the first quarter, a 98.6% increase compared with the same period a year earlier. That figure, says ACT, is just below the record first quarter of 2006, when carriers ordered 140,742 Class 8 trucks.
Motor carriers are placing larger orders too so they can lock down truck maker’s manufacturing capacity said Don Ake, vice president of commercial vehicles of FTR. “Fleets need more trucks to handle huge freight demand and continue to order trucks at record-setting rates.” The immediate effect of this rising demand for vehicles and new fleet capacity is its effect on pricing. As early as April, industry press were noting demand was increasing the price of used trucks—the outcome of a tightening supply of affordable new vehicles.
Driving Home from the Picnic?
There is a driver shortage and everybody knows it. With demand for freight and transportation capacity likely to rise, there’s big spread to take care of and along with it all those new trucks to haul it, the question still remains who’s going to be driving home from the picnic?
Truck fleets operators and others are stepping up their efforts to attract, recruit and retain drivers and are taking a fresh look at all the things that may be keeping drivers away from the profession. For the past 45 years the Roemer Report has reported this extensively and while there may not be a “King” reason, low pay, long hours, harsh, dangerous working environments and driver exploitation tactics have all conspired to send new drivers fleeing the industry after one year. Last December Trucks.com reported turnover rates as high as 95% at some fleets.
It’s no picnic for truck drivers still, but fleet owners and operators, industry groups including truck manufacturers are starting to understand that to attract and keep drivers they have got to put out a better spread. In March the American Trucking Associations metrics show annual truck-driver salaries rose between 15% and 18% from 2013 to 2017, with growth varying based on the type of fleet and the nature of the routes.
In the WSJ Logistics Report quoting ATA stats, Greg Eddy, president of Venture Logistics in Indianapolis, said his fleet is working to reduce driver turnover after more drivers started jumping ship in search of higher pay. He said his company employs about 80% of its drivers full-time, still faces about 75% turnover and drivers are commanding higher guaranteed weekly pay. Eddy said Venture offers “pretty juicy,” benefits, including life insurance, a retirement plan with employer matching, a driver concierge service and other incentives. Eddy explained the bottom line: “Everything that we can do to make that driver’s life and life on the road easier, we try to do it.”
Independence and Liberty for All
Although tightening capacity and rising costs (including fuel, and equipment prices responding to demand) are all challenging, and will continue to fuel inflation in the sector and economy in general. Perhaps it’s the good kind, especially since the economy has been flat and flaccid for so long. What’s good inflation? Driver wages getting stronger by the minute; that’s what.
The heat of Trump’s rising summer economy is appearing to be doing great things for drivers and correcting a badly skewed balance that used to favor unscrupulous operators, shady shadow shippers, and fly-by-night freight brokers while leaving drivers and their families behind. A better economy means more independence and liberty for all Americans; which everyone knows is led by the trucking industry. Will all the spilled pop, skinned knees and sunburn wind up in the industry’s rear-view mirror after summer is gone? Perhaps, but for now it’s a RED, WHITE and BOOM summer for trucking. Light it up!
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