Truck Tonnage Indices Up, But Caution Signs Abound

Freight activity was up in the U.S. during September but transportation industry watchers are keeping an eye on driver shortages, capacity issues and the relative health of the U.S. labor market.

The American Trucking Associations’ Truck Tonnage Index was up 1.4% in September compared to August, and “surged” 8.4% compared to September 2012. Year-to-date, the tonnage index is up 5.4% compared to the 2012 period.

“I continue to be pleasantly surprised on the strength of truck tonnage,” ATA Chief Economist Bob Costello said in the tonnage report. “I attribute a part of tonnage’s robustness to the sectors of the economy that are growing fastest, like housing construction, auto production, and energy output. These industries produce heavier than average freight, which leads to faster growth in tonnage versus a load or shipment measure.”

Costello said the more than two-week federal shutdown will result in an industry “headwind” in the fourth quarter. However, he thinks ongoing freight activity reflects a better-than-estimated economy.

“While tonnage is likely running ahead of overall economic growth, perhaps the economy is stronger than many believe. The index has now increased in four of the last five months and the year-over-year growth rate has accelerated. Plus, other measures of truck freight volumes, while increasing at a slower pace than tonnage, have also accelerated in recent months,” he said.

Trucking serves as a barometer of the U.S. economy, representing 67% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods, according to the ATA. Trucks hauled 9.2 billion tons of freight in 2011. Motor carriers collected $603.9 billion, or 80.9% of total revenue earned by all transport modes.

The Cass Freight Index reported that freight shipment volume increased 1.7% in August and 2.7% in September. However, 2013 shipments are still 3.7% below September 2011 volumes. Also, the shipment and expenditure levels have been mixed.

“The third quarter of 2013 saw the greatest year‐over‐year growth in expenditures, at 4.1%, compared to a drop of 0.8% in the second quarter and a 0.7% rise in the first quarter,” according to Rosalyn Wilson, a supply chain expert and senior business analyst with Vienna, Va.-based Delcan Corp., who provides economic analysis for the Cass Freight Index. “As for shipment volumes, the third quarter was the worst this year with a decline of 1.1%, following a 1% decline in the second quarter and a 0.8% rise in the first quarter. The first quarter is the only quarter with positive growth for both indicators.”

Cass uses data from $22 billion in annual freight transactions processed by its information processing division to create the Index. The data comes from a Cass client base of 350 large shippers.

DRIVER SHORTAGES
In addition to inconsistent economic growth, the trucking industry also faces a driver shortage.

Costello said fleets are adjusting to continued tightness in the driver market by increasing pay and hiring newer drivers.

“While the driver shortage is generally confined to only certain segments of the trucking industry, it is having real impacts in how fleets recruit and retain their drivers,” he explained, during a recent panel discussion that included Jeff Flackler, vice president of transportation for Wal-Mart Stores Inc.

According to ATA figures, the trucking industry needs to find an average of roughly 96,000 new drivers annually to keep pace with demand. If freight demand grows as projected, the driver shortage could balloon to nearly 240,000 drivers by 2022.

“Fleets in all segments of trucking have told us they are having a more difficult time finding qualified drivers than they were a year ago,” Costello said. “As a result, more fleets are considering hiring drivers straight out of driver training programs and nearly three-quarters of those we surveyed plan to increase pay or have already done so.”

CAPACITY ISSUES
If the growth in freight demand reaches projections, shippers may have a hard time finding enough trucks to meet their shipping needs.

“At the moment, fleets are expanding slowly,” Costello said, “which means that once we see more consistent, accelerated economic growth – think 2.75% or 3% increases in GDP on a regular basis – it will eventually cause very tight capacity.”

Wilson, with the Cass Freight Index, also has predicted a capacity problem.

“The trucking industry is still in a precarious balance, with over 95% capacity utilization and an abundance of regulatory and cost pressures that indicate a looming capacity problem. The tricky part is forecasting when it will occur. The economy is growing slowly enough that the tipping point remains just on the horizon,” Wilson noted.

This potential shortage of capacity – too few trucks and trailers compared to shipment demand – could result in higher rates and more revenue for trucking companies, according to Costello.

“While we do see tightening capacity going forward, until we get to those consistent levels of growth, margins will be under pressure because the costs of fuel, driver recruitment and retention and equipment will rise faster than freight rates,” he said. “However, once capacity does tighten, carriers will see improvement on the bottom line.”

Brad Delco, a transportation industry analyst with Little Rock-based Stephens Inc., said the capacity issue will emerge when economic conditions become more robust.

“Once we see an acceleration in economic activity we are set up to see capacity tighten in the truckload industry. The current environment has been challenged with carriers experiencing a tremendous amount of inflationary cost pressures that are not being adequately compensated with rate increases. This indicates to us that supply/demand equation is fairly balanced at the moment, and until shippers feel the capacity crunch and (are) willing to pay up for capacity, margins should continue to see some pressure.”

LABOR MARKET
A more robust economy is not a certainty, according to Wilson, who says the U.S. unemployment rate is not a good indicator of the national jobs picture.

“The Bureau of Labor Statistics has reported that the unemployment rate has indeed been falling, but for the wrong reason. The number of workers who have exited the job market is growing and the labor participation rate has fallen to 63.2 percent, the lowest since 1978. This means that the unemployment rate is dropping without creating an overall growth in the level of employment,” Wilson explained.

Wilson also noted in the Cass report that The Gallup payroll‐to‐population ratio (P2P) – a measure of the percentage of the total adult population that is employed full time – fell from 43.7% in August to 43.5% in September and is down more than one full percentage point from this time last year.

Wilson’s fourth quarter outlook is not positive.

“Looking globally, the growth in imports and exports slowed in the first two quarters of 2013, after substantial expansion since the recession. China’s new orders and order backlog are still flat for goods manufactured for export, indicating that the U.S. has not been ordering goods in any great quantity. Retail, wholesale and manufacturing inventories are at high levels and not moving rapidly. The conclusion? Expect slower growth for the fourth quarter.”