State of the State Mid-2022: Freight demand ‘still there’ but softening amid inflationary pressure

The trucking and transportation industry continues to face strong freight demand and tight capacity, but some companies have struggled with rising costs and falling demand.

Shannon Newton, president of the Arkansas Trucking Association, said industry executives have been reporting high levels of freight demand and stress to meet the demand. Newton noted these are generally good problems to have. She said the first half of the year went largely as expected with the challenges related to labor and equipment shortages continuing to be priorities the industry works to address.

“The economy has remained strong, and the demand for services is still there,” she said. “From that perspective, it has been generally good and a continuation of 2021 much like we expected.”

She said one surprise that’s been a headwind is the rise in fuel prices, up about 50% since the start of the year, particularly on-road diesel. According to the U.S. Energy Information Administration, the U.S. average for a gallon of diesel rose by 57% from $3.61 on Jan. 3 to $5.67 on July 4. This has been a “pain point” for all the organization’s members, but some have managed it better than others based on fleet size, negotiating ability and fuel-surcharge contracts, she said. Whether margins have been affected significantly, she said it’s impacted cash flow for all fleets.

Another challenge is that supply chain issues have affected the industry’s ability to add capacity and maintain equipment because parts have not been available, said Newton, adding that the industry is absorbing inflationary costs, including rising fuel, labor and equipment expenses.

An example of the lengths that carriers will go for capacity is a long-term agreement between Lowell-based J.B. Hunt Transport Services Inc. and ocean carrier Swire Shipping Pte. Ltd. The multi-vessel agreement will provide ocean transportation for J.B. Hunt’s new intermodal containers and cargo shipping opportunities for customers from ports in China to the West Coast.

Also, Newton said the U.S. Supreme Court declining to hear a case on California legislation that affects owner-operators or independent contractors has led to uncertainty on how it might impact the industry. She said the law essentially eliminates the owner-operator business model, and owner-operators are an important part of the supply chain and significant for Arkansas-based carriers in handling the ebbs and flows of contract business.

SPOT MARKET WOES
According to Kevin Williamson, CEO of Chicago-based RJW Logistics Group, companies that rely more on the spot market, as opposed to contract freight, have been struggling. RJW, which has a Bentonville office, provides transportation and warehousing for consumer packaged goods companies. He said after the first quarter, freight and consumer demand fell. This followed a decline in supply amid COVID-related shutdowns in China.

“Capacity has loosened up and continues to be available,” he said. “We’ve seen in the market some of the trucking companies starting to go out of business where they might be over-leveraged with debt trying to afford the inflationary pressures on the equipment that they were purchasing.”

Retailer inventories spiked, stimulus money ran out and inflation accelerated amid cost increases the supply chain faced in 2021 and now are reflected on store shelves, he said. Also, the Federal Reserve Board has raised interest rates, trying to curb inflation that’s at the highest level in 40 years.

Williamson said Americans are spending an additional $400 to $500 a month on fuel they’d otherwise be using to buy goods.

“We’re headed into a recessionary period, with the interest rates and gas prices and inflationary pressures,” he said. “We could see a small recession coming.”

He expects more trucking companies likely would go out of business by the end of this year if they aren’t prepared for a recession. He also expects more warehouse labor to become available, a reversal from last year when it was tight.

FREIGHT MODERATION
Andy Balthrop, research associate in the Supply Chain Management Research Center at the Sam M. Walton College of Business at the University of Arkansas, said the transportation industry is coming off some record years, and demand is starting to soften. But he said he doesn’t expect a freight recession.

“Given 2021 was a record year, 2022 will probably just be a good year,” he said.

A leading economic indicator is manufacturing output, which softened in the first quarter, said Balthrop, and this points to the softening in demand. Donnie Williams Jr., executive director of the Supply Chain Management Research Center, said companies are expecting a slowdown but continue to experience strong demand. He said a lot of goods continue to come into ports, and this supports continued freight demand.

Balthrop said an unknown is how macro-economic policymakers will react to higher inflation. Still, the industry has remained strong through the Fed’s previous measures, said Williams, adding that as long as consumers continue to buy durable goods, transportation demand will remain strong.

“While the costs have escalated, those costs are going to be passed down or absorbed within the supply chain or with the consumer,” he said.

Something Williams said he’s watching is negotiations with longshoremen at the West Coast ports and whether this leads to a labor strike. He said a previous strike caused ripple effects across the industry, and another would likely affect transportation across the country. Companies are preparing for a possible strike at the ports of Long Beach and Los Angeles where most goods come to the United States from China and Asia.

Balthrop said U.S. ports are not as efficient as they should be, and automation factors into this. The average time a vessel spends at port is longer compared to others, including China.

“There’s a lot of pressure by ocean carriers to improve port efficiency, and automation is a part of that,” he said. “The unions perceive that as coming at the expense of union jobs, replacing a job that’s done by a person and instead doing it by a machine.”

Editor’s note: Link here to connect to the State of the State section.