State of the State Mid-Year 2023: Transportation industry manages soft demand, uncertainty

Editor’s note: The State of the State series provides reports twice a year on Arkansas’ key economic sectors. The series publishes stories to begin a year and stories in July/August to provide a broad mid-year update on the state’s economy. Link here for the State of the State page and previous stories.

The trucking/transportation and logistics industry faces uncertainty in freight demand, including when it will begin to recover.

Shannon Newton, president of the Arkansas Trucking Association, has seen multiple economic cycles in her past two decades in the industry and offered an optimistic outlook. She’s hopeful the past includes the worst of inflation and consumers right-sizing spending. Still, she doesn’t expect a robust recovery.

“We’re going to toddler-walk out of it…in the way we’ve kind of walked into it,” she said. “We’re upright. We’re just a little unsteady in our steps. The industry as a whole has fared – [in] what is certainly economic uncertainty – fairly well,” added Newton, noting inexplicable demand and high costs. “Most of the members I’m talking with are weathering the uncertainty and trying to find ways…to maintain their talent, watch their costs, and wait until the economy becomes more stable and inflation subsides.”

Newton cited the following expenses and how much they’ve increased in five years: driver wages, 21%; equipment costs, 25%; repairs and maintenance, 15%; and tires, 18%.

“That’s a lot of headwinds in a soft market,” she said. “We can’t forgo equipment or forgo employees…We’ve got to run our operation, so how do we protect any sort of margin in a soft environment where pricing is not particularly strong?”

Another challenge is California looking to require all vehicles to be battery- or hydrogen fuel cell-electric by 2035. If required, she said other states may look to implement this. Newton noted the concern is more immediate for larger carriers because their networks don’t allow them to cease shipments in some states.

“You can’t just stop at the state line,” she said. “Forty percent of the nation’s imports flow through three ports in California.”

Industry highlights this year comprise the May opening of the 84-space truck parking area in West Memphis and the positive attention policymakers and educators have given to workforce education during the legislative session. She also highlighted that legislators referred to voters an amendment proposal to allow lottery proceeds to be used for scholarships for technical and vocational training.

Kevin Williamson, CEO of Chicago-based RJW Logistics Group, expects the truckload market to remain soft this year. RJW provides transportation and warehousing services for consumer packaged goods (CPG) companies. In the first half of 2023, the market continued to decline and hasn’t recovered, said Williamson, adding that from June and into July, there’s been no uptick.

By the end of the year, he expects more trucking companies to go out of business. In the less-than-truckload sector, volumes at some carriers have started to rise as Yellow faces bankruptcy and shippers shift their freight to other carriers. He said the market should be able to absorb the loss of the $5 billion carrier, but less-than-truckload pricing is likely to rise. He also expects parcel pricing to increase as carriers pass costs on to customers, even with UPS avoiding a strike. He said the increases won’t reflect a market recovery.

“We measure a lot of things within CPG being that we’re in that business, and across the board, we’ve seen branded items have a pretty significant fall off in demand and then private label continuing to increase,” he said. “At least our fill rates as we look at it, CPGs have recovered and are fulfilling items in full for the most part.”

Its supplier customers have caught up on their inventory and are slowly reducing inventory levels after demand fell in the second quarter of 2022.

“They’re somewhat right-sizing that, but all the feedback and all the data we’re looking at, CPG demand is absolutely down in retail at the consumer level,” said Williamson, who’s tracking data since 2017 on items flowing into retailers. “There’s definitely a softening of the demand for those goods, which is slowing down the demand of trucking for raw materials, ingredients and finished goods.”

He looks to the second quarter of 2024 for a market recovery. Williamson said the summer produce season didn’t increase demand, and he expects the holiday shipping season to be weak. But if demand were to rise, he said the industry can handle it.

“I believe consumer demand is going to be pretty low during Christmas and the holidays, which will reflect the demand for transportation,” he said. “Through the end of the year, I expect it may have a false uptick due to the holiday but not much.”