February 2018

Freight Space Tight, Rates Headed North

As 2017 ended and as we reported last month, a significant trend emerged that could have a significant impact on the trucking industry in 2018. We say could because there are a number of uncertainties in play.

The trend involves truckload capacity remaining tight and rates inching up. The uncertainties are connected to the ELD mandate, the economy and tax reform.

So, what to believe and what does it all mean?

Let’s take a look at Truckstop.com’s Market Demand Index, which measures how many trucks are available versus how many loads there are on the spot market. Coming off a down 2016 and first quarter of 2017, the index spiked in the 2nd quarter of last year. Not surprisingly, another spike occurred after hurricanes Harvey and Irma and at the end of the year. Then came 2018: During the first week of the new year the index hit record highs.

pull out quote 2.jpg

Rates up, too. For now.

Freight rates showed a similar pattern. Up most of 2017 and remaining elevated the first month of this year. Analysts predict a slight drop as the year progresses but the spot market is expected to remain vibrant.

“I think there’s perhaps no more striking indicator of what’s happening in trucking than what’s happening in rates," Avery Vise, FTR's new vice president of trucking research, told Heavy Duty Trucking [HDT] "The spot market began to turn about a year ago and has soared since."

As is typical, contract rates began to move higher as well, but on a delayed basis.

"A robust spot market will continue to translate into higher contract rates as carriers and shippers adjust to a new normal," he said.

FTR projects that spot market rates will continue to grow throughout 2018 but not as fast as last year. Likewise, contract rates should accelerate through 2018 before tapering off.

Why the tapering off or even dropping? According to Vise: “The expectation of modest capacity gains and carrier hesitation to press too hard on rates for too long [reinforces the idea that] markets typically cannot sustain pricing gains indefinitely."

Additionally, the FTR research analyst says that when you study loadings in the over-the-road market, there will be a moderation going forward, especially when you look at data from previous years.

“There will be some adjustments as shippers move to alternative shipping methods,” he said.

pull out quote 1.jpg

Truck capacity filled

As Vise says: “It is almost by definition not sustainable, because market forces take over.”

As a result, fleets are ordering more trucks while significant bonuses and pay raises are in place to attract more drivers.

The economy, of course, is a key factor in this development. If it remains as strong or stronger than 2017, operating conditions could change for a significant period of time. If that’s the case, will the industry be able to build excess capacity or will things stay tight throughout 2018?

One concern, of course, is the cost of the new equipment, bonuses and higher wages and the impact it will have on profits. But offsetting these expenses is the steady, relatively low cost of diesel and expected benefits from the new tax law – at least in the short term.

pull out quote 3.jpg

ELD mandate impact

Unknown at this point is the impact the electronic logging device will have on capacity. There’s a soft enforcement period until April 1 and also a temporary waiver for agriculture haulers.

Eventually, the impact likely will be seen in reduced miles for carriers that are not complying with the mandate and also with an unknown number of owner-operators and small fleet owners possibly quitting the business. The latter is only speculation at this point as it won’t be until enforcement begins for out of service violations that will impact CSA scores that those drivers will make their decision on whether to stay or carry on.

Recommended Articles: