May 2018

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Trucking’s Rising Tides and the Bumpy Road to Growth Town

With the President's deregulation and tax agenda rising the tide, several of the U.S. economy’s bigger boats have been getting a pretty big lift including trucking. As of the end of April it looks like the nation’s economy is maintaining a pretty good head of steam even though spring is late this year. Back in March, the Bureau of Labor Statistics reported that total non-farm employment added 313,000 jobs in February, the largest job gain since 2016. The kicker though was in the trucking sector which gained some 5,600 jobs, a significant number, and one marking the fastest growth the industry since 2015.

To many in trucking, that news sounded Great and the broadcast media, for the first time in a long time, began covering the trucking industry’s role in sustaining our country’s economic growth and its importance as a jobs driver. For once, issues like driver pay, safety and turnover were front and center. Other issues facing fleets and owner operators are also getting more sober coverage—new regulatory mandates and relying on a crumbling infrastructure for example—in sharp contrast to the drumbeat of negative media drivers and the industry is often subject to. The industry’s building some real momentum, but is it sustainable?

With HQ in Toledo, Ohio, Roemer Report caught up with President and CEO of the Ohio Trucking Association, Thomas A. Balzer to get OTA’s read on the industry’s potential. Balzer says he thinks the trucking economy has real legs and is extremely upbeat about the prospects and opportunities for truckers and fleets in the coming decade. “As the economy continues to expand and we see it shift more toward e-commerce, it is changing the supply chain in very dynamic and positive ways.”

“The trucking industry will be,” intones Balzer, describing trucking’s key role in delivering the country’s economy, “as it always has been, that is, relied upon to deliver consumer’s goods quickly, reliably and flexibly.” Emphasis on relied upon indeed.

Balzer points out that tougher presidential trade policy has the potential to boost the trucking economy on an industrial scale: “The steel tariffs recently announced should facilitate a rebound in U.S. steel production, thus increasing the need to move raw materials,” notes Balzer, no doubt understanding that the demand for consumer goods will drive the purchase of more raw materials for the manufacture of durable goods and prompt capital spending by shippers so they can purchase enough trucks to ship it all.

Roemer Report checked in with national thought leader and ATBS CEO Todd Amen. Amen, has been opining on the economic environment of the trucking industry and its impact on independent drivers for decades. His optimism is on the rise. “For the drivers and the trucking industry,” says Amen confidently, “we’re looking at one of the best business climates in decades.”

Comparing recent history to current events, Amen explains that there is some debate as to whether or not the six-year period prior to 2014 was trucking’s last “best” decade, while he asks, “where did that economic blast of business go?” Out with loads of shovel-ready public works infrastructure outlays, no doubt. This time around, says Amen, “there is a significant difference, and the forecasts are strong for three reasons: One, the supply side (shippers available) is tight. Two, the freight economy’s prospects are ‘Super Robust’ and three, we are seeing ‘real’ economic momentum that is sustainable.”

For example, Amen says with business tax reform and the ability to claim 100% depreciation now, “People are buying!” But, he explains, “There will likely be a lag before that new capacity can become productive. Bringing this new capacity online is going to take time” and may be a limiting factor he warns.

Capacity utilization is high and that means the freight market is tight and could get even tighter. “In 2014 it was at 8.6 %, today it is down to 4%, its going to take a ton of new capacity to make up the difference.” He also points out that with fleets seemingly unable to hire drivers at a rate higher than attrition and in the face of ELD mandates and so forth, it’s going to take time, “as much as three years,” Amen expects, “to put new, needed capacity on the road.”

The near-term shake out? Things are going to get tighter and there is going to be some inflation—Amen noted that in February the spot market is up, some 4% and double-digit levels are expected with annual growth ranging from 2 to 5%.

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The Bumpy Road to Growth Town

But not everything is smooth sailing out there on trucking’s high seas, and if this intermodal switch in metaphors is forgivable, the road to “Growth Town” may get pretty bumpy – and for many carriers seeking to exploit the sharp uptick in demand there are some bumps - hopefully not roadblocks - in the road.. The persistent driver shortage, says OTA’s Balzer, isn't going anywhere. “If anything,” he notes, “it will continue to get worse,” pointing out that the industry is already experience a capacity shortage as a result.

Kate Patrick at SupplyChainDive.com, explains “the jump in trucking” is dramatic and “likely a direct response to the capacity crunch and high truck driver turnover rate,” which, she says companies are trying to “mitigate.”

Patrick notes that because trucking is often considered a good barometer at gauging the health of the U.S. economy, the sharp increase in trucking jobs we are seeing now is interpreted as a positive sign. “But,” and it’s a pretty big one she finds, “given the discord over the ELD mandate and driver misclassification,” she says, “even high wages and attractive benefits packages aren't enough to bring down the turnover rate, which is almost at 100%.”

That can dampen a positive interpretation of the jobs gains explains Patrick: “A jobs increase won't do much to alleviate tight capacity in the industry unless trucking companies and 3PLs can keep drivers in those jobs. Otherwise, if trucking volumes continue to climb, late shipments and delays could result.” Patrick foresees trucking growth could be nearing a ceiling “if industry decision-makers can't find a way to grow at a sustainable pace that accounts for driver tensions and capacity limits.” It seems to us she’s got that right.

But the hiring that fleets need to achieve and the uptake of new drivers throughout the entire industry required to span the gaps in capacity is going to be challenging. Overall industry tightening in the interim is unavoidable. Amen says the likely outcome is shippers will be moving from the spot market to more contracted freight to guarantee the availability of trucks and drivers to get goods and services to market.

Not to Mention Regulation

Regarding ELDs, Amen notes the “safety” effect of these devices has not yet been factored into operating expenses like insurance premiums. “Insurance is lagging,” he says, but is firming with the uptake of the devices and their incorporation into operations. ”When the ELD mandate is fully enforced, predicts Amen, “the data will help underwriters factor in the effects of compliance and perhaps offer a path to premium discounts.”

“It is smart business to be government compliant,” says Amen. But with ELDs, small carriers could be at a disadvantage if risk and liability is not apportioned in a relative sense, and potentially penalized because the volume their ELD data is not sufficient to “prove” safer operations statistically. “Small guys are always interested in innovation when it comes to safety and compliance,” says Amen, “but not at their expense.”

Although the constraints caused by the driver attraction/repulsion merry-go-round will continue, the industry is responding to capacity constraints, explains SupplyChainDive’s Patrick, by adding new trucks to the market, “so that even with a high turnover rate, capacity wouldn't be as aggravated.” The 3PLs “like UPS,” she says, “are already planning big investments--attributed to increased cash flow due to recent tax cuts--so this could be a viable solution for many companies.”

To get to Growth Town, and keep the U.S. economy buoyant, the trucking industry is going to need plenty of boats, er, trucks and plenty of drivers. Fortunately, among the positive outcomes of increased demand and a tightening of the freight capacity available, is the necessity to purchase new vehicles to meet new demand. The good news is, and pundits, analysts and ATRI studies agree, one of the things that attracts and is helping retain drivers is providing a better healthier work environment; and that includes access to state-of-the-art vehicles and safety equipment. Welcome aboard!

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