The trucking industry is seeing the best economic climate since deregulation, according to Bob Costello, chief economist and senior vice president of the American Trucking Associations.
Speaking at the opening session of Omnitracs’ Outlook 2018 user conference in Nashville on Feb. 26, Costello said the trucking industry should face smooth sailing over the next year or two. “This is a growing environment,” he said, noting that the economy is in its third-longest expansion in history— which is on track to becoming the second-longest by springtime.
From a macroeconomic view, the two key drivers are productivity and population growth, he said, with those two indicators suggesting GDP growth of about 2.3%. Instead, the economy is chugging along at 2.7% growth and should remain there for the next couple of years. Part of what is boosting GDP growth can be attributed to the new tax law, he said, but other factors are also playing a role.
Even higher interest rates don’t bother him, Costello said, noting that the Federal Reserve was expected to increase rates 4 times this year. Interest rates have been very low and the increases are just “normalizing interest rates. I believe a higher interest rate can add to the economy in the near term.” Banks will be more likely to make loans if they can get better returns.
Costello pointed out three “big buckets” and one smaller one that he said drive freight growth: consumer spending, construction, factory output, and inventory levels (the half bucket). And for the first time during this expansion, all three of the big buckets are doing well at the same time.
From the consumer perspective, the economy has created over two million jobs a year for six consecutive years. That puts us very close to full employment, which makes it harder for companies to find workers. That, in turn, leads to wage and salary increases. He estimates wages and salaries will grow by 3% this year. Higher wages lead to more spending. “For most households, the extra money that comes in the door, goes right back out” in spending, he said. As a result, Costello expects personal consumption to grow 4.6% this year and 2.5% in 2019.
But even though “we are spending more money, we are not spending it in the same places,” because of the increasing role of online sales, which have grown 246% since 2000 as opposed to 78% growth seen in traditional brick-and-mortar stores. As a percentage of traditional sales, online sales are now 16%. All of that has ramification for the supply chain, he said.
Construction Activity and Factory Output
The second bucket of freight, construction is also going well. He estimated there could be 1.3 million new homes built in 2018 and 1.4 million in 2019. There were 1.2 million new homes in 2017. All of that leads to more trucking.
The third big bucket, factory output, was up 1.7% in 2017 and will go up about 3% in 2018 and 2019, he said. “Because the economy has improved, businesses are reinvesting their capital. If you are an LTL carrier this is good.” Over the longer term, “I’m bullish on not only U.S. factory output, but North American output,” he said. And even though U.S. factories can’t compete with factories in China, India, or elsewhere on wages, “where we can compete is in productivity.”
Increased automation increases productivity. On the other hand, automation does have implications for the broader economy – more machines doing the work means fewer people are needed. “But at the end of the day, productivity has improved which will generate a lot of freight,” he said.
The Role of Inventory-to-Sales Ratios
As for the half-bucket, the inventory-to-sales ratios are also looking good, Costello said. When that ratio rises, trucking slows; when it drops, trucking improves. But if it falls too far, there is a capacity crunch and suppliers have trouble keeping shelves stocked.
But the optimum level for inventory/sales ratio has moved up a bit due primarily to e-commerce. Customers expect to get their online orders within a couple of days, therefore retailers are holding more inventory because they have more distribution centers around the country. But even with the higher inventories, they are cycling through time more quickly.
“We’ve come to a point where inventories are no longer a drag on trucking movements,” he said. Online sales require more inventory and the supply chain doesn’t want to get too lean. “Don’t underestimate the importance of this to why freight volumes are good right now.”
Threats Posed by War in Korea and Ditching NAFTA
And while “we’ve not had it so good” in some time, it could derail. “What could de-rail it? Some policy choices could,” he said, such as going to war with North Korea or pulling out of NAFTA.
“NAFTA is critical to trucking,” Costello said. NAFTA trade via truck supports over 46,000 jobs in the industry, including 31,000 truck drivers. “If NAFTA goes away, you will eliminate 31,000 truck driving jobs and lose over $6 billion to the industry.”
Costello argued it is not NAFTA that has impacted U.S. jobs, but rather China. He pointed out figures that show that from 1994, when NAFTA was signed, until 2000, U.S. factory employment increased by about 500,000 jobs. In 2000, China joined the World Trade Organization. That combined with increased automation costs 3.9 million jobs between 2000 and 2007.
Costello acknowledged NAFTA needed to be renegotiated – a lot has changed since 1994. “But,” he stated, “we can’t do away with it.”
Effect of the Changing Supply Chain
As for trucking and its segments, the growth rate in truckload was 2.9% in 2017 after growing at .1% in 2016. Between 2000 and 2014, it averaged 2.6%. On the other hand, total miles are down – more loads but less miles. The average haul is now around 527 miles and most fleets struggle to get 100,000 miles per tractor now. Some of that is due to the changing supply chain from e-commerce with more distribution centers.
LTL tonnage is also trending up, growth rate was 1.5% in 2017. Rates are also trending up, especially in the spot market. Contract rates have grown at a more modest, but steady rate.
Driver turnover is still a problem with truckload carriers, at 95% in 2017. Turnover in LTL remains steady at about 8-11% since 2009. He said that at current trends, the industry could end up short 174,000 drivers in coming years.
All in all, as Costello presented it, trucking has it well.