Rate increases, shrinking capacity and expected strong holiday sales project continued strength
Spot rates continue to climb and capacity continues to shrink, and now experts are predicting a strong holiday retail season. Could the good news for carriers get any better?
DAT reported that spot rates rose once again last week, with van rates climbing another 3 cents to $1.97 per mile. Flatbed rates were up 2 cents to $2.27 per mile and refrigerated rates inched up a penny to $2.23 per mile. The van load to truck ratio is at a seven-year high, climbing 9.5% last week and is up 120% over September 2016 at 7 loads per truck. Capacity continues to shrink, falling 3.2% for the week ending Sept. 30.
For the month of September, the van spot rate rose 18 cents.
DAT attributed the continued rate increases to supply chain disruptions due to Hurricanes Irma and Harvey along with continued economic growth and a strong harvest season.
Contract rates have begun to rise as fleets and shippers engage in negotiations for 2018, with some indication of rate jumps as much as 10% or more in some instances. The implementation of electronic logging devices in December remains a great unknown, though. C.J. Driscoll & Associates recently conducted a survey of carriers and owner-operators and found that 60% of carriers and none of 20 owner-operators surveyed had installed ELDs yet.
Chris Harlow, director of operations at ELD provider Zed Connect, told Trucks.com that perhaps as many as one million trucks are still not equipped with the devices just three months before the deadline. Speculation is that a certain percentage of the industry – mostly small carriers and owner-operators – may choose to leave the industry instead of installing the devices. Combined with trucks running legally, that could pull 10% or more of the capacity out of the industry.
There is expected to be at least a 4% productivity hit at least, but some estimates say it could be 20% in some sectors. For fleets looking for even higher rates, the good times may be just beginning.
The timing of this coincides with what is expected to be a robust holiday shopping season. According to the National Retail Federation, holiday retail sales (those made in November and December excluding autos, gas and restaurants) are expected to climb between 3.6% and 4% with overall sales totaling at least $678.75 billion.
“One thing is the strength of the economy as a whole,” NRF President and CEO Matthew Shay said. “The recent economic growth number of 3% [GDP] is very good…and not as robust as we would like to see but still very solid. It shows that the economy is expanding at a steady but modest pace. We think the economy is in a very good place. The current state of retail is also positive and strong across the board. The industry is making big investments, with brick and mortar companies spending more to improve what they do online, as well as legacy online players that are getting better at connecting with consumers in non-traditional channels, including brick and mortar locations. Our forecast reflects the steady momentum of the economy and industry expectations.”
There are other data points that continue to paint a positive picture for trucking.
“In addition to the recent activity, the outlook for continued capacity constraints as we move into 2018 is starting to make a significant impression,” Jonathan Starks, COO of FTR, wrote in a recent blog post. “Over the last year, while posted loads have more than doubled, truck availability has seen a 1/3 reduction. This has put the Market Demand Index (MDI) at record levels – surpassing the high levels seen during the winter of 2014. And this was even prior to the hurricane impacts. It has only gotten tighter from there.”
There are some data FTR tracks that are showing a mixed bag, though. Consumer confidence slipped slightly in September, according to the Conference Board’s index of consumer sentiment. It fell to 119.8 in September, down from August’s 120.4. Some of that, FTR noted, can be attributed to the hurricanes that hit Florida and Texas.
“The recent hurricanes have created some uncertainty and likely helped lower the index,” FTR’s Steve Graham wrote on the company’s blog page. “Rebuilding efforts will help offset the decline in economic activity ad help shore up confidence. Economic data in August came in weaker than expected and September’s reports also will show some impact from the storms. Generally, the rebuilding from natural disasters offsets the losses, but that could take several quarters.”
U.S. economic activity also slowed in August, falling to -0.31, down from July’s 0.03 reading, and new home sales fell in August, dropping 3.4% month-over-month and 1.2% from year ago. Pending home sales also dropped in August, down 2.6% from August 2016.
“Sales fell to an annual pace of 560,000 in August,” Graham said. “With the market starting to slacken, the median new house price also fell to $302,059, down 7.5% in August, but still up 0.5% from a year earlier. Hurricane Harvey had a hand in slowing August sales, but the sales pace likely would have [fallen] anyway. The industry appears to have slowed just as the supply is increasing. The market for existing homes is still tight.”
There are some bright moments, though, FTR pointed out. “New orders for durable goods increased 1.7% in August, a larger than expected gain and total orders are 5% higher than a year earlier. Core capital goods orders rose 0.9% excluding civilian aircraft and shipments rose 0.7%. Autos and parts orders rose 1.5%, but the road ahead for autos is soft.”
In the manufacturing sector, orders for computers and electronic products increased 0.7% and primary metals increased 1.7% and are now up 11.9% from a year ago.
Among manufacturing industries, orders were generally positive. Orders for electrical equipment lost 0.3%, but orders for computer and electronic products increased 0.7%. Orders for primary metals were up 1.7% and are up 11.9% from a year earlier. New orders for machinery advanced 11%. Also posting a gain was personal income, which rose 0.2% in August.
“Fundamentals for business investment remain solid,” Graham said. “Production of core capital goods is trending in the right direction. There are some risks as the lack of action in Washington to pass any legislation related to stimulus and lower taxes for businesses could undermine confidence and affect investment decisions.”
The Institute for Supply Management issued its set of readings with its PMI, which measures manufacturing, increased to 60.8, rising 2% over August. It is the 13th straight month of growth. The group also reported the production climbed 1.2% in August and new orders, which drive manufacturing, increased 4.3%.
Of course, last week the Trump administration and Republican leaders introduced their long-awaited tax reform plan. As expected, the plan calls for a significant cut to the corporate tax rate, from 35% to 20%, and the elimination of four of the seven individual tax brackets, creating brackets of just 12%, 25% and 35%. The plan would also create a “pass-through” provision which would tax certain small businesses at a rate of 25% rather than as personal income. For workers, the plan doubles the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly. The alternative minimum tax and the estate tax would be eliminated.
While the plan was met positively by many, including the business community, Congressional leaders have noted that the framework does not provide specific tax policy so until that is written, nothing can be assured. There are also new reports that Trump officials have already signaled they are open to changing course when it comes to eliminating a deduction for state and local taxes. For businesses, there is also a framework to allow them to deduct full depreciation of new equipment.