Truck fleets should benefit from rate, volume increases in 2017

Posted by Brian Straight.
As the economy continues to improve, freight volumes are expected to improve and possibly drive up rates.

As the economy continues to improve, freight volumes are expected to improve and possibly drive up rates.

As 2017 began, the country welcomed a new president amid a sea of uncertainty. For the trucking and shipping industry, that uncertainty followed on the heels of a 2016 that had not turned out as rosy as anticipated.

But, finally some good news. After a year in which truck manufacturers announced rounds of layoffs due to falling vehicle demand, Volvo Trucks rescinded 500 layoffs at its main truck manufacturing plant in Dublin, VA.

Source: Stifel Transportation & Logistics Equity Research

Source: Stifel Transportation & Logistics Equity Research

Perhaps that was foreshadowing more good news this week, which came from the U.S. Commerce Department announcing a 0.5% advance in consumption in December, the highest growth in three months, according to Bloomberg. Consumption makes up about 70% of the U.S. economy.

Incomes were also up, rising 0.3%, although Bloomberg reported that was less than expected. The auto industry finished a record year with an estimated 17.55 million vehicles sold, according to Ward’s Automotive Group numbers. January 2017 numbers are also strong, Ward’s said, with light vehicle sales at a seasonally adjusted annual rate of 17.01 million units.

“The consumer has almost everything going for it,” Ryan Sweet, a senior economist at Moody’s Analytics Inc., wrote. “As the consumer goes, so goes our economy. We’re setting up for another decent year in 2017.”

For the trucking industry, increased consumer sales in the final few months of 2016 could be a prelude to increased capacity in 2017, as businesses drew down oversized inventories.

“In the last month or two, the ISM [Manufacturing Index] has perked up a bit,” said John Larkin, managing director, Stifel Nicolaus, during the company’s recent 2017 Rate Outlook presentation. “That is good news as it indicates the inventory glut we’ve been dealing with [is easing], so if that continues into 2017, that should be good for truckload” carriers.

Larkin also noted that consumer spending remains positive and the housing market is still strong, with 1.15 million new starts last year, although its recovery seems to have stalled.

Rates were challenging in 2016, he said, due in part to soft demand. That should be changing as restocking begins following the drawdown of inventories and more normal flows resume.

“The inventory glut was a major drag on truck freight volumes last year. That will subside in 2017,” Bob Costello, chief economist and senior vice president of the American Trucking Associations, wrote for a guest blog on software company TMW’s website. “Add it all up and the economy will grow at around 2.3% in 2017 versus 1.6% last year. While that may not seem like much, it will be a big improvement for the trucking industry forecast.”

In the last month or two, the ISM has perked up a bit. That is good news as it indicates the inventory glut we’ve been dealing with [is easing] ... that should be good for truckload.
— John Larkin, managing director, Stifel Nicolaus

The result will be rate climbs in the 1-3% range by the second half of 2017, Larkin said. He cautioned that a “laundry list of regulations” that affect the industry, if they come to pass, could create a capacity crunch in the second half.

Larkin said he still sees the electronic logging device rule, set to go into effect on Dec. 1, as happening, but plenty more such as speed limiters on commercial trucks and entry-level driver training are up in the air.

“There are some trucking-specific changes that will benefit the industry in 2017. The last year and a half was a classic industry recipe for disaster: soft freight volumes with growing capacity. Industry capacity outpaced freight growth for the last 18 months or so, which led to an overcapacity situation,” Costello wrote for TMW. “This will likely change in 2017 as new truck orders are off significantly. Favorable economic factors will benefit freight volumes, and the industry will continue to improve as truck capacity adjusts the level of volumes.”

According to Larkin, severe capacity shortages will not occur until at least 2018.

Rates for less-than-truckload carriers are also likely to rise, climbing 2% this year, Larkin said.

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Brian Straight

Brian Straight has covered the U.S. trucking and transportation community for more than 10 years, winning numerous regional and national editorial awards, including a Jesse. H. Neal Award. Prior to working on FreightWaves, Brian spent 10 years at industry trade magazine Fleet Owner, and prior to that managed daily newspaper editorial operations.