Truckload carriers have been watching the data for months wondering when the capacity shortage is going to come, always disappointed that any shortage was short-lived and was not translating into contractual rate increases.
The spot market has been on fire for months, indicating that demand is outstripping capacity in the truckload market. The larger asset carriers had not been finding any real traction with rate increases on intra-bid commitments, but this changed in mid-August as some larger carriers started to see signs that contract rate increases were imminent.
One large national carrier we spoke with suggested that 3% rate increases are a lay-up and any customer that did not agree to at least this would find themselves paying more later, as much as 8-10%. In fairness, the larger guys have a lot more leverage than the small fleets, but they tend to be the ones to lead the market and if they are seeing rate increases hold, then the rest of the market should as well.
Add Harvey into the mix and everything just got crazy. The mother of all capacity shortages is upon us and carriers will be in the lead on pricing for the next 24 months. How can we be so sure?
First off, capacity is already tight. The spot-market has already recovered and is starting to show real sustainable rate increases. Spot data from every spot index provider is showing large increases year-over-year. Morgan Stanley’s survey of carriers was showing super positive sentiment from the carriers that were interviewed.
The labor market is super tight. The major sectors of employment that tend to pull from the driver force are already at full employment. Construction demand is super-high across the market, the oil sector is relatively healthy and coming back, and the overall economy is on solid ground. Add to this an aging driver population and an administration that has been cracking down on immigration and what we are left with is a tight labor pool.
The resupplying and rebuilding of South Texas will make any Keynesian economist blush with the level of spending that will take place. Texas is a rich state with vast resources. The area that Harvey hit was a very important part of the state and national economy, with large concentration of petro-chemical companies.
Short-term, the focus will be on relief. Many homes and businesses were completely ruined. According to Moody Analytics, the damage is estimated to be $50-100B, including $30-40B in property damage alone. Add another $10B per week in lost retail sales and taxes for every week that retailers are closed, and you have a massive economic loss coming to the area. The Feds and State of Texas will most certainly foot the bill for a portion of this and insurance will come in as well with fresh dollars. Also, expect the large companies in the area to play a big role (good news for Houston and South Texas is the sheer number of oil companies in the area that are known to write big checks for projects).
One big box retailer we spoke with mentioned they have over 150 plus stores that are currently closed or approximately 5% of their national footprint. Many of these stores are without power and many are flooded, which means their stock is completely ruined. First, they will be scrambling to get the stores cleaned up and then focus on rebuilding them. Next, will come the replenishment and restocking (assuming there isn't a chance to remodel the stores while rebuilding them). This will mean a massive amount of truckloads. Keep in mind that 150 stores is only one retailer. In total, there are thousands of stores that are currently off line and will need repair and replenishment.
These companies will place a significant amount of pressure on state and federal officials to rebuild quickly. Any student of government spending can tell you that quick spending is over-spending, which will mean that Texas will come back with much better and more expensive infrastructure. Plus, when does Texas ever do anything small?
Add to it a president that likes to build the greatest and biggest things around (without being concerned about what it costs) and you will have gold plated outcomes in Texas.
With all of this comes additional truckload demand - and not the kind of freight that comes from Amazon. We are talking about massive orders - the kind that it takes to rebuild an entire city. Then add a tight labor pool and you get super-large capacity shortages (04/05 type shortages).
Construction employment has an inverted correlation to trucking employment, meaning that when construction spending is high, people choose those jobs over driving trucks. Add to it that these will be higher paying and very attractive jobs and you will have competition for labor.
Slate Magazine argued that the U.S. might not have enough construction workers to rebuild Houston after Harvey and it will require both the government and private individuals to pay higher than market wages to get workers. This will hurt trucking efforts to retain and recruit new drivers into the industry.
The fact is that the labor market is already super-tight, experiencing a record 82 months of job growth and at full employment. Government relief and infrastructure jobs already pay top dollar, so this will be an attractive place for many drivers to exit the industry. Plus, during Katrina, over 100,000 immigrants were used, many of them undocumented. Considering how hard the administration has been on undocumented workers - the labor is unlikely to come from that pool to the degree it did in prior disasters.
So where does this leave us?
In the short-term, spot rates will remain super high. Some fleets reported getting as much as a $1,000/day for relief capacity and more from shippers to haul their freight. In the medium and long-term, Harvey replenishment and rebuilding freight will be competing against e-commerce capacity, retail holiday capacity, and into next year's ELD mandate.