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Trucking rates are starting to plateau, but market remains strong says ATA economist

Gains in rates will moderate in coming quarters, but underlying issues of driver availability will keep market tight.

The growth in trucking freight rates is expected to decelerate, but remain elevated going into 2019. Surging truck orders aim to replace fleets as carriers seek more employee drivers rather than rely on independent contracts.

Those were the views of industry experts on a conference call hosted by Bloomberg Intelligence transportation analyst Lee Klaskow. He says truckload rates have entered a prolonged upcycle fueled by tight capacity amid GDP growth, new regulation and limited driver availability.

“The robust rate environment that truckload carriers find themselves in should provide tailwinds for revenue and earnings growth into 2020,” Klaskow said.

Klaskow says year-to-date spot rates are up 20% while contract rates are expected to rise between 8% and 12%. But rate increases “should moderate from low double digit growth this year to mid single digit growth in 2019,” he added.

“We do expect pricing power to continue into 2020,” Klaskow said.

Bob Costello, chief economist at the American Trucking Associations, says leading indicators on consumer spending, construction, and industrial activity and inventories “look pretty good for the industry right now.”

Dry van rates are up 10% this year through August, excluding fuel surcharges, a 17-month streak of increases, Costello says. “We haven’t seen dry van numbers like this for quite some time,” Costello said.

Rates did slow down in August with year-on-year growth of 2.5%. Costello says growth rates will decelerate “if nothing else because of tougher year-over-year comparisons.”

Other indicators show the trucking market plateauing. Utilization rates are down to 95% from 100% levels earlier in the year. A survey from Citigroup (NYSE: C) equity researchers shows that the number of shippers that believe U.S truckload capacity is less available went from 39% in August to 39% in September.

The industry is also dealing with shorter hauls than ever before. Costello says the average length-of-haul for dry van truckloads fell to just around 500 miles for the year-to-date period, down from an average of 800 miles in 2005.

The decreasing length-of-haul stems from gains in ecommerce and increasing shipments to and from fulfillment centers closer to the customer. Costello says the decreasing length of haul represents a “structural change” in the industry.

“Ten years ago, truckload carriers were getting 100,000 ot 125,000 miles on a truck now they struggle to get a 100,000 miles,” Costello. “This has ramification for truck buying patterns and for driver pay.”

The ATA says the industry fell short 51,000 drivers last year. But that shortage is most concentrated in the over-the-road segment, which ATA estimates has about 500,000 drivers. The current trend suggests trucking could face a driver shortfall of 175,000 drivers by 2026.

“I don’t believe that’ll happen, but if it does our industry and our economy are in for a world of hurt,” Costello said.

The number of new truck orders might suggest more capacity coming online. Costello says the number of orders for heavy duty trucks “is really really high relative to historical averages.” But he says the orders are really driven by replacement and less by fleet expansion.

“It’s not the amount of trucks that are out there it’s the people that are willing to drive those trucks,” Costello said.

As for those drivers, Costello says many carriers are switching away from independent contractors to employee drivers with the number of company tractors up 4.9% since 2017 and the number of independent contractors down 4.3% according to ATA survey data.

Costello says it’s likely independent contractors are interested in going it alone thanks to the strong spot market. But also regulatory issues such as the increasing amount of regulatory scrutiny facing trucking companies in California are also prompting more carriers to go with employee drivers.

“I know of fleets that are actively trying to convert from independent contractors to company tractors in California,” Costello said. “In some cases they are buying the independent contractor’s tractor and they will make you an employee. The legal risk in California continues to grow around this independent contractor.”