Truckload rate signals

Market stability comes with slow growth for motor carriers, but are price hikes on the horizon?

   Business for U.S. trucking companies will taper off a bit in the next couple of years compared to the post-recession recovery since 2011 and costs will increase by 10 cents to 20 cents per mile over the next decade because of government user fees and taxes, Noël Perry, a senior consultant and economist at FTR Associates, recently predicted.
   “This will not be as favorable a freight recovery as it has been so far,” he said at the company’s annual conference in Indianapolis Sept. 24-26.
   But, he noted, conditions are ripening for rate hikes.
   The consensus among economists is that the U.S. economy will expand between 2.2 and 2.8 percent, essentially staying flat or increasing slightly from 2012 and 2013.
   U.S. Gross Domestic Product grew 2.8 percent in the third quarter, according to a preliminary report by the Commerce Department. And, the American Trucking Associations said its survey of members showed seasonally adjusted truck tonnage increased 1.4 percent in September from August, and was up 8.4 percent from September 2012, the largest year-over-year gain since December 2011. Year-to-date the tonnage index is up 5.4 percent. It has increased four of the last five months and year-over-year growth has accelerated. ATA Chief Economist Bob Costello said in a statement that tonnage reflects the strength of industries such as housing, autos and energy that produce heavier than average freight.
   The Truck Tonnage Index is widely interpreted as a proxy for truck demand, but its strength is misleading, according to John Larkin, transportation and logistics equity analyst at Stifel, because the tonnage mix has shifted some from traditional dry van to short-distance, heavy-haul transport related to oil and gas extraction in places such as Texas and North Dakota.
   Anecdotal accounts from merchandise carriers suggest that the fall “peak season” was relatively flat compared to last year.
   Meanwhile, home sales have slowed in recent months, retail sales are lackluster, consumer confidence has dipped again and the government shutdown is expected to shave a half point off growth in the fourth quarter. More economic uncertainty is likely next year because Congress must try again to craft a budget and decide to raise the debt ceiling after three years of gridlock over spending policy that culminated in automatic budget cuts and the government shutdown in 2013.
   The headwinds were manifested in the October freight index report compiled by Cass Information Systems, a major processor of freight payments, which showed freight shipments fell 3.5 percent in October from the previous month and 2 percent from a year ago.
   Perry said the truckload sector, which is heavily tied to industrial production, will only grow 2.7 percent next year and 2.8 percent in 2015 after achieving 5.5 percent growth this year — cumulative average growth was 4 percent during the past three years — because services continue to take a larger piece of the economic mix. During the early stages of the financial recovery, industrial production outpaced GDP, but that dynamic is starting to reverse, he explained.
   The weak freight market kept rates subdued during the post-recession recovery, but they also remained stable the past two years despite solid growth in volumes because carriers have become good at trimming excess capacity and controlling costs, aided by flat to falling fuel prices the past three years, according to Perry.
   Experts say diesel should remain stable through next year, and possibly into 2016.
   Perry also surmised that truckload carriers have been cautious about raising rates, preferring to build sustainable relationships with shippers because of economic uncertainty. More carriers are offering dedicated contract carriage even though the approach locks in rates for a year or more.
   But the FTR economist said contract data recently compiled by ATA suggests new regulatory changes have upset the cost equilibrium, which will force costs up 4 to 5 percent during the next couple years depending on the duty cycle. And shippers can expect to see those costs in the form of higher rates.
   The primary pressure on trucking expenses comes from the Federal Motor Carrier Safety Administration’s new hours-of-service (HOS) rules that went into effect July 1, as carriers face the prospect of having to hire extra drivers and buy trucks to move the same amount of freight on a daily basis to make up for the loss of productivity for each current vehicle. The agency has nearly two dozen regulations recently implemented, in the pipeline or under consideration that freight experts say will have a direct impact on motor carrier operations, too.
   Perry, who is also the founder of Transport Economics, said the forecast for cost increases depends on whether regulators follow through on all the promises for new rules.
   The July and August price data shows rates for both months increased 7 percent on an annualized basis after being flat to negative in prior months. Spot market data is more mixed.
   In the past, carriers have used high fuel prices as a rationale for raising underlying rates even as they impose fuel surcharges as a quick cost recovery mechanism — often, shippers suspect, with extra profit baked in — when fuel spikes. That option has faded since diesel prices stopped being volatile.
   In a recent commentary for FTR’s Freight Focus publication, Perry wrote trucking executives are publicly hammering home the notion that the HOS changes are clipping productivity by 3 to 5 percent. The same thing happened the last time the HOS rules changed in 2004.
   “Rates moved up just when the HOS changes occurred — and stayed on an upward trajectory for almost two years. We now have two months of data indicating the same thing,” he said.
   If trucking companies make a compelling case for the regulatory burden they face, shippers will accept reasonable price increases, especially if they perceive capacity tightening, he said at the conference.
   Nonetheless, Costello said in an ATA statement, fleet margins will be under pressure until there is steady economic growth because the costs of fuel, driver recruitment and retention, and equipment will rise faster than freight rates. Once capacity tightens, carriers will see improvement in their bottom line.
   Additionally, Perry forecast that the tax burden on the trucking industry during the next 10 to 15 years will translate to 10 cents to 20 cents per mile in extra costs as states and the federal government increase highway user fees to raise money for deteriorating infrastructure, some kind of a national healthcare system becomes inevitable and other tax changes are considered to address the national debt. Trucking industry leaders have expressed willingness to pay higher diesel taxes to support upkeep and necessary expansion of highways, but Perry said Congress will make truckers bear a heavier load than motorists because it is an easier political sell for an institution that has been unwilling to raise fuel taxes since 1993.
   As for health care, Perry envisions a two-tier national system where the wealthy can pay a surcharge for better coverage. That means large carriers that provide premium health benefits will have to bear a significant increase in costs, while small carriers that don’t provide benefits will be taxed at a higher rate for each employee to cover the costs of national coverage for those without insurance.
   Perry said carriers could see about half the tax burden, equivalent to about 8 cents per mile, within the next five years.