All bubbles burst. Technology experienced it in 2000 and 2001, followed by the housing market from 2008 to 2010. Unfortunately, the global commodities market is the latest vertical to feel the impact, and it is having far-reaching effects on the U.S. transportation industry.
Katz, Sapper & Miller hosted its annual Trucking Owners Business Roundtable on Feb. 24 at its Indianapolis office, at which experts discussed the state of the industry, their predictions going forward, and the potential results of regulatory changes. Moderated by Tim Almack, the roundtable featured:
- Thom Albrecht, BB&T Capital Markets
- Bryan Merolla, Cleveland Research Company
- Andy Marquis, Scopelitis, Garvin, Light, Hanson & Feary
The Current Economy
“Every 10 years in trucking ending in a '4' seems to be special,” said Albrecht. “1984, 1994, 2004 and 2014 were all strong, but you need to be careful in how you read the tea leaves.”
Many of the gains achieved in 2014 re-corrected in 2015, due primarily to the drop in oil prices and a strengthening of the U.S. dollar. As a result, industrial trends began to suffer. Albrecht presented four components to explain the 2015 lull:
- Industrial Production (IP) is more important to freight creation than Gross Domestic Product (GDP). In 2015, IP quickly shifted from a state of consistent growth to no growth, without first experiencing a gradual slow-down. For 11 of 12 months, IP either shrank or was flat.
- The strong dollar led to a decrease in exports, which subtracted substantially from GDP.
- Fleets began to grow in size, increasing capacity.
- Hours of Service (HOS) suspension of the 34-hour restart impact was greater than expected, adding back capacity.
Accurately projecting how much excess capacity exists is of major concern. Albrecht believes implied excess capacity is currently between 2.2% and 3.2%. In July 2013, that number was closer to 1%, representing a sizable industry shift that will likely take at least another year to change as the industry takes steps toward correcting the capacity gap.
Albrecht then moved on to the global economic factors affecting the industry. These included:
- Oil’s historically dramatic slump, comparable only to a collapse in 1985-1986
- The reduced demand for commodities (i.e., corn, copper, rubber, wheat, etc.)
- Changes in consumer spending patterns, where the fastest-growing areas create little relative freight
- The increase in healthcare costs
The drop in oil prices has been especially significant. Merolla pointed out that with the price of oil currently hovering around $30 a barrel, the high cost to produce it in the U.S. makes profitability difficult. “The number of working U.S. oil rigs has dropped precipitously while oil storage has grown rapidly,” said Merolla. “We have so much excess oil right now. Even as U.S. production wanes, global production remains high.”
Albrecht noted that one industry bright spot has been the housing market. Permits for new housing have increased and bank lending is growing. Student loan balances, however, have gone up 77% since 2004. Because of debt, the age of first-time home buyers has increased from 26 to 30.
The e-Commerce Effect on Trucking
Freight flows have also been dramatically impacted by the shift among consumers toward online shopping rather than at traditional brick and mortar stores. Albrecht said he believes at least 15% of all malls will disappear within the next decade as retailers put more focus on their online efforts. In the trucking industry, Less-Than-Truckload shipments are growing a faster rate than full truck loads. Merolla noted that because of heavy inventories, retailers are cutting back on orders.
The Truck Driver Challenge
Albrecht highlighted some key statistics about the changing face of today’s truck driver:
- 21 years ago, 40% of drivers were 20-34; today, less than 21% are in that age range
- 21 years ago, 11% of drivers were 55 or older; today, 26% are in that age range
Making the industry attractive to new drivers will be an ongoing concern. The main challenges include finding acceptable candidates for the position, minimizing turnover, and being able to provide livable wages for employees.
The Short-term Outlook
Albrecht and Merolla agreed U.S. manufacturing will remain under pressure through 2016. “The energy markets will continue to be an albatross,” said Merolla. “We are going to see continued declines on the industrial side, which means more capacity than freight. As a result, rates will be flat or down.”
Merolla recommended in 2016 that companies focus on building relationships and creating greater strategic alignment for 2017. Albrecht added, “Downturns in industrial production historically do not last more than three years, which is why there is expectation that we will begin to see signs of improvement in 2017.”
Merolla still urged caution. “There is always concern industrial weakness will stay for a while. And if those industrial markets begin to have a greater effect on consumers, we could see a decrease in spending, which might portend an extended drop.”
The Regulatory Spin
Following the economic discussions, Andy Marquis of Scopelitis, Garvin, Light, Hanson & Feary discussed the current regulatory state for motor carriers. Marquis provided an overview of the Federal Motor Carrier Safety Regulations created by the Federal Motor Carrier Safety Administration, with specific focus on the Compliance Safety Accountability system.
Because the regulatory environment continues to change, Marquis urged attendees to preserve high levels of compliance and safety, including maintenance of all pertinent documentation. “Drivers, small business owners and motor carriers must work together to minimize liability and increase safety,” said Marquis.