A couple of weeks ago, the transportation and logistics research group at Stifel Nicolaus & Co. got together to make some freight industry predictions for the balance of 2015 on into 2016.
As they regularly cover all modes of freight transportation – railroad, air cargo, truckload, and LTL – Stifel’s analysts can paint a pretty broad yet detailed picture about major trends developing in the freight markets.
So, without further ado, here are a few findings trucking fleets might find interesting
- Freight seems to be weakening overall. Stifel’s analysts found that railcar loading are flat to down year-over-year, with "soft" is the word du jour when talking to trucking carriers about business levels. Yet Stifel’s team stressed that year-over-year freight comparisons are more difficult to a degree for 2015 because the U.S. transportation system got “tangled up” pretty significantly in 2014 due to bad weather and other factors. Thus some significant yet temporary “modal switching” that occurred in 2014 reversed itself in 2015, with truckload freight going back to rail and LTL freight back to truckload. Overall, freight networks are running much more smoothly in 2015.
- Inventories are on the rise and that’s not good. The steady increase in inventory levels throughout the supply chain can be traced back to the major labor disruptions that occurred at West Coast ports earlier this year. Though rising inventory levels haven’t been a big deal in the recent past, as they’ve typically kept pace with sales, it isn’t the case for 2015. For the last 12 months, the inventory-to-sales ratio has been climbing; a concern from a freight point of view, said Stifel, as excess inventories lead to a drop in freight demand when they get worked off. As a result, Stifel thinks the U.S. is going through a “de-stock” period – a rightsizing of inventories – that began in the second quarter this year and should continue until the end of the third quarter. In Stifel’s view, this does not bode well for volume growth and earnings expectations. Yet since September typically makes up the bulk of third quarter volume and earnings, the firm plans to take a “wait and see” approach before cutting revenue and profit estimates for the freight sector.
- The driver shortage will only persist. Not only will the pressure to increase driver wages continue in trucking, just finding and quality drivers will remain a major challenge. Stifel described the problem this way: “Nobody is going to college today to accumulate a boatload of student loan debt only to sit behind the wheel of an 80,000 lb. vehicle in traffic for 11 hours per day all by himself or herself while getting the evil eye from all other non-CDL motorists for only 40 cents to 45 cents per mile.” Thus, while recent pay hikes have helped retain driver, many vacancies remain, the firm noted. Yet, Stifel emphasized that this has been good for trucking in this “soft” freight market, as capacity is constrained and is expected to stay constrained until driver wages rise significantly further or freight volumes drop more. “Our expectation is for continued upward driver wage pressure to drive increased costs throughout the supply chain for the next several years,” Stifel said.
- Lower energy prices go from hurt to help. The U.S. economy suffered a hit from low energy prices – specifically for oil, which dropped to around $45 per barrel – as it put the brakes on the country’s booming oil and natural gas sector starting at the end of 2014. However, Stifel now thinks the U.S. is “readjusting” to low energy process, and before too long, the nation should see the benefit of lower gas prices in terms of more consumer discretionary income flowing through the economy.
Trends to contemplate as the backyard grills get fired up this Labor Day weekend.
