Truckload rates will increase about 4% this year, with capacity pressure brought on by the looming ELD mandate more than compensating for an economic recovery that’s become “stale,” contends transportation economist Noël Perry.
“Our economy has shifted from a high-growth, high-cyclical economy to a slower-growth, more consumer-oriented economy where it grows at about 2%,” Perry said Thursday, speaking for the monthly FTR State of Freight webinar series. “We are increasingly concerned—not in 2017, but certainly for 2018-19—about the chance of a recession.”
And what that should mean for trucking is a drop in volume and pricing of 5-10%. However, an array of federal regulations—most significantly, the electronic logging device mandate that takes effect in December—will result in substantial productivity losses in the near term. That, in turn, will increase the demand for truck drivers—except that those drivers are not to be found.
Perry notes that the “productivity hit” for large fleets, which had some drivers “cutting corners” prior the adoption of electronic logs, initially ran 4-8%. And while carriers have reengineered lanes, those changes have not been able to fully recover that lost productivity. The impact of ELDs on late adopters is likely to much higher.
“The maximum impact will occur in 2018, and it won’t stop until two to three years afterwards when people finally figure out they have to do it,” Perry said.
FTR charts truckload capacity utilization spiking at more than 100% into next year, assuming the ELD requirement “is enforced with any kind of efficiency.” The “worst case” result will be “a major truck shortage” lasting 4-6 months. But even this year, Perry puts the chance of a “significant” capacity shortage at 60%, with a 30% chance of a “real whacko” shortage.
Perry also notes that the spot market tends to be much more volatile, with the 4% increase in contract rates translating “easily” to a 15-20% upswing in spot pricing.
“There’s a real exposure if you’ve got a lot of spot business,” Perry said.
More long term, Perry points out that lost in the current “euphoria” over Trump’s proposed trillion dollar transportation infrastructure program is who, exactly, is going to pay for it. While Perry supports the Trump plan’s reliance on private capital and market efficiencies, any transportation investment requires a return—and that means tolls.
FTR estimates trucking currently pays about 3 cents per mile to maintain the highway system. Catching up on maintenance backlogs would double that to 6 cents per mile, and to actually improve the system with additional lanes and highways would bring that amount to 20 cents per mile.
More concerning for Perry is the national debt: Based on the European model which uses business taxes to fund social programs, the cost to trucking could soar to nearly $2 per mile.
“As we look out 5 to 10 years, there is a major cost exposure that has to do with how we’re going to solve our debt problem,” Perry said.
On the other hand, automation offers significant opportunities for improving efficiency in the coming decade, adding up to savings of as much as $1 per mile on the average linehaul cost.
“Right now, a truck spends more than half its time sitting while the driver rests. If you automate that truck one way or another, you don’t have to stop it to let the guy rest and it doubles his productivity,” Perry said. “There’s a whole bunch of things that are coming at us faster than you think.”
Automation in the broader economy, however, will also drive down the demand for transportation, Perry cautions, and he suggests that common industry forecasts of 25% growth in the 2020s are exaggerated. FTR puts the growth at about 15%, with recession included. Depending on how the national debt is managed, transportation demand could grow by as little as 5%.
