A shortfall in trucking capacity is not expected to fully develop until at least two years from now, according to several industry experts, as current “supply and demand” between available trucks and loads is more in balance than many might think.
“Supply and demand is not currently imbalanced, in the aggregate,” noted Scott Moscrip, founder and CEO of load-board provider the Internet Truckstop, in a conference call last week host by Wall Street investment firm Stifel, Nicolaus & Co.
“It is just that some trucks are positioned where little freight is available and some freight is available where an insufficient number of trucks are positioned,” he explained. “In theory, through better use of [load availability] data, these imbalances can be partially eliminated.”
Moscrip stressed, however, that the capacity picture will change precipitously over the next three to five years as additional trucking safety regulations are implemented by the Federal government.
“Too much effort is focused on trucking industry safety and the truck driver and not enough attention is paid to the other 99% of the traffic that plies our highway network,” he said.
Electronic logging devices [ELDs], speed limiters, changes to drug testing methodologies, changes to the process of determining carrier fitness, etc., will in aggregate create major supply and demand “imbalances” where capacity is concern, Moscrip believes.
While he thinks that won’t happen in 2014, largely due to the still-sluggish U.S. economy, it is possible that the industry could witness what Moscrip described as a “truly debilitating truckload capacity shortage” develop sometime in 2016, 2017, or 2018.
“With shippers scrambling for capacity, more may turn to the spot market to cover their loads,” he added. “That increased demand will boost spot pricing which, in turn, will convince more carriers – typically small carriers, but increasingly mid-sized carriers – to allocate capacity away from contract customers and towards the higher priced segments of the spot market.”
One recent metric highlighting the still-slow-growth-state of the U.S. economy is the recent jobs report issued by the U.S. Bureau of Labor Statistics, which indicated total nonfarm payroll employment increased by 142,000 in August; a number well below the 230,000 analysts had predicted.
The agency noted that both the unemployment rate (6.1%) and the number of unemployed persons (9.6 million) in the U.S. changed little in August as well.
And while the ISM Manufacturing Index gained more than expected last month, rising from 57.1 to 59.0 in August – the fastest pace in three years – Lindsey Piegza, chief economist for investment firm Sterne Agee cautioned that such activity is “out of step” with declines in consumer spending.
“Manufacturing activity remains generally strong as we push further into the third quarter,” she added. “Furthermore, gains in new orders suggest that at least modest growth in manufacturing is likely to continue for the next month or two, a welcomed support for third quarter gross domestic product.”
Yet she pointed out that as American factories appear to be ramping up production, further reports show gains in inventories and lingering stockpiles of goods as consumer spending continues to show signs of weakness – with minimal income growth restraining overall consumption.
“This clear disconnect will need to be rectified sooner rather than later with either a reduction in goods production or a ramp up in consumer spending,” Piegza noted.
That’s one reason why Gordon Klemp, founder and president of the driver pay analysis firm National Transportation Institute (NTI), believes TL volume will remain flat for the time being -- keeping freight rates to some degree stagnant in the short term.
“However, given the driver shortage, we may see some leverage to move rates a little bit as the year goes on,” he added. “But, overall optimization on the carrier side in just resources will remain the most important element in maintaining fleet profitability as we go through the year—as we see it now, at least.”
By contrast, some experts believe a capacity crunch will develop much sooner than expected.
According to FTR Transportation Intelligence, its Trucking Conditions Index (TCI) increased to a reading of 8.49 for July – one of the highest points this year –reflecting rising prices and service lapses caused by the current capacity tightness.
Jonathan Starks, FTR’s director of transportation analysis, noted in a statement that the firm’s TCI could go even higher this fall if the economy accelerates.
“When looking at the TL market, for much of 2014 it has been a tale of two markets,” he explained. “Spot activity has been very strong, especially in rates, [while] the contract market has been less robust but still showing signs of stress on capacity, costs, and rates.”
Starks said FTR expects those two markets merge this fall as a shipper’s core carriers get further stressed and contract rates move higher. “Keep an eye on spot rate as we head into September as they will be an early indicator of capacity shortages and stress in the system,” he added.
Yet the Internet Truckstop’s Moscrip believes the U.S. economy seems to be in his words “stuck” in the 1% to 3% annual growth rate band with no significant acceleration in economic activity evident at the moment – and thus no significantly broad capacity tightness should develop, keeping a lid on rates near term.
“Spot rates have not moved higher since the run-up earlier in 2014,” he added. “Effectively, supply and demand have reached equilibrium at today’s pricing. A little more improvement might be possible, but the low hanging fruit has certainly been harvested.”
