Over the next few years, motor carriers should gain significant increases in freight rates as the current capacity crunch is expected to last for at least another two years, according to the most recent outlook compiled by research firm FTR Associates.
However, fleets may need to keep money earned from higher rates close at hand as FTR’s analysts think there’s a 60% chance or better that another freight downturn will occur in the 2014-2015 timeframe. However, that one is not expected to be as severe as the drop carriers suffered in the “Great Recession.”
“I’m relatively pessimistic about the long-term trends that are developing in the economy right now,” explained Noel Perry, senior consultant with FTR and principal of consulting firm Transport Fundamentals, during FTR’s latest “State of Freight” webinar.
Perry’s first major concern is that the U.S. housing market remains exceedingly weak, with the supply of houses twice that of historical levels. “That means there will be weakness in housing for a while yet and it’s one reason why this decade will be worse that the last one,” he said.
The next big worry is the rapidly escalating federal debt, which has exceeded $14.2 trillion. “Even if all so-called ‘discretionary’ spending were completely cut, without touching Medicare, Medicaid, and Social Security, we’d still be $300 billion in the red per year,” Perry pointed out. “Basically we can’t [eliminate the deficit] without doing uncomfortable things; and our political system is uncomfortable doing uncomfortable things.”
Higher fuel costs are another concern, with the recent price spikes adding up to some 100 basis points of impact on U.S. gross domestic product [GDP], he said. Yet FTR believes fuel costs will moderate for the rest of this year and possibly into next as high oil prices have curbed energy demand.
Though a resurgence in U.S. manufacturing activity and a strong export market for U.S. goods – worth 170 basis points of GDP – are creating what Perry called “a good economic mix for freight demand,” the overall U.S. economic recovery “has been disappointing” in his view.
“Though nothing’s changed our forecast for a 4% increase in freight for the second half of this year and through 2012, the upturn won’t be smooth,” he said.
In the short term, increased manufacturing activity and export volume, coupled with tight trucking capacity, will give carriers the opportunity to charge higher rates.
Perry believes freight rates should increase 9% to 10% this year, and increase again “in the double digits” for 2012 and into 2013.
Yet he also thinks trucking will begin to face significant challenges, particularly on the regulatory front, starting next year that will hamper productivity. Add to that an economy that’s become far more cyclical and volatile and you have a forecast for what he calls “serious headwinds” in the not-too-distant future.
For starters, revisions to hours of service (HOS) regulations should hit trucking in 2012-- at the same time new rules regarding driver health and wellness, identification, electronic onboard recorders (EOBRs), to name just a few also will go into effect. “We believe all of that translates into a shortage of about 400,000 drivers,” Perry said.
The broader concern, however, is that the U.S. government’s ability to adequately address the burgeoning federal debt will lead to higher interest rates. And if that occurs, it will be what Perry dubs the “downside trigger” for another freight recession.
“You’ve got to remember that, even with higher freight rates, trucking profitability – especially for small and medium carriers – is only at about 5%,” he said. “That’s not enough to encourage risk or significant investment.”