CostelloNATSO Photo: Sean Kilcarr/Fleet Owner
ATA Chief Economist Bob Costello

Trucking outlook positive, yet potholes lie ahead

Freight demand and tax reform are boosting the industry, but dissolution of NAFTA could wipe that all out, notes ATA’s chief economist.

NASHVILLE, TN. These are heady days for trucking, or what Bob Costello, chief economist for the American Trucking Associations (ATA), believes is perhaps the “greatest period” for the industry since it was de-regulated back in 1980.

The “why” is pretty simple, he explained here at NATSO Connect – the annual convention of the trade group formerly known as the National Association of Truck Stop Operators.

First, the U.S. economy as a whole is “accelerating,” with U.S. gross domestic product (GDP) growth clocking in at 2.3 % for 2017 – which included two quarters of above 3% growth, Costello said – and expectations that it will range between 2.7% and 2.8% this year with “no reason it can’t do that in 2019” as well.

Second, freight volumes are strong and getting stronger: TL freight volumes increased 2.8% in 2017 versus 2016, more than surpassing the weak 0.1% increase in TL volumes that occurred in 2016 versus 2015. By segment during 2017, dry van freight demand went up 2%, flatbed increased 2.2% and refrigerated spiked by 5%. On top of that, dry van demand surged 7% in the fourth quarter of last year and the pace hasn’t let up yet.

“I’ve been hearing consistently from motor carriers that this is the best January they’ve ever seen” in terms of freight demand, Costello noted. “This has already been the third longest economic expansion in U.S. history and by spring it will be the second longest. Usually by this point [in an economic expansion] we’re starting to slow down. Instead we have the opposite happening.”

Third, tax reform plus any spending that may result from the infrastructure funding bill now being discussed is providing further “shots in the arm” in to the U.S. economy in terms of spurring growth.

“Tax reform puts more money back in the consumer’s wallet, and what do consumes generally do with more money? They spend it,” he explained. “Add to that the creation of 2 million new jobs, and economy almost near full employment, and wages that have increased 3%. Thus, spending on consumer goods is expected to climb 4.3% this year.”

Photo: Sean Kilcarr/Fleet Owner

ATA Chief Economist Bob Costello

Three other factors are also aligning to help boost freight demand as well, Costello added:

  • Construction: Permits to build new homes, housing starts and the number of new homes completed all hit high levels in 2017, the highest since 2007. “Throw in an infrastructure bill, and [freight] demand from this sector will be even better,” he said.
  • Factory output: After two years of “very soft” activity, output rose 1.5% in 2017 and may reach 3% in 2018 and 2019 – even possibly pushing 3.5%.
  • Inventory cycle flip: From 2015 into early 2017, there was too much inventory stock on hand in the economy, Costello said, which dampened freight demand considerably. But now that oversupply has been worked out of the system. “That means the inventory cycle is no longer a drag on freight demand; we’ve actually never seen it this good,” Costello noted.

Yet despite all the good news, there remain several negatives that trucking must continue to deal with.

“The three biggest problems for trucking can be summed up this way: drivers, drivers, drivers,” Costello said. “The driver shortage ballooned to 51,000 this year especially in the long-haul over-the-road segment. That particular segment employs about 650,000 drivers, so a shortage of that size in that space is problematic.”

He added that “if nothing changes” regarding current trendlines, the driver shortage will grow to 175,000 in 10 years. “But I don’t believe that will be the case,” Costello explained. “When you have a shortage of anything, the price goes up. And we’re seeing driver pay go up. A lot of the rate increase motor carriers are getting are going to driver pay.”

He also noted that length-of-haul for trucking has declined 34% over the last 17 years, falling in the dry van segment from just under 800 miles in 2000 to 527 miles by 2017.

Even though TL volumes surged 7% in the fourth quarter last year, with overall 2017 TL volumes up 2.8% year-over-year, mileage stayed flat. But that was the best year since 2014 for mileage, as trucking mileage declined in both 2015 and 2016, he said.

“Several of the ‘core’ fleets I talk to that used to get 125,000 miles on their trucks per year are now struggling to get 100,000 miles a year,” Costello pointed out.

That decline in truck mileage is mainly due to supply chain changes being driven by the impact of e-commerce, he said.

“If you look at the retail supply chain, in 2000, you had big box retailers working out of a handful of distribution centers (DCs),” Costello noted. “But by 2017 each of them had dozens of DCs all over the country. Online shopping drove this and big box retailers followed; now that consumers order something online on the East Coast and want it in two days, do you think anyone is going to ship it from California? So we’re seeing a shift to more regional operations. But less miles means more trucks will be needed, so eventually, that will increase mileage. We’ll see it go back up as more trucks get on the road.”

Finally, there is an overall threat to his trucking outlook if the U.S. withdraws from the North American Free Trade Agreement (NAFTA), which is something the Trump administration has threatened to do, but which Costello indicated could be a “negotiating” tactic.

“I’m slightly optimistic that this [a pull out] is being floated as a negotiating tactic,” he said. “With the Mexican presidential election in July and our mid-term [Congressional] elections in November, the odds of making a deal by this point are long.”

If Trump were to truly initiate a NAFTA pull out, that would occur in late March/early April and would activate a six-month clock for dissolution of the trade deal. But Costello does not see that scenario developing quite yet. “It might be a ploy to get a deal done within that six months, but that would be a really big gamble. And suffice to say this is a really big deal for trucking: cross-border truck-traffic generates $6.5 billion a year for U.S. truckers. [That trade] is critical to the trucking industry.”

 

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