If the economy keeps pumping, will freight capacity withstand economic strength?
Finding freight is not the problem. Carrying it is. The strength of the economy continues to put the squeeze on already scarce transportation resources. As if the 3.73% economic growth logged in the third quarter wasn't enough, it comes as fleets attempt to absorb the freight that shippers -- stung by service problems -- are pulling off the Union Pacific Railroad in record amounts. Tack on the increased volume of shipments that normally occurs as retailers stock their shelves for the holiday season, and you're talking unprecedented capacity constraints.
As this pig moves through the python, industry executives are debating just how far this economy can flex its muscles. Many are openly talking of an adjustment. With that in mind, let's look at the forces that act without much deviation through typical business cycles.
Lead time to market, whether it's primary processing, intermediate processing, or finished goods inventory, tends to get ragged as productive capacity is strained and supplies become more scarce. It is during these times that transportation becomes both more and less efficient.
The increase in efficiency comes from the ability to locate the next load quickly and nearby. Fewer empty miles and more completely full trailers drop good news to the bottom line of most carriers. So long as the capacity of the fleet does not grow faster than the demand for services, this can bode well for the duration of economic growth.
The decrease in efficiency comes from the need to position product in the marketplace at a time when the fleet in use is losing flexibility due to the increase in traffic demand. Shippers with or without their own vehicles are likely to increase the use of smaller shipment sizes to meet their customer requirements. Turn times for inventories become more difficult to maintain as service interruptions cause discontinuous traffic patterns. The shipper with its own fleet begins to rely more on the for-hire sector to take up the slack.
All too often, this leads to growing the fleet rather than altering distribution patterns or accepting longer lead times to market. The consequences of lost sales require suppliers to remain vigilant in their efforts to maintain product access and cost at delivery. Regardless of the effort, bottlenecks occur and prices rise for essential transportation services.
So long as there has been at least 90 days of sustained growth, this industry has always believed that there will be another 90 days of sustained growth. Equipment backlogs lead fleets to make rather remarkable commitments for equipment for an extended period of time. The result is a self-fulfilling prophecy.
Fleets will consume equipment well past the point where there is a sustainable return on their investment.
Currently, we are adding over 100,000 Class 6-8 vehicles to the active population of 3 million. While representing only a 3+% gain, this involves the most productive equipment. The result is an increase in effective capacity approaching 5%. But over time, this will result in another capacity gl ut. The question is when and how well will all participants be prepared.
Driving the demand for capacity are two fundamental economic activities -- industrial production and final sales of goods. For both activities, the outlook is rather positive for the next three quarters.
The successful fleets, both private and for-hire, will be those that rationalize their services and distribution patterns with the understanding that decline will occur without significant lead time. Such unforeseen shocks have had substantial influences in the past several downturns, even while analysts cited other more standard contributing factors.
This time around keep your eye on the service sector -- employee wages there will likely lead the way for manufacturing in the next three to four months. Wage pressures will lead to inflationary concerns at the Federal Reserve, which could call for interest-rate increases.
The Fed has had a spectacular track record for the past few years, but that's no guarantee of what's ahead.