Michael Zimm, a truck transportation analyst with GE Capital, made some interesting observations the other day concerning the current state of the motor carrier industry; specifically that truckers are benefitting from what he’s dubbed a near “goldilocks” supply/demand environment.
From where Zimm sits, he see profit tailwinds, strengthening freight trends, pricing leverage due to tight capacity and declining diesel prices all helping to keep trucking in the driver’s seat (pun intended) in freight negotiations with shippers.
“Additionally, GE economists remain optimistic that the domestic economy will continue to gradually improve and expect real U.S. GDP [gross domestic product] growth to accelerate from 2.1% in 2014 to 2.6% in 2015,” he added.
However, Zimm did stress that this “goldilocks environment” is not entirely absent of challenges – and they are ones every trucker is more than a little familiar with by now.
“Historically high driver turnover, hours of service (HOS) and other regulatory related operating inefficiencies, driver shortages [plus] upward pressure on driver wages are likely to remain headwinds for the industry,” he said, pointing out that LTL carrier Con-way is planning to spend $60 million in 2015 to boost driver wages and benefits. That’s not chump change by any means.
Still, the economic metrics seem to be aligning to the benefit of the U.S. freight transportation industry, based on what GE Capital is seeing. Here are some of those portents:
- Retail Sales and Food Services continue to rebound strongly from a January low. Year-to-date through September, retail sales increased 3.8% from the same timeframe a year ago yet remained below the 4.4% growth during all of 2013. Nonetheless, looking at the six months through September alone, retail sales were up 4.5% compared to the same timeframe a year earlier.
- The Cass Freight Implied Rate Index rebounded in September and is just shy of the cyclical peak reached in December. While freight shipment declined 1.4% in September from August, total expenditures incurred to ship those volumes increased nearly 1%.
- Looking ahead, Zimm said the upward trend in the rate environment could begin to moderate as upward pressure from labor costs and pricing leverage from tight capacity are somewhat offset by a reduction in fuel surcharges.
- The Purchasing Managers Index (PMI), which is a measure of near-term business conditions in the U.S., has rebounded strongly since a sharp drop in January. The September PMI of 56.6 was down compared to a multi-year high in August but still well above the 12-month low of 51.3 in January and went up again in October (as I noted yesterday).
FYI: the past relationship between the PMI and GDP suggests GDP growth of 4.0% based on the average PMI year-to-date through September. In addition, if September’s PMI is annualized, it would equate to GDP growth of 4.4%. But that’s getting a little ahead of things right now.
Factor in a couple of other indices as well: rising employment and sales of commercial vehicles.
Demand for commercial vehicles also ticked up in October, with 67,900 Class 5-8 North American orders booked in total, according to ACT Research – up 50% from a year ago.
Over the past twelve months, ACT noted that Class 5-8 North American net orders totaled 563,600 units, representing the strongest 12-month period since the twelve months ending January 2007.
“The 46,200 Class 8 North American net orders in October represent the convergence of a number of trends that continue to drive healthy order activity,” said Kenny Vieth, ACT’s president and senior analyst, in a statement.
“Those trends include pent-up demand amongst small and medium fleets, superior new truck fuel economy, improved economic activity in key freight sectors, and most importantly, rising freight rates and fleet profitability,” he noted.
Vieth added that October’s preliminary 21,700 Class 5-7 North American net orders represents the best medium-duty vehicle order volume since April, up 14% compared to last October and up 11% sequentially. “October marked the second consecutive positive year-over-year order comparison after soft orders from May to August,” he pointed out. “On a seasonally adjusted basis, October’s orders are slightly lower than actual at 19,400 units, but like actual are the best month since April.”
Year-to-date, Class 5-7 North American net orders were booked at a 218,300 unit annual rate.
In the final analysis, through September, GE Capital’s Zimm said most freight indices are at or near cyclical if not all-time highs.
“Since January, monthly sequential freight trends have remained positive while year-over-year tonnage growth continues to mirror a strong rebound in GDP,” he explained. “Barring a significant and unexpected slowdown in economic activity, freight trends should remain healthy although growth could slow seasonally during the late fall and winter months as the holiday retail inventory build dissipates and weather slows construction activity.”
Good stuff indeed where trucking is concerned.