Freight did not appear to increase last fall, according to most carriers and market analysts. But if that's true, how did we manage to eat and consume at a rate more than 3% faster than the previous quarter? The answer lies in two areas: the type of freight that was shipped and logistics.
The factors that contribute to GDP, including consumption and production, are measured in dollars. They are not measured in weight, size or any other metric that might be more suitable for judging freight demand.
In fact, production was increasing, as was consumption. Traditionally, a 1% growth in GDP is associated with a 15,000-unit increase in Class 8 tractors, the primary haulers of freight. The problem with this approach, however, is that it holds true only if the basket of goods used to measure GDP has a fairly constant demand for transportation services.
If the basket of goods is filled with more expensive yet lighter freight, the relationship falls apart. We did see growth in freight last fall, but it was fueled by electronic products, which are indeed more expensive and lighter than traditional items.
Logistics is increasingly altering the patterns of freight movements. What started as a warehousing operation decades ago changed into a rate-negotiating tool in the 1990s. During that time, logistic services earned their keep by reducing costs to the shipper. The system worked — as long as rates could be squeezed.
Then the driver shortage tipped the balance of power in favor of those who could move the freight, taking it away from those who had freight to be moved. The rather simplistic approach used by logistics suppliers had to change to meet the challenge of cost savings in the face of rising freight rates.
Another factor that played into the hands of the more agile logistics providers was the need to time the arrival of freight for the holiday shopping season. Complicating the situation was the fact that ships were parked in the Pacific Ocean waiting for available docks to unload their freight, which led to a bottleneck of freight movement into the major population centers for those seasonal items.
Shippers and receivers had to decide what to do. On the one hand, they could keep distribution costs to a minimum but run the risk that their goods would not make it to market in a timely fashion. On the other hand, they could ship over a longer period of time and incur increased holding costs while having their goods readily available for seasonal market demand.
They chose to be sure their goods got to market in time for the holiday buying season. Since these goods were coming from Asian manufacturers, margins were usually high enough to absorb the additional distribution costs incurred by holding stock. Freight shipments were stretched out over a longer period, resulting in a reduction in the fourth quarter “bubble” we had all become accustomed to seeing.
In addition, the demand for intermodal services increased. In prior years, this transportation mode had lost business to trucking when shippers and receivers were desperate to get the freight to market.
The impact of these two factors on trucking is a new challenge. Relying upon historic shipping patterns will likely lead to false expectations and inappropriate planning for the allocation of transportation resources.
The entire transportation sector will continue to be challenged to meet the goal of optimizing transportation services with the flow of freight. Not to mention the fact that all this will have to take place within the context of equipment changes, more driver restrictions, decreased access to efficient routes, and higher use taxes.