U.S. warehousing costs spiked in 2013 as retailers, incented by low interest rates and inventory carrying costs, bulked up on products in expectation of an economic recovery that didn't materialize, according to the Council of Supply Chain Management Professionals' 25th annual "State of Logistics Report," sponsored by Penske Logistics, released today in Washington, D.C.

The report said 2013 warehousing costs increased 5.6 percent over 2012 levels as rising inventories filled all available capacity. Demand for peak-season space in last year's fourth quarter reached the highest level on record, according to the report. The U.S. industrial vacancy rate ended the year at 8 percent, down from 8.9 percent in 2012, the report said.

The report found that warehouse demand was triggered by manufacturers' and retailers' forecasts that economic activity would be more robust than it turned out to be. As hopes for a strong holiday buying season didn't pan out, the supply chain was left with excess inventories and an overinvestment in warehouse space.

Meanwhile, interest rates, which have been at historic lows since the Great Recession, continued to bounce along the floor in 2013. The Federal Reserve's annualized rate for commercial paper—the interest component used in the report's model—fell to 0.09 percent in 2013 from 0.11 percent in 2012. As of the end of May, the Fed's commercial paper rate had hit 0.08 percent. Commercial paper is an unsecured promissory note with a fixed maturity of no more than 270 days.

The interest rate component of the report fell 22.6 percent in 2013. That offset the cost of greater investment in inventory, leaving overall carrying costs up 2.8 percent over 2012 levels, the report said.

Retail inventories increased 6.2 percent year-over-year, and inventory levels rose sequentially throughout 2013, the report said. Wholesale and manufacturing inventories rose by 2.7 percent and 2.1 percent, respectively, indicating those supply chain components kept stocks low until late in the year.

The overall inventory investment by all seven categories, which also include mining, construction, agriculture, and services, rose 3 percent in 2012 to more than $2.5 trillion last year, the report said.

Rosalyn Wilson, the study's author, said low interest rates encouraged companies to take on more inventory because there would be little economic penalty to warehousing product. However, a yo-yo economy that ended the year on a soft note left the supply chain hanging, she said.

"Manufacturing has had a number of sustained growth periods, but so far none have stuck," Wilson said in an email prior to the report's release.

The cushion of ultra-low interest rates was apparent in the report's analysis; if the annualized 2007 interest rate of 5.07 percent prevailed during 2013, total logistics costs would have increased by $128 billion, it found. All told, U.S. logistics costs reached $1.39 trillion, up $31 billion, or 2.3 percent, from 2012 levels. Costs in 2012 increased by 3.4 percent over 2011 levels.

Logistics costs in 2013 as a percentage of GDP declined to 8.2 percent, according to the report. For the past two years, costs as a percentage of GDP—a key gauge of the supply chain's efficiency in moving U.S. output—was stuck at 8.5 percent. Some of the year-over-year decline in 2013 could be attributed to a 1.9 percent drop in "shipper-related costs" as companies increased their supply chain productivity, the report said.

Overall activity in 2013 was similar to the post-recession years that came before it. Transportation revenues—measured as "costs" in the report—rose 2 percent year-over-year. Trucking revenues gained only 1.6 percent, making 2013 one of the weakest years for the industry in recent history, the report said. Intercity truck revenues rose 1.8 percent, while the "local delivery" segment gained 1.2 percent. Tonnage gained 6.1 percent, a figure that is "much higher than revenue figures would seem to indicate," according to the report.

John G. Larkin, transportation analyst for the investment firm Stifel, Nicolaus & Co., has said truck tonnage numbers are skewed by the surge in demand for trucks used to move heavy shipments of fracking sand to support drilling for shale oil and gas.

2013 TRANSPORTATION COSTS
Truck shippers continued to be successful during 2013 in resisting rate increases, according to the report. Although carriers are operating at or near full capacity, shippers believe they have enough service options to hold the line of rate hikes, the report said. Rates were relatively flat except for in the spot market when capacity was scarce, the report said.

As has been the case for several years, rail revenue growth outpaced truck in 2013. Overall rail revenue rose 4.9 percent year-over-year, while revenue per ton-mile increased 5.3 percent. Total carloadings jumped 8.2 percent, while intermodal volume rose 10.6 percent, the report said. However, strong price competition from motor carriers dampened intermodal rate growth last year.

Revenue from the port sector rose 4.5 percent, while airfreight revenues were flat year-over-year, the report said. Revenues for the third-party logistics (3PL) sector rose 3.2 percent in 2013, down from a 5.9-percent year-over-year gain in 2012. Most of the softness was in the international sector as a subpar global economic recovery and shipper reluctance to commit to new business restrained results. By contrast, the domestic 3PL market showed strong demand as shippers increasingly turned to intermediaries to help procure capacity in a tightening market for supply, the report said.

It what could be a portentous comment, Wilson forecast that 2014 is shaping up to be a "banner year" for the economy and, by extension, logistics. This marks a tonal departure for Wilson, whose commentaries in all of the post-recession reports have been sobering. The first five months of 2014 have been the strongest freight performance since the end of the Great Recession, the report said.

The report is produced by the Council of Supply Chain Management Professionals (CSCMP) and sponsored by Penske Logistics.