Look out above: 2018 could be one for the books for truckload rates, analyst says
Truckload contract rate increases "could break records" in 2018, and are likely to remain strong for the next two years after that, a transport analyst said today.
Benjamin J. Hartford, analyst for investment firm Robert W. Baird & Co. Inc., said contract rates could easily rise 5 percent over 2017 levels, and could approach, if not surpass, double-digit increases on some lanes. Speaking at the SMC3 annual winter meeting in Atlanta, Hartford noted that spot, or non-contract, rates, which generally lead contract rates by 6 to 9 months, have escalated dramatically through most of 2017 after bottoming early in the year. In the week ending Jan. 13, spot rates for dry van freight—the most commonly utilized type of truck trailer—rose to $2.28 a mile, 17 cents above year-end 2017 levels, which were already the highest in three and a half years, according to figures from consultancy DAT Solutions LLC, which tracks spot-market activity.
Hartford said that 2005 and 2010 were the last two years when rates saw dramatic firming. In 2005, the industry coped with a driver shortage and strong demand from a surge in residential housing, the latter of which turned out to be unsustainable. The 2010 increases came on the heels of the first full year of recovery after the Great Recession in 2007-09, which had been precipitated by the bursting of the residential and retail real estate bubbles.
Hartford forecast strong economic growth through all of 2018, which will bring the demand for freight services that folks in the industry had hoped for, and at the same time had feared. Capacity is already tight due to a shortage of qualified drivers and the transition to electronic logs, which are expected to reduce driver productivity by ending the practice of drivers clocking more miles than allowed by law. In addition, carriers are being forced to pay significantly higher wages to attract and retain drivers, and will seek to recoup those costs by asking for higher freight rates.
The first sign of this will be in the upcoming semi-annual contract bid cycle, which starts in March and runs through May, he said. The one factor that could spell relief on the roads would be an improvement in the rail portion of intermodal service, which Hartford said deteriorated in 2017. Tighter rail capacity could spell even higher rates across both modes, though, especially if a shortage of intermodal boxes that presented itself in 2017 persists into 2018.
The current year may be the peak of rate elevation, although 2019 and 2020 look strong as well, Hartford said. Although the pace of rate increases will decelerate as time passes, it won't contract quickly, he said.
Hartford's bullish outlook on the economy was echoed by Donald Ratajczak, the noted economist, who predicted at the SMC3 conference that U.S. Gross Domestic Product will rise more than 3.1 percent, U.S. industrial production will rise by 4 percent, and world economic growth should increase by 3.9 percent. The global economy is in a synchronized recovery, and there is little to impede it for the balance of the year, Ratajczak said.
The economist noted that U.S. retailers are in solid shape on the ordering front because they have reduced once-elevated inventory levels by shuttering thousands of stores—about 7,000 in 2017 alone. Retailers with large brick-and-mortar exposure have been forced to re-think their network strategies in light of the tremendous growth of e-commerce, which has led many consumers to migrate their buying patterns from physical to digital. Ratajczak noted that the problem all along was not too much product, but too many stores.
The one potential fly in Ratajczak's ointment is inflation: His "leading inflation indicators" turned positive over the past two months after trending flat to negative for months prior to that, he said. This portends accelerating inflation by around mid-year, he said.
For those looking for relief from the upward rate pressures, Hartford advised gazing beyond the next three years to the meat of the next decade. That's when a phenomenon he dubbed "Logistics 2.0" kicks in, he predicted. The next phase will be marked by mainstream adoption of powerful visibility tools and automated advancements that will change transport and logistics on virtually every front, Hartford said.
As costs get permanently reduced and efficiencies meaningfully enhanced, the trucking industry will settle in for a prolonged period of price declines, Hartford predicted.
