‘Truckflation’ Rolls into Town

October 29, 2018
BBH looks at the U.S. trucking industry, which is facing rising demand amid zero excess capacity.

The U.S. trucking industry hauls 10 billion tons of freight a year – dwarfing rail, barge and air, with more than 70% of all domestic shipments – connecting supply and demand in a sophisticated supply chain often overlooked by the end consumer. With the trucking industry facing strong demand and operating at full capacity, the relationship between truck logistics and consumer costs may soon become more difficult to ignore. Over the past 15 months, pricing power has shifted toward trucking companies and away from cargo shippers. In response, freight rates are firming, and transportation costs are reaching new highs. Whether measured by record-setting freight movements, shipping expenditures or fleet utilization data, the outlook for U.S. trucking and intermodal logistics providers is robust.

The average cost to ship a 53-foot container by truck from Los Angeles to Chicago was $2,845 during the week ended December 31, 2017. The cost to truck a container along the same 2,032-mile route was $4,305 during the week ended August 31, 2018.1 The fact that freight costs soared by up to 50% (in some regions) during the first eight months of the year reflects tight capacity in the trucking industry that has been strained by high demand. While supply is responding accordingly as new orders for trucks reach new highs and lead times extend, the industry is struggling to find the truckers to drive them.

Demand is exceeding capacity in most modes of transportation by a significant amount.

Zeroing in on demand, domestic freight shipment volumes are growing at a record-setting 10% year-over-year rate, according to a U.S. freight index compiled by Cass Information Systems2 that measures the average monthly volume of container freight shipments. The Cass Freight Index is derived from more than $25 billion in freight invoices and payments processed annually on behalf of Cass’ client base, which provides a statistically significant snapshot of North American freight shipments and spending on rail, trucking and intermodal logistics. As can be seen in the nearby charts, relative year-over-year freight volumes began to surge in the third quarter of 2017. Domestic freight activity in 2018 has continued to surpass volumes from all previous years. When measured by shipment volumes, the U.S. freight industry appears stronger than it has ever been.

This graph chart shows the Cass Freight Index Shipments from 2015 to 2018

This chart shows the Cass Freight Index Shipments Year Over Year change in percentages.

Strong freight demand is driving full trucking fleet capacity utilization, and rates have responded accordingly. The FTR3 Truck Utilization Index measures truck and driver availability in the domestic commercial truck fleet and has been at 100% since the third quarter of 2017. In addition to demand growth in the freight market, full capacity utilization has resulted from the December 2017 enforcement of the federal electronic logging device (ELD) mandate, which regulates the amount of time commercial truck drivers may spend driving. While the ELD mandate was first published in 2011, in December 2017 its requirements became more strictly enforced, and now all CDL holders (commercial truck drivers) must electronically report hours of service, or hours spent driving. ELDs virtually ensure trucking companies and their drivers comply with hours-of-service restrictions put in place for roadway safety. Restricting driving hours to improve roadway safety comes at a cost – by some estimates, ELDs have taken 10% of available trucking capacity out of the market, at least until new trucks hit the roadways.

This graph chart shows the FTR Active Truck Utilization Index from 2011 to 2018

Amid relentless demand for shipping freight, the supply side has responded: North American orders for commercial trucks hit an all-time high of 52,250 units in July, surpassing the previous record of 51,194 units set in March 2006. FTR reports: “Fleets are desperate to get new trucks, but [new equipment] supply is limited. ... [T]here is a truck shortage.” Manufacturers are working at a feverish pace to meet new orders, but they cannot keep up – the backlog of truck orders has more than doubled over the past year. Bloomberg reported in August that as of July 31, roughly 248,000 new commercial trucks had been ordered by domestic fleet operators. Given the rate at which new trucks are built – currently, about 30,000 per month – the order backlog will take at least six to eight months to reach operators, which will support intermodal freight rates until at least mid-2019. Even so, as new orders relieve the equipment shortage, fleet capacity will remain constrained by a lack of qualified truck drivers.

As the market rushes to add new trucking capacity to the fleet, a labor shortage is compounding the problem. The Bureau of Labor Statistics estimates the average age of a truck driver is 55 years old, so drivers are retiring at a relentlessly increasing pace. The American Trucking Associations estimates the “driver shortage” is currently in the 50,000 to 75,000 range and – absent quicker adoption of driverless trucks – roughly 900,000 new truck drivers will need to be hired in the next decade. However, put simply, not enough young people want to be truck drivers.

Both in equipment and labor, the trucking market is grappling with little to no excess capacity. Trucking fleets have responded by raising rates. For the week ended August 30, 2018, spot freight rates increased by an average of 50% from the prior year, according to InTek Freight & Logistics, an intermodal logistics provider that services and tracks 115 major national freight lanes in a weighted average intermodal rate index.

Freight demand is growing at a 10% annual rate, now building on the already strong baseline set in 2017. Robust volume growth has pushed capacity utilization to 100%. Supply, meanwhile, is a function not only of the size of the fleet, but also the size of the driver pool. As such, freight rates are at historic levels that are in many cases 50% higher than they were one year ago. While the market is adding to the fleet size, the labor side of the equation remains tight. With the outlook for autonomous trucking still uncertain and mired in regulatory red tape, there is no quick fix in sight to the labor shortage. All said, the near- to medium-term operating environment for trucking appears to be quite healthy.

1 Bloomberg and InTek Freight & Logistics, LLC.
2 Cass Information Systems is a leading provider of freight transportation payment processing and related business intelligence services, disbursing more than $25 billion annually on behalf of its clients.
3 Freight Transportation Intelligence (FTR) is an industry source for freight research that has served the shipping, trucking, intermodal, equipment and financial communities for nearly 30 years.

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*The Cass Freight Index uses January 1990 as its base month. The index is updated with monthly freight expenditures and shipment volumes from the entire Cass client base. Volumes represent the month in which transactions are processed by Cass, not necessarily the month when the corresponding shipments took place. The January 1990 base point is 1.00. The index point for each subsequent month represents that month’s volume in relation to the January 1990 baseline. Each month’s volumes are adjusted to provide an average 21-day work month. Adjustments also are made to compensate for business additions/deletions to the volume figures. These adjustments help normalize the data to provide a sound basis for ongoing monthly comparison.

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