Van capacity-demand balance is close to “average” levels for early May
Entering May, van capacity is tighter than in May 2016, is almost identical to 2015 and 2013, and is getting closer to the longer term average for this time of year. The index has recovered most of its falloff from January into February.
Capacity started to tighten up a little through July of 2016, but then the index flattened out through November. In December, capacity tightened and the index reached its highest level of 2016. That was a very different pattern than 2015, when capacity was at it tightest in January and became more readily available throughout the year.
While the negative impact on capacity of ELDs will not be felt until late 2017, any acceleration in the freight economy could lead to tighter van capacity by Q3 of 2017. In most years, capacity gets tighter as we enter Q2, but that is only marginally true in 2017. If there is a surge in freight volumes later in Q2, capacity will tighten and we will see upward rate pressure, but it is not at all clear that we will see demand increase enough in Q2 to absorb the excess capacity in the market today. The index measures incremental demand for dry-van truckload services compared to incremental supply. The higher the index the tighter is capacity relative to demand when compared to a prior period.
Graph reproduced with permission from Morgan Stanley. *2006-2016 average trend line excludes financial crisis years of 2008 and 2009. For more information contact: Alex Vecchio at Alexander.Vecchio@morganstanley.com
Through mid-year, rail carload traffic is down 4% year-over-year while intermodal traffic has grown by only 2.6%. Looking at the data across major commodities, coal is not only the largest commodity group on the U.S. railroads it is also the one that has declined the most, down 9.4% year-over-year. Despite that decline, coal accounts for over one-third of non-intermodal rail traffic. Clearly, the EPA’s war on coal combined with much lower natural gas prices has had a significant impact on demand for coal. Overall, five major commodity groups have grown, while the other five have declined.
Other significant commodity groups with less rail traffic this year than last include Metallic Ores (down 6%) and Petroleum (down 2%), the latter reflecting the slowdown in oil production as oil prices plummeted.
Only two major commodity groups have grown by more than 1% year-over-year. Grain is the fastest growing at 4%, which is somewhat surprising given the strength of the dollar. Motor vehicles are up 1.8% reflecting the strong performance of auto sales and assemblies in 2015.
Intermodal growth of only 2.6% is disappointing, but this includes international freight which was significantly impacted by the west coast port strike. Lower fuel prices and more readily available truck capacity have undoubtedly slowed domestic intermodal growth in 2015.
Source: Weekly Railroad Traffic, AAR
The Environmental Protection Agency (EPA) and National Highway Traffic Safety Administration (NHTSA) proposed Phase 2 Green House Gas (GHG) emissions standards for medium- and heavy-duty trucks and trailers on June 19. The rules will be phased in through 2027 with truck requirements taking effect in 2021, 2024, and 2027 while trailer requirements will take effect in January 2018. The cost and environmental impacts are still being evaluated by carriers and truck and trailer manufacturers, in part because of the 1,329-page proposal plus 972-page regulatory impact analysis, and in in part because the mix of existing and yet-to-be deployed technologies that will be required to achieve the goals.
Trucking is estimated to produce 20% of GHG emissions despite accounting for only 5% of all vehicles on the road. The proposal calls for advances in fuel economy to yield a 24% reduction in emissions per mile for tractors designed to pull trailers plus an 8% reduction for trailers compared to 2017 levels. The Environmental Defense Fund estimated that tractor-trailer combinations would have to achieve about 9.5 MPG in 2027, up from 6.0 MPG in 2010 to meet the targets. The regulators’ expectations are that MPG gains will offset the estimated additional equipment costs over a 24-month period making the proposal a winner for both the environment and supply chain costs. Industry representatives are not totally convinced but are not speaking out strongly against the proposal at this time. The additional expected costs for a tractor are estimated at $10-$12k per unit by 2027, and if that is the case the cost increase is less than what was required to meet NOx and diesel particulate emissions regulations. In addition, those improvements tended to degrade fuel economy whereas the GHG initiatives are intended to improve fuel economy providing a benefit to truckers. Trailer requirements are expected to boost purchase costs by about $1,200 between 2017 and 2027.
There are some concerns with the proposal. Truck dealers don’t want to see pre-buying ahead of implementation years as was the case in 2006 before the 2007 engine requirements, which led to plummeting sales following the effective date, that lasted through 2009. OOIDA is concerned about costs and reliability with some of the new untested technologies such as waste-heat recovery. The proposed rules do not mandate any particular technology to achieve the goals.
The ATA, through Vice President and Energy and Environmental Counsel Glen Kedzie, issued a positive statement regarding the rules. “ATA has adopted a set of 15 ‘guiding principles’ for Phase II, and based on conversations with regulators and a preliminary review this proposal appears to meet 14 of those. We believe this rule could result in the deployment of certain technologies that do not fully recognize the diversity of our industry and could prove to be unreliable. This unreliability could slow not only adoption of these technologies, but the environmental benefits they aim to create.”
It appears that the proposed rules will not dramatically increase the up-front purchase price of tractors and trailers over the next 12 years and that the increases in capital costs will be offset by fuel savings over a 24-month operating period. There is no immediate impact as the rules for tractors will not take effect until 2021 and trailers until 2018. All in all, the early indications are positive for the trucking industry and its customers.
If our nation fails to get its fiscal house in order, every sector of the economy will experience negative impacts, but the supply chain will be particularly hard hit. With four years of trillion dollar plus annual deficits and over $16 trillion in national debt there is now a heated debate about the extent to which we have a spending problem or a revenue (tax) problem. The data suggests we have both but that the spending problem is far greater than the revenue problem. In addition, anemic economic growth, not the Bush Tax Cuts, are the reason for the revenue slow down.
Let’s start with spending. From Reagan’s first term through Clinton’s second term the federal government increased annual spending by $200 to $280 billion from one administration to the next regardless of which party held office. Clinton turns out to be the spendthrift of the bunch only increasing annual spending from $1.5 trillion to $1.7 trillion in his second term. Spending over the last 12 years has spiraled out of control. In Bush’s (43) first term he increased annual spending by $396 billion and in his second term he beat that by increasing annual spending by $628 billion. From Clinton’s second term to Bush’s second term annual federal spending increased by over $1 trillion, from $1.7 trillion to $2.7 trillion. Not to be outdone, in Obama’s first term annual spending increased by $884 billion resulting in annual spending of $3.6 trillion, more than double the level of Clinton’s second term. Is anyone spending twice as much per year as they did in 2000? This is not a Democrat or Republican issue. Both parties are complicit in doubling annual federal spending over a 12 year period.
The revenue side of the equation is more complicated. The Reagan tax cuts (1981 and 1986) did not drain the treasury as many complained nor did the Bush (41) tax increases result in a federal windfall of revenue. In fact from Reagan’s first term through Clinton’s first term, annual revenues increased by $187 to $262 billion from one administration to the next. The revenue increases were not much less than the spending increases and average annual deficits were in a tight range of $150 to $233 billion. Then things got interesting. In Clinton’s second term annual revenues surged by almost $500 billion per year from $1.3 trillion to nearly $1.8 trillion as the dot-com boom/bubble boosted tax receipts. Note that this revenue surge followed the 1997 Taxpayer Relief Act which cut the capital gains tax rate from 28% to 20%. We ran a federal government surplus for four years (the last of which was under Bush). In Bush’s first term despite the dot-com bust, 9/11, a short recession, and two rounds of tax cuts (2001 and 2003) annual revenues still increased by $88 billion – modest by DC standards. Far from starving the federal government of tax revenues, the Bush tax cuts paved the way for his second-term recovery that saw tax receipts increase by over $500 billion per year, from $1.9 trillion to $2.4 trillion annually, in spite of the 2008 recession when real GDP dropped by 0.3%. As already pointed out, rather than pay down debt with that revenue windfall, we spent it. That brings us to Obama’s first term where revenues actually declined by $153 billion per year. Declining GDP in the first year, weak corporate tax receipts and a decline in Social Security receipts were major factors, not the Bush tax cuts that led to record tax revenue in his second term. By the end of Obama’s first term, FY 2012 federal tax receipts had recovered to $2.5 trillion.
Under Obama’s first term average annual deficits increased by $1 trillion; from $0.3 trillion under Bush’s second term to $1.3 trillion per year under Obama. For the full four year term that is $5.3 trillion in deficits and incremental national debt. Comparing Obama’s first term to Bush’s second term, we increased spending by $884 billion per year and saw revenues decline by $153 billion per year – $6 of extra spending for every $1 dollar of lower tax receipts. Clearly, we have much more of a spending problem than a revenue problem but we do have a revenue problem. The recently passed 10-year $650 billion tax increase will not begin to reduce our deficits. If nobody changes their behaviors and there is no economic damage done by the tax hikes – both extremely unlikely – we will have solved less than 5% of our annual deficit problem – $65 billion out of $1.3 trillion.
The solution to more revenue is a stronger economy. While the relationship is not perfect, the best economic growth period since 1980 was Clinton’s second term when real GDP grew at 4.4 percent per year which produced the second highest increase in receipts, the lowest increase in spending, and a balanced budget. The greatest increase in annual revenue was Bush’s second term despite the second slowest economic growth since 1980 and two rounds of Bush tax rate cuts. The growth came in the first 3 years of that term while real GDP was growing at a 2.5% annual rate and personal, corporate, and Social Security tax receipts were all increasing at a rapid pace even with no increase in tax rates. The rising tide does lift all boats increasing tax receipts and at least providing an opportunity to cut spending as unemployment falls and incomes rise.
The tax package that averted the fiscal cliff does nothing to stimulate economic growth. Higher tax rates on capital gains and on income for businesses like Transplace that are not C corporations – and thus pay taxes at the now higher individual tax rates – will leave less after tax cash flow to invest in growth as well as less incentive to take the risks that all businesses need to take in order to accelerate growth and improve our nation’s dreadful unemployment rate.
Slow economic growth, trillion dollar annual deficits, stubbornly high unemployment, $16 trillion in debt, and tax hikes on small businesses and job creators negatively impact our nation’s supply chain. Our highways and bridges need to be repaired, but we are broke and few believe a gas tax hike is possible and even fewer believe that if federal gas taxes were hiked the money would be effectively spent fixing our critical highway infrastructure. Eventually our debt and monetary easing will lead to higher interest rates and inflation, driving up the cost holding inventory and transporting goods. Will truckers be able to afford and willing to take the risk of buying trucks and hiring drivers? The stunning increase in federal spending and the resulting national debt hang like an albatross around the neck of our economy. America has weathered tougher storms in our 237-year history. When we have needed it the most, a great leader, or team of leaders, has always emerged to get us on the right path. Who will step up now?
-Welcome to the Transplace Industry Blog. In this blog I share information covering three key areas plus topical miscellaneous items. First, I post the economic data that our Customers see in many of our quarterly business reviews. This is not meant to cover the entire economy, only some key items such as fuel prices as well as factors that drive freight demand such as retail sales and housing starts. Second, I identify some key regulatory and legislative issues that affect freight transportation. This section is more of an opinion and commentary on how each items affects the supply chain. I also provide links to other resources about the topic. Third, I’ll post information on Carrier and 3PL financial performance. Most of this data represents publicly traded companies as reported by highly respected financial analysts who cover the industry.I hope you enjoy and learn from our blog. I welcome your comments and would prefer that you include your name, company, and title if you wish to opine. Feel free to use our graphs and charts in your own presentations. They are easy to copy, save, and paste.I also want to publicly acknowledge and thank Shraddha Lakhera, a former graduate student at the University of North Texas, who was initially responsible for continuously updating the data, charts, and graphs that make our blog possible. Shraddha has graduated and joined Transplace International, our ocean and air forwarding business, but she continues to provide assistance when needed. Alec Abernathy, an undergraduate student at College of The Holy Cross, has assumed the primary duties for updating our charts and graphs and assisting with various research efforts.Thanks for visiting the Transplace Industry Blog.