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Trucking is growing, but watch NAFTA and driver shortage

Posted: February 26, 2018 by John G. Smith

Trucking activity is strong, but there are still threats like a driver shortage to address, says Bob Costello of the ATA.

NASHVILLE, Tenn. – Trucking activity is surging thanks to an array of economic factors in the U.S., but there would be a steep price to pay if U.S. President Donald Trump follows through on threats to pull out of NAFTA.

“NAFTA trade via truck supports over 46,000 jobs in our industry, including nearly 31,000 truck driver jobs,” American Trucking Associations chief economist Bob Costello observed during a keynote address to Omnitracs’ fourth-annual Outlook conference.

“NAFTA is critical to trucking.”

The fear is whether Trump will decide to pull out of the trade deal as a negotiating tactic, he said. Should that happen, tariffs would rise, and cross-border goods would cost more.

The best case scenario would be a pause in negotiations after an upcoming round of trade talks in Mexico, and maybe another quick one before Mexican elections, he said. “Pay attention to the media after this round. I think it will tell you a lot.”

But Costello’s presentation was hardly one of doom and gloom. The U.S. trucking industry continues to benefit from a thriving economy – particularly against a backdrop of rising consumer activity, construction, and factory output.

The real GDP in the U.S. is forecast to grow 2.7% this year and next year. “Part of that is the new tax law. That added 0.3 percentage points this year,” he said. Costello also expects the federal reserve to increase interest rates to normalize, likely rising in every quarter. “When bank margins improve, they are more likely to make loans,” he said.

Strong housing starts certainly lead to an increase in flatbed activity, but don’t forget the impact on dry vans, either. “You’ve got to put furniture in them,” Costello observed. Factory output was up 1.7% this year and should grow 3.3% this year, reaching some of the highest levels since the great recession. And LTL carriers are among the biggest winners when the latter freight increases.

The driver shortage and e-commerce

Still, there are challenges.

With unemployment rates hovering around 4%, close to full employment, it’s difficult to find workers in every sector of the economy.

“We know that’s the case with truck drivers,” Costello said.

The natural response has been to boost pay, and wages and salaries for U.S. drivers have grown about 3% over the past year. But this doesn’t necessarily mean that drivers are taking home more pay. Tractors that once traveled 125,000 miles a year can struggle to hit 100,000 miles in the current operating environment. The average dry van shipment traveled 796 miles in 2000, but 527 miles last year, Costello explained, citing changes in the supply chain.

Look no further than e-commerce for one of the most significant reasons why. Since 2000, e-commerce sales for non-store retailers are up 246%, while brick and mortar operations have seen their online sales rise 78% — reaching 16% of sales overall. These goods, however, carry promises of two-day deliveries, and that means retailers have needed to hold more inventory and establish more distribution centers.

The way these shippers effectively package freight is also changing the number of truckloads that are required. “Shippers are now shipping less air,” he said. “They’ve figured out packaging exactly.” Producers of goods like laundry detergent are finding way to remove water from their goods, and it isn’t the only way transformed products are making a difference. Trailers that once held 100 big screen TVs can now move hundreds of flat screens, for example.

“Our growth potential is not as high as it once was, at least in the number of loads,” he said.

But the growth in recent trucking activity has still been strong, even in that context.

From 2000-07, truckload volumes were relatively flat, expanding at a rate of about 0.9% per year. Between 2010-14 the annual growth was closer to 2.6%. That dropped to 1.1% in 2015 and was relatively flat in 2016, but the tonnage is picking up. Factory output will push it higher, Costello said. “If you’re LTL, expect more freight coming your way.”

Small fleets have been adding capacity while their large counterparts held back.

Truck sales and the driver search

While truck sales are strong – creating one of the biggest markets in 25 years — it’s unknown what share of the vehicles are for replacements rather than adding capacity, Costello noted.

When fracking activity began to slow down in 2015, large fleets stuck with the number of trucks they had in hand. Small fleets with revenues below $30 million per year were quick to add capacity, and they filled driver seats with employees who had been laid off from jobs in the oil fields.

By 2016, large fleets pulled back tractor counts by 5%. In contrast, small fleets increased by 5.1% — in part because there was low-mileage used equipment on the market. Both the average miles per truck and the price per truck dropped 15% in a two-year period. By the time freight volumes turned around in early 2017, large fleet capacity still dropped because no drivers were available. Small fleets allowed their fleet sizes to shrink 0.2%.

Finding people to sit behind a steering wheel for any of the fleets remains an intensifying challenge.

Driver turnover rates in the U.S. truckload sector were around 86% in the third quarter of 2017. Costello expects the numbers to reach 90% for the year when final figures are analyzed.

That turnover costs the trucking industry an estimated US $1 billion a year, and the shortage intensifies.

Last year’s shortage of 51,000 drivers, largely in the over-the-road space, may seem small in the context of 3.5 million truck drivers or even the 1.7 million drivers that include those at the wheel of dump trucks and cement mixers. But there’s actually only about 500,000 drivers who work in the over-the-road segment, he said.

“At current trends we could end up at 174,000 short by 2026. But you know what? I don’t think that’s going to happen,” Costello predicted, noting how wages would push higher and attract more people. “It has been, and it should, and it will continue to do that. And it must.”

So, too, might there be a need for policy changes that lower the minimum age for interstate truck drivers in selected cases, with the right training and technology. They’re currently allowed in 48 states but can’t cross state lines, he said.

“Demand for drivers is heating up significantly,” Costello told the crowd. “We need to somehow attract 900,000 new drivers to the trucking industry every year.”

The economist also had a message for shippers who are worried about available capacity. They have the means to create it.

“Stop making the drivers wait,” he said, referring to delays that will be clearly identified through mandated ELDs. “The smart ones are trying to figure that out.”

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