Most people are unaware of the impact the transportation industry has on the US economy because of the efficient supply chain network that makes it work. From delivering the raw materials manufacturers need for production, to shipping retail goods to stores, the cost efficient movement of materials and products is central to keeping the economy strong.
The most essential part of the US transportation infrastructure is the trucking industry. Almost 70% of freight in the US is transported by trucks. The total amount spent on trucking a year is over $700 billion. It’s no surprise then that as trucking goes, so goes the economy.
When trucks are busy, it’s a good sign that manufacturers are producing and consumers are buying. Conversely, when trucking declines, it is a clear sign things are slowing down. In fact, transportation has such a great importance that many economists use the strength of the trucking industry as an indication of how well the country is doing as a whole.
Another impact logistics has on the economy is that when transportation costs go up, the price of most everything goes up as well. Higher shipping costs make products and materials more expensive up and down the supply chain, and, perhaps more importantly, to all of us as consumers.
An ongoing challenge for the industry is that trucking, especially LTL trucking, is exposed to countless market driven and regulatory influences. Here is a look at issues currently facing the industry.
Higher Turnover Means Higher Prices
The industry is facing a driver shortage, which is widely viewed as the biggest problem for trucking. With the economy doing well, and unemployment down, it is difficult for most carriers to find and keep drivers. This issue has tightened capacity and puts upward pressure on freight rates.
Last year, the truck driver turnover rate hit 100 percent in the third quarter for many large truckload carriers. This represents a 13% increase from the second quarter, its highest since 2012, according to the American Trucking Associations. Drivers are demanding benefits and higher pay. This has led to an increase in operating costs for carriers and higher transportation costs for shippers.
Government Regulations Limit Expansion
Like many industries of such great national importance, trucking companies constantly struggle with tight government regulation – and the costs it takes to comply.
One of the most impactful regulations in recent years is the CSA (Compliance Safety Accountability) initiative from the FMCSA. The original intent was to improve safety by the enforcement of new regulations as well as to closely track and report on compliance. It also sought to provide a universal scoring system to assess which carriers are most reliable. While the intention was good, the reality has been less effective. The results of the program are in question since the effort to comply is so costly for carriers.
There are more regulations on the horizon. The Electronic Logging Device (ELD) mandate comes into effect in December of 2017, meaning that all driver hours will be monitored electronically. While many larger companies already use this system to keep track of the hours their drivers work, small and medium-sized businesses will incur significant costs for the technology needed to comply with the new regulations.
Although long since implemented, the debate over Hours of Service (HOS) continues. Truckers and drivers maintain that the mandatory breaks are overdone and continue to hurt productivity. With anecdotal claims of 3-8% loss of productivity in a time of tight capacity, HOS is one more factor pushing freight rates higher.
Dropping fuel prices would seem to be a good thing, right? When it comes to the cost of shipping, cheaper fuel means less cost. To shippers and consumers, lower fuel helps, but it’s not necessarily so positive to carriers.
With fuel surcharges becoming the norm over the last 10-15 years, many carriers are in the habit of making fuel surcharges account for other costs. Lower fuel reduces the surcharges that can be charged, which can lower margins more than what the price of fuel actually reflects.
Outlook for 2016 and Beyond
There are other market and regulatory factors that will shape the industry in the coming years. For one, the Obama administration has introduced the goal of increasing truck mileage to as high as 10 miles per gallon (mpg). Today, an average loaded tractor trailer gets around 5 or 6 mpg.
The logistics infrastructure of the US is very dependent on the trucking industry. Market and regulatory pressures that restrict the industry will always put upward pressure on freight rates. As these issues evolve over the coming year, it will be interesting to see the impact each has on the trucking industry and the economy as a whole.