2014: A rewarding year for U.S. logistics

Last year, when Rosalyn Wilson, the Parsons Corp. transportation consultant who researches and writes the annual "State of Logistics Report," predicted that 2014 would turn out to be a "banner year" for the U.S. logistics industry, some listeners were skeptical. That bullish outlook simply didn't mesh with her persistently pessimistic take on the economy and the logistics business since the Great Recession ended in 2009.

But as it turns out, that optimism was more than justified. In the 26th annual report, released in June, Wilson wrote that in terms of freight volumes and demand for services, 2014 was the best year for U.S. logistics since the start of the recession in 2007. And there's more to come: Barring unforeseen events in this year's second half, 2015 should also show strong growth despite a weak first quarter caused by inclement weather, a stronger dollar that curbed export activity, and problems caused by labor strife at West Coast ports, the report said.

Article Figures

[Figure 1] Calculation of 2014 logistics costs (in U.S. $ billions) Enlarge this image

[Figure 2] U.S. logistics as a percentage of GDP Enlarge this image

[Figure 3] Total U.S. business inventories Enlarge this image

[Figure 4] U.S. inventory-to-sales ratio Enlarge this image

The annual "State of Logistics Report," produced by the Council of Supply Chain Management Professionals (CSCMP) and presented by Penske Logistics, provides an overview of the economy, the logistics industry's key trends, and the total U.S. logistics costs for the previous year. The research also reviews 2014 freight market developments on a month-by-month basis and concludes with a look at industry indicators for the current year.

It comes down to the consumer
Why such an upbeat outlook? It's all about consumer demand. "The U.S. economy is on fairly solid ground" with unemployment falling, real net income and household net worth inching up, low to moderate inflation, and declining oil prices putting more money in Americans' pocketbooks, Wilson wrote in the report. "We're actually seeing some very sustained growth, in my opinion," she added in remarks during the press conference where the report was released.

When consumers have more cash available, companies sell more products and construction firms build more houses. That translates into greater demand for transportation and logistics services—one of the main reasons total logistics costs in 2014 were up 3.1 percent over the previous year, to slightly less than US $1.45 trillion. (See Figure 1.)

One of the report's most frequently cited data points is logistics costs as a percentage of gross domestic product (GDP). That number has remained within a range of 8.2 percent to 8.4 percent since 2010. That pattern continued in 2014, when the number hit 8.3 percent. (See Figure 2.) However, in an e-mail interview prior to the report's release, Wilson said that the current levels are likely unsustainable, and that the ratio eventually will rise to levels of 9 to 9.5 percent as a crisis in motor carrier capacity causes freight rates to climb. Trucking costs—measured as carrier revenues—accounted for slightly less than half of the total expense of the nation's logistics system, so any trends in that sector will have a significant impact on overall logistics costs.

That truck rates did not surge in 2014 was one of the biggest surprises in the report's findings, Wilson said in the interview. Truck revenues did rise, by 3 percent over 2013, but tonnage gained 3.5 percent, meaning that rates remained relatively flat, she wrote.

Shippers succeeded last year in whittling down motor carriers' proposed rate increases, from 6 to 8 percent to levels approaching 2 percent, Wilson said. However, that practice cannot continue indefinitely, especially as carrier capacity tightens to extraordinary levels, she added. "At some point, rates have to rise, and I think we'll see that by the end of this year," she said at the press conference.

When the pricing picture turns, it will likely be a quick and sharp change, with one of the big motor carriers taking the lead and others following suit, Wilson said in the e-mail interview. In her report, she advised shippers to pay more attention to carriers' capacity guarantees than to the rates they charge, and to work with carriers to optimize their equipment utilization. Shippers that take both routes will stand the best chance of mitigating 2015 rate increases, because carriers would be more willing to keep rates steady if they know their equipment and drivers are being turned faster and more efficiently, she said.

Rail intermodal volumes rose 5.2 percent last year, continuing a pattern of solid multiyear growth for the sector due to conversions from truckload services as well as the onboarding of new business. Rail carloads rose 3.9 percent, while overall revenue increased 6.5 percent. Together, the two segments posted the highest annual rail traffic on record: just under 28.7 million carloads, containers, and trailers. Rail traffic is now close to its prerecession levels, but the mix of products and the growth in various service segments has shifted, the report said.

All segments of waterborne transportation grew in 2014, despite the months-long congestion on the U.S. West Coast, as importers hurried to bring in merchandise in anticipation of labor troubles, and imports from China surged in the third quarter. Inland waterway freight traffic rebounded due to solid growth in the number of shipments of grain, minerals, and petroleum products by barge. Overall, costs for water transportation rose 8.9 percent.

Air cargo revenue declined 1.2 percent, paced to the downside by a 3.6 percent drop in international revenue. Domestic revenue, meanwhile, rose just 0.4 percent. Cargo yields fell as load factors remained weak, the report said, but there was one bright spot: In 2014, a record $968 billion of high-value merchandise moved by air, with exports accounting for just 44 percent of that total.

The current downward trend in exports will likely persist in the coming months, as the strong dollar continues to make U.S. products more expensive overseas, Wilson said. "I don't see exports recovering, at least before the end of the year," she said at the press conference.

The third-party logistics (3PL) segment, meanwhile, turned in a strong performance in 2014 with net revenue—revenue after factoring in transportation costs—rising 7.4 percent. Revenues for domestic transportation management and dedicated contract carriage services rose by 20.5 and 10.4 percent, respectively, as tightening truck capacity drove demand for those services. International transportation management and value-added warehousing and distribution services, meanwhile, each posted low-single-digit increases. The overall 3PL market is expected to grow at a slower pace in 2015 than it did in 2014; Armstrong & Associates Inc., the consulting firm that provided the 3PL data in the report, is forecasting growth of 5.7 percent.

Rising inventory costs a concern
Despite a 4.8 percent decline in the interest component that kept interest rates at historically low levels, inventory carrying costs increased by 2.1 percent over 2013.

The "State of Logistics Report" tracks three components of carrying costs. One is interest, which remained about the same as in 2013, at $2 billion. The second is taxes, obsolescence, depreciation, and insurance, a category that rose by 1.2 percent, in large part due to the growth in inventories last year. The other is warehousing costs, which rose 4.4 percent, capping off a second consecutive solid year as national vacancy rates declined to 7 percent, down 2.7 percent from the previous year. Strong demand from e-commerce providers is a major factor behind the shrinking availability of industrial space; U.S. retail e-commerce sales hit $237 billion in 2014, up from $211 billion in 2013, according to the report.

In the e-mail interview, Wilson forecast further increases in carrying costs as interest rates finally begin to rise and warehousing demand continues to escalate. In the report, she also pointed to rising warehouse labor costs as a contributor to higher warehouse costs in the future.

Inventory levels in 2014 remained above the recession high point, reaching nearly $2.5 trillion, with the second and third quarters the "high-water marks," the report said. (See Figure 3.) Retail and wholesale inventories saw the biggest gains, while manufacturing inventories experienced a slight decline in 2014.

The overall inventory-to-sales ratio, which measures a business's inventory investment in relation to its monthly sales, rose rapidly in 2014. The ratio ended 2014 at 1.35, its highest level since late 2009. (See Figure 4.) A rising ratio indicates either falling sales or excess inventory levels.

That rise was due in large part to wholesalers and retailers ordering more goods in anticipation of labor- and congestion-related delays at U.S. West Coast ports, combined with slower-than-expected holiday sales, the report said. The wholesale and retail ratios leveled off and the ratio for manufacturing began to trend downward in the first quarter of 2015.

In a brief interview following the press conference, Wilson said that she expects the overall inventory-to-sales ratio will decline. Rising carrying and obsolescence costs and warehousing expenses will provide an incentive for companies to get their inventory levels under control, she said. "I'm concerned that inventories are as high as they are, but ... manufacturers are using up the supplies that they have. Nobody is ready to make big investments in more inventory."