CSCMP's Supply Chain Quarterly
November 11, 2019

Reduced speed zone

With rates, tonnage, and revenue stagnating, the outlook for 2016 is trending toward slow growth for both truckload and less-than-truckload carriers.

What a difference a year makes. In 2014, the U.S. domestic for-hire trucking industry experienced a bounce-back after several years of contraction. Total tons and ton-miles reached the highest level in years, rates were on an upward slope by the end of that year, and, according to the American Trucking Associations, trucking revenue grew to over $700 billion for the first time ever. But just one year later, rates, tonnage, and revenue were stagnating, and the outlook was—and still is—trending toward slow growth in freight movements.

IHS Markit, a global provider of business information, analytics, and solutions, expects total U.S. domestic for-hire truck tonnage will see low year-over-year growth rates over the medium and long term. The proprietary IHS Transportation Transearch database of U.S. commodity movements shows that after a solid 2014, for-hire truck tonnage grew at a rate of just over 1 percent in 2015, to a total of roughly 4.4 billion tons handled by truckload carriers and 110 million tons by less-than-truckload (LTL) carriers. By the end of 2016, total tonnage for both truckload and LTL carriers is expected to be up only slightly—less than 1 percent each—from the 2015 year-end totals.

Article Figures
[Figure 1] Annual truck tonnage growth rate
[Figure 1] Annual truck tonnage growth rate Enlarge this image

Truck tonnage should recover slightly in 2017 and 2018. Over the next decade, truckload tonnage is expected to increase at an average annual rate of 1.9 percent, while less-than-truckload tonnage will grow at a 2.5 percent rate. (See Figure 1.) Even with higher growth rates, total LTL tonnage is not expected to exceed 3.0 percent of the total for-hire domestic tonnage during the forecast period.

Why the slowdown?
The slow growth in truck tonnage doesn't seem to be due to any shift to other transportation modes. In fact, any move from truck toward rail intermodal should not impact the total tonnage on the road, as the typical container shipped on the rails has a corresponding truck drayage movement on both the origination and termination sides. Nor are we seeing private fleets taking business away from for-hire carriers. Private fleets are expected to see the same tonnage softness as for-hire trucking, and companies with private fleets increasingly are considering outsourcing their moves to dedicated, for-hire carriers as a cost-cutting measure. Additionally, rail carload and inland barge tonnage are both down. While these are not traditionally competitors for truck tonnage, this decline is another indicator that the slowdown is systemwide and is not limited to any particular mode.

Limitations on the availability of drivers do not seem to be causing the slow growth, either. While the industry continues to experience a shortage of qualified drivers, it's also true that trucking companies are looking to reduce excess capacity rather than expand their hiring. One indication of that trend is a sharp decline in orders for heavy-duty Class 8 tractors, down by one-third year-over-year as of June 2016.

Instead, the overarching reason for slow growth in truck tonnage is weak economic growth in the short term. In other words, the cargo is not there to be moved in the first place. Even the few bright spots in the economy may not offer much hope for a trucking recovery in the near term. The most recent data from the U.S. Department of Commerce shows housing construction rebounding from recession levels, particularly in the West and Northeast. Spending on highway and road construction has also been rising every year since 2011, to an estimated $1.07 billion in 2015, according to the U.S. Census Bureau.

While this is certainly good news for the U.S. economy as a whole, the impact on the trucking sector is somewhat circumscribed. For one thing, the effects tend to be more regional; shipments in the construction industries often are associated with a shorter length of haul and therefore have a smaller revenue impact. For another, many of the primary commodities used in those industries—particularly aggregates, steel, lumber, and other building materials—are more likely to be transported by specialty haulers, so the gains are limited to a subsector of the for-hire trucking industry. Due in part to these factors, it is likely that the growth of freight movements will lag behind the growth in U.S. total gross domestic product (GDP).

The road ahead
Shippers have already been experiencing the impact of slow freight growth in the form of lower rates. In May, the Cass Truckload Linehaul Index, which measures per-mile truckload rates, showed three consecutive months of decline and fell to its lowest level since the summer of 2014.

IHS Transportation expects trucking prices to start heading upward in the second half of this year, assuming carriers are able to constrict supply enough to support higher rates. Other potential factors behind rate increases include higher costs for trucking companies in the form of higher wages and fuel prices. Due to the soft market, costs are currently out of synch with rates, and carriers are anxious to pass those higher costs along to customers as soon as the market allows. The industry's extremely high turnover—over 100 percent—and a period of wage stagnation in recent quarters could lead to driver wage increases. Additionally, average highway diesel prices started the year at $2.00 per gallon, but by the end of 2016 could be over $2.50 per gallon, echoing crude oil prices, which at this writing have bounced from their bottom of around $30 a barrel to more than $50 a barrel.

The expectation is for slow growth to continue. With energy prices low and employment gradually improving, U.S. consumers may be inclined to spend more of their paychecks, driving up demand for retail goods and therefore demand for transportation services. But there are a number of risks to consider. Unanticipated economic, political, or security shocks could upset the economic recovery. Another recession could mean a decline in freight movements; it could also lead to higher freight costs as smaller carriers go bankrupt and capacity shrinks further. Federal regulations, particularly upcoming greenhouse gas emissions standards and potential changes to hours-of-service restrictions, could also impact the trucking industry by reducing capacity and further slowing growth. And finally, what happens abroad has a direct impact on U.S. domestic trucking: a slowdown in the global economy or a revisiting of trade agreements may result in fewer goods and materials being transported to and from U.S ports of entry. With so many risk factors in play, buyers of trucking services will need to be vigilant if they're to anticipate how rates and capacity will play out in the coming year.

Steve Owens is a senior consultant with IHS Transportation.

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