Watching the economic scales settle to equilibrium

By Timothy Brady

Question: Are freight rates and the amount of freight really continuing to improve? I’m seeing different signals from different areas. Many flatbed and general freight haulers saw a significant drop in their freight in July. In current month-to-month comparisons according to TransCore’s Spot Market Rate Index, freight loads for dry vans and reefer (refrigerated) vans each dipped 8 percent in July compared to June, while flatbed load availability declined 17 percent. One flatbed carrier told me his June rate from Atlanta was $1.60 to$1.70 per mile and that it dropped to $1.10 to $1.20 in July with fewer available loads. The bright side of this picture is we have continued a strong showing, with a 122 percent increase in spot-market-freight availability in July 2010, compared to this time last year.  

Yet the diesel fuel indicator from Ceridian-UCLA Pulse of Commerce Index™ (PCI) by UCLA Anderson School of Management climbed in July by 1.7 percent after dropping 1.9 percent in June. So one side is indicating the economy’s slow but steady recovery, while the side directly affecting truckers’ wallets is showing an economic decline.

Did we experience a bubble that is deflating again (or getting ready to pop) or is this a temporary glitch in an improving economy? Again, it depends on where you look. In the last weeks we have also seen the largest jump in fuel prices, steadily increasing for the last three. Last week the price jumped 6.3 cents per gallon, the largest increase since May. To top off the diesel price discussion, the DOE's Energy Information Administration (EIA) released their monthly Short Term Energy Outlook for August projecting on-highway diesel fuel retail prices, which averaged $2.46 per gallon in 2009, will average $2.97 per gallon in 2010 and $3.14 in 2011. (Keep in mind the DOE’s EIA diesel prices projections have historically been low).

Other recently-released economic reports, data on housing and inflation, are also showing mixed results.

The Commerce Department report indicates housing starts - the number of new homes beginning building - rose 1.7% to an annual rate of 546,000 in July, but then permits fell 3.1% to an annual rate of 565,000. Economists were anticipating housing starts to increase to a seasonally adjusted annual rate of 555,000; building permits were expected to slip to a rate of 573,000. So the number of housing starts was lower than anticipated and the number of building permits slumped even below predictions.

The Producer Price Index, a measure of wholesale inflation, matched expectations by increasing 0.2% in July, after dropping 0.5% in June.

Finally, unemployment, the number of first-time filers for unemployment insurance rose to the highest level since late February. The national unemployment rate currently stands at 9.5%, which doesn’t include the under-employed or those who have just stopped looking for work. Yet the report indicated that many companies are flush in cash, pushing their workers to the max but still not willing to add employees to their payrolls. Even the wealthy are reining in their spending according to some reports, and that 5% of the wealthiest Americans represents more than a third of the economy, at 37% of all consumer spending.

From my observations, and I’m no economist, is that the economy is still struggling. While we don’t need a sudden increase in all of these areas, we do need a steady, slow, upward movement and most importantly, we need the unemployed, and underemployed to have decent-paying jobs. Without more consumers with some discretionary income, we are going to remain stagnant, not really moving up or down. However, we are going to continue teetering on the edge of the recession cliff until the economy can get some momentum to start pulling away.

So what does this mean to the trucking industry? It means cautious optimism, having the equipment and personnel in the wings, ready to jump at each hauling opportunity that improves your overall revenue and the bottom line. Carriers must be careful not to jump in too quickly in any freight lane which has been floundering in the past. You must carefully evaluate the freight to be hauled: Is going to be sustainable over a long period?  Committing your valuable assets needs to be done with forethought and precise planning.

1. Is the freight available to haul for a period that allows you to maximize your equipment and drivers during that period?  Short hauling arrangements are ok to fill in gaps in your long-term freight contracts, but you cannot sustain or grow a carrier on this type of dispatching strategy.

2. Does either the revenue produced by the haul or the commitment of equipment and drivers exceed 25% of your carrier’s resources? If it does on either count and you were to lose the haul, the results could be devastating to your operation.

3. Is the backhaul sustainable? Does the revenue produced from the entire round exceed your break-even points on each piece of equipment plus create a profit at the end of each month? You don’t need to profit on every leg of a freight lane. The trick is to create enough revenue from all the legs in order to profit when the freight round’s completed.

The economy, according to all the stats and factors, is going to continue bouncing along the bottom for the foreseeable future. With the unpredictability of what the future holds, and the refusal of American business to produce more by hiring more workers, we’ll continue to have times when inventories are at or above needed levels, making less freight to be hauled. We’ll also see short periods when inventories dwindle and production increases so more trucks are needed to haul both raw product and finished merchandise. Being prepared and having a plan for this new paradigm is what will sustain and grow your operation.

Good loads and good roads, everyone.

Timothy Brady  ©2010