Why The Last Mile Is Such A Big Deal

Why the last mile is such a big deal…

(The last mile refers to the final distance covered to get an on-line purchase delivered to your door. The journey from factory to your house may take over 7,000 miles, but the last leg of that journey is gaining importance in the transportation sector)

Think about a common, small-ticket item which you hate to purchase. A good example for me are windshield wipers, and, on a recent rainy drive to Pennsylvania, I realized it was time to change my blades.

The usual buying process for the product is as follows:

1.    Drive to the auto parts store, which for me is “not on the way” to anything, about a 10-minute trip one-way. 

2.    Find the wiper blade catalog which is dirty, roughed-up, and missing some pages. The large book is difficult to hold because it is chained to the shelf and there is no place to set it down.

3.    Find your car in this book. The book is not easy to read because the type is small, the pages are thin and the store lighting dim.

4.    Find the cryptic code for the wiper blade you need. Something like: FGR3T-47 and if you need two sizes: FGR4T-47.

5.    Search the stock of wiper blades trying to remember the secret code that you need because you can’t write it down.  The blades are not displayed in any particular order, so it’s difficult to find the right one.

6.    After searching for a couple minutes, you determine that the blades you need are not stocked in that brand.

7.    Repeat Steps 2 through 5. Usually you can find your wipers in the second brand searched, but if not, you need to repeat those steps for brand three.

8.    You finally find them and head to the check out. On at least one time in your life, you grab the wrong ones, foolishly confusing FGR3B-47 for the blades you wanted.

9.    Wait at the checkout counter as the cashier is on the phone having an in-depth discussion about the transmission on a ’68 Mustang.

10. Pay for your purchase and receive four grease-coated coins as change.

11. Drive home. Estimated time of total trip = 35 minutes.

Who needs that?

A Better Way?

I was running behind on things after returning from my trip and having difficulty finding time to go to the auto parts store. So, one day at lunchtime I Googled “windshield wipers.” The first website up was Walmart.com. Clicked, entered the make, model, and year, and was instantly presented with four brands of wipers at various price points. Selected the second-best brand and went to checkout. But I was $4.59 short of free shipping. What to do? No problem, the website showed me four related products, that would raise my total over the

Free Goods, Even!

threshold. I selected the Glass Water Repellent for $4.69, entered my payment information, and bada bing, bada boom, the purchase was completed in about five minutes.

I didn’t even look at the delivery information since I didn’t need the blades right away. So, I was startled to see the delivery guy scurrying across my yard (I work from home) with the Wal-Mart box the very next day. Alas, they had not delivered in 24 hours, it was actually 25.

Now today we consider this commonplace, we even expect it, but let’s ponder just what happened here.  What would be the reaction, if just several years ago I called the auto parts store and said this?

Here’s my car information. Now go get me prices on every brand you carry.  Then I’m going to choose one and have you process my payment over the phone. Then I want you to go pull my blades off the shelf and package them up for me. Yeaaah, I’m going to need you to deliver them to my house tomorrow. Oh, and I’m not paying any delivery charge. If you could do that, that would be greaaaat.

Now spread this hassle-free buying experience over millions of products and you can hear the collapse of the brick-and-mortar, as the last mile explodes. And, of course, this trend is accelerating. Millennials demand ease of purchase in everything, and baby boomers (like myself) are learning we don’t have to put up with the annoyances of yesterday, because there is really a better way. Everyone will eventually want it fast, easy, and free.  And the “last mile” will cease to be a common term, it will just be normal, standard practice.

The transportation/logistics network has been adapting to these consumer/cultural changes. The system is better than it was, but not optimal. Eventually, one can imagine a network of automated warehouses, serviced by a fleet of self-driving delivery vehicles. And drones, don’t forget drones. Lots of drones.

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

They Said 4% GDP Was Unreachable? What Now?

The conventional economic wisdom (as defined by the forecasts of the most respected economists) last year, was that GDP would not be able to hit 4% for any quarter in 2018. When the economy achieved 4.1% in Q2 2018, the

conventional wisdom was that it was a blip and that growth rate could not be sustained. But it looks like Q3 will come in around 4% again.  Now the conventional wisdom is that economic growth has peaked in this cycle. The economy will start to slope downward in Q4 and continue to ease in 2019, eventually returning to trend growth of somewhat above 2%.

The question I have been asking colleagues and analysts lately is: What happens if these so-called experts are wrong again. What happens if we get two more quarters of 4% growth?

Now, there are several things that support the conventional outlook. The economy is very cyclical and, now that the economy has been allowed to upcycle, we should expect some type of downcycle, maybe even a recession. Unemployment is at a 49-year low, and the unemployment rate usually bottoms out as the economy peaks. So, how low can it go? Also, it makes more sense this time because companies are having trouble finding more workers to produce more stuff. If you can’t sell and produce more stuff, the economy can’t maintain its current growth rate.

Establishing A Baseline

The current GDP forecast from the Wall Street Journal Economists Survey and the forecast from FTR (Freight Transportation Research) are shown below.

	2018Q4	2019Q1	2019Q2	2019Q3
WSJ Survey	2.9%	2.5%	2.5%	2.3%
WSJ – Lowest Forecast	1.7%	1.0%	0.9%	0.0%
WSJ – Highest Forecast	4.9%	4.4%	4.0%	3.9%
FTR	3.9%	3.6%	3.5%	3.3%

The WSJ survey reflects the “conventional wisdom” view described previously, with the economy back to trend growth, possibly early in 2019. There is a wide gap in the low vs. high forecast numbers in the survey, indicating the next year contains a high degree of uncertainty. However, these outlier forecasts do not seem feasible. It would be difficult for the economy to accelerate going into 2019; likewise, it would be a surprise it the economy cooled that rapidly, unless there were a shock to the system (however, as I am typing this, the stock market is plunging again). The FTR forecast is more optimistic, showing a gradual easing back from the peak, and still growing at a healthy 3.3% rate into the second half of 2019.

A Look At The Forward Looking Indicators

Now that we have a baseline to work from, let’s see what some forward-looking economic indicators are saying.

Leading Indicators

The Conference Board Leading Economic Index has cooled from the hot numbers of last October through February, but they are still vibrant. However, the Weekly Growth Index from ECRI has cooled considerably from Q1, even briefly touching negative in August.

Manufacturing

The ISM index for New Orders and Backlogs indicate manufacturing growth should slow slightly in the coming months.  However, the numbers remain historically strong.  Growth in Factory Orders flattened during the summer.

Housing

Recent numbers on Building Permits show a small y/y gain.  The Housing Market Index (HMI) has edged down from the high readings in Q1. The future of the housing market appears to be more of the same, providing neither a boost nor a drag to the economy.

Consumer Spending

My Discretionary Spending Index (based on key elements of retail sales) shows consumers have plenty of discretionary income, and they are spending it. Wages are finally beginning to increase, and this, combined with low unemployment, bodes well for the consumer segment of the economy.

Confidence/General Indices

The NFIB Small Business Optimism Index continues to run hot. Tax reform is really boosting this segment, and the high numbers should lead to more new jobs. The General Activity Index from the Philly Fed is still strong, but lower than it was through the first half of the year. The same is true for the Moody Survey of Business Confidence.

What About the Awful Tariffs?

I have not seen an accurate forecast yet regarding the impact of new U.S. tariffs and retaliatory foreign tariffs. All initial forecasts tend to say the impact will be disastrous and then gradually wither to a forecast of moderate to negligible effect. However, some tariffs are only starting to kick in, so it’s too early to judge. The doomsday forecasts typically assume that if a tariff produces negative consequences, it will be allowed to continue indefinitely. If you view the U.S. tariffs as punitive, this would be the case. If you think the tariffs are strategic in nature, then they will be fluid, and change as circumstances dictate. The tariffs do increase short-term risk for the chance of long-term rewards.

The Trucking Markets

Trucking fleets are ordering Class 8 and commercial trailers in huge, unprecedented numbers. So they expect this economic boom to continue through next year.  However, fleets tend to be reactionary and are placing these orders based on the current conditions they are experiencing. As we have seen, the indicators do not predict this trend will continue. The FTR freight forecast is for moderating truckloads in the second half of 2019. Therefore, all the trucks being ordered today will probably not be needed. Expect order cancellations to be pervasive throughout next year.

Conclusions

The data backs up the conventional wisdom that the economy will not maintain its hot pace for much longer. Almost all the indicators point to lower GDP growth in the coming quarters. However, most of the numbers remain relatively strong, which signals only a moderate change.

The Call

There is no basis to support a GDP exceeding 4% in the next nine months; however, it doesn’t appear we are headed down to 2% either. There could be a dip to near 2% in 2019Q1, just because recent Q1 readings have been inexplicably low. Therefore, I like our FTR forecast of 3.3-3.9% GDP over the time period.

This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

A Short(age) Tale

Trevor Needs Some Water

Once there was a man named Trevor living in a rural area who bought his drinking water for his water cooler from a local supplier. His requirements averaged four jugs (5/gal each) a month. In the summer he would use a little more, and in the winter a little less, but for the year it always averaged out to four jugs a month. So, every month Trevor would place an order for four jugs (20 gallons), to be delivered the following month.

But then an environmental event occurred at the spring where the water company is sourcing its supply. The company delivers two jugs to Trevor the next month, instead of four. The company explains the situation. It says he will get his other two jugs in about three weeks, because they have all their customers on allocation due to the shortage. They are unsure how much water they will deliver next month and don’t know how soon the situation will be rectified.

Now it is time for Trevor to place his next order. Let’s assume he can place monthly orders, twelve months out (so 12 monthly orders), and he can change the quantity he previously ordered, one month before delivery without any penalty.

How many jugs would you order under these circumstances? Let’s say Trevor orders eight jugs a month for the next 12 months. His logic being that if he is on a 50% allocation, he can still get his four jugs every month. When he is sure supply is normalized, he will cut the remaining orders in half. He also plans to put four additional jugs in safety-stock inventory, just in case supply is disrupted again.

How many do you order?

In addition, there is another water supplier. Unfortunately, this company draws water from the same spring and also has a shortage. However, Trevor thinks there is a chance this supplier could get more water sooner than his main supplier, so he orders 16 jugs spread out over the next four months from this company.

The typical monthly order is four jugs, but due to a supply shortage, Trevor has just ordered 112 jugs of water. And let’s say all his neighbors respond the same way. The water suppliers are ---- flooded with orders! They have never had so many orders in the history of the business. They don’t have to worry about filling all these orders in the short-term, because they don’t have enough product to do so.

What is Trevor’s new water demand? It hasn’t changed, it is still four jugs a month. But the shortage has tremendously impacted his buying (ordering) behavior. Now traditional economists would find fault with my story, claiming that if demand is 4 jugs, the rational action would be to order 4 jugs. However, I think behavioral economists would agree with my conclusions. Heck, if Trevor were thirsty when he was placing his order, he may have even ordered more.

Now under classic economics, the price of water would rise to alleviate the shortage. We are going to assume the water companies are going to use allocation in the short-term instead of price, so as to not alienate their long-term customers when the shortage ends.

The Reality of the Class 8 Truck Market

Now, you cannot argue that the story is not realistic, because it is based on what has happened in the Class 8 truck market this year. Orders for the last two months have been at all-time record levels. In fact, six of the top order months ever have occurred in the first eight months of 2018. Over 477,000 truck orders have been placed in the last 12 months, shattering the previous best 12-month period of 400,000 in 2005-2006. Those orders resulted in the peak production year of 376,000 trucks in 2006. The industry will be stretched to build that many in 2019 due to factory closings since 2006.

The primary reason for the high orders is a vibrant economy generating outstanding freight growth. Earlier this year, however, component suppliers could not keep up with this surge in truck demand. This shortage of components led to a severe shortage of Class 8 trucks. At one point, OEMs had around 1,000 semi-completed trucks parked, awaiting final components before they could ship. Some truck dealers waited over two months before receiving much needed inventory. OEMs could not raise prices to alleviate the shortage due to contracts and not wanting to damage long-term customer relationships.

The truck shortage has been abated for now, and suppliers are doing a much better job of meeting delivery dates. However, the supply chain is still very tight and could easily reemerge as an issue in the near future. Therefore, since demand remains robust, the response from fleets and dealers is to order trucks in record numbers, for delivery up to 12 months out, hoping to reserve more trucks if they are needed.

What is true demand? Unfortunately, its difficult to tell by looking at orders alone since some of the orders are to hold build slots, months out in the future. And backlogs are inflated, but by how much? Regardless, demand is extremely strong, and the fundamentals for freight and equipment demand are solid into mid-2019.

  

What Happens Next?

OEMs have to ramp up production to build all the orders they can, and suppliers have to keep pace. FTR (Freight Transportation Research) forecasts that freight growth will begin easing in the second half of 2019. If fleets have adequately increased capacity by that time, excess orders will begin to be cancelled and squeezed out of the backlog. If the economy stays at its current pace into mid-2019, the shortages could reappear, and the order deluge will continue.

This post first appeared on the FTR website with minor changes here..  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Bottleneck In The Supply Chain Is An Economic Threat

The Institute for Supply Management’s PMI for Manufacturing (Purchasing Managers Index) jumped to 60.2 in June, up from 58.7 in May and rising for the second straight month.  Considering that anything over 50 represents growth, the 60.2 is a robust reading which means everything must be wonderful in the manufacturing sector, right? Well not so fast, Machine Boy. Literally, not so fast.

A closer look at the numbers shows some disturbing trends. A big jump in the Supplier Deliveries sub-index indicates deliveries from manufacturers to customers slowed tremendously in June.

The primary reason for late deliveries is a lack of manpower. Manufacturers assumed they would be able to expand capacity when they took the original orders, but because the economic recovery is widespread, all industries have been competing for the same labor pool.  That left many companies short on workers.

Even if you have enough workers, there still can be problems (as will be discussed later) if your suppliers are short on staff. If your supply chain consists of 50 vendors, but 10 of these suppliers are delivering late, it’s going to wreak havoc with your production schedule and result in late deliveries.

Another reason deliveries are slow is lack of trucking capacity.  Fleets managed capacity very conservatively after the Great Recession and that worked well in a slow growth economic recovery. But now that commerce has accelerated, there are not enough trucks and trailers to handle the amount of growing freight.  Many companies have been forced to bid for trucks in the spot market for the first time in years.  This is resulting in many late deliveries.

Class 8 Equipment Issues

The conditions causing delivery delays detailed above are severely prominent in the Class 8 equipment market.  Specific numbers are difficult to obtain, but industry sources tell me that more than 30 parts are in short supply at truck OEMs. Most of the shortages are the result of Tier 1, Tier 2 and even Tier 3 suppliers not being able to hire enough workers to make the needed components and parts. Companies are in some cases air-freighting parts in from Asia to keep production lines running.

Word on the street is there are over 10,000, and maybe as many as 15,000, semi-completed Class 8 trucks parked, waiting for parts to arrive, so they can be driven off the lots. Component deliveries have been so slow that some of these trucks have sat for over a month.

There is no good way to predict when the supply chain will open up and all needed parts and components will be delivered on time. And even when the key components arrive, all these trucks will need to be delivered to dealers and fleets throughout the country. This presents a logistics nightmare since OEMs were having problems finding drivers to deliver the trucks before the supply chain bottleneck struck. 

So ironically, the driver shortage is causing delivery problems in the trucking industry.  The driver shortage has grown progressively worse since the beginning of 2016 and is reaching a critical point. With the unemployment rate at 3.8% and the competition for workers from other industries, it gets more difficult for fleets to hire drivers every day.  A recent article in the Washington Post told the story of an 87-year old man who was offered a trucking driving job, provided he obtained his CDL. However, he turned down the $50,000 a year job because he did not want to spend that much time away from home.

Tariffs Enter the Picture

Most discussions of the new tariffs involve the impact on prices. However, my sources tell me they will soon negatively affect the supply chain in the short-term.  Aluminum coils from China and steel stock from other countries have been diverted or delayed because of the tariffs. Soon U.S. manufacturers will need these materials to make parts, components and products – some for the truck OEMs.  To a supply chain already performing poorly, the tariffs hitting at this moment just adds to the mess.

The Economic Impact

The lack of parts and components, for all industries, slows down production. The lack of trucking capacity slows down the movement of goods. At some point, this will slow down economic growth.  Normally, you would expect the economic laws of supply and demand to balance things out. And this will happen, in the long run. In the short run, it’s about to get ugly.

A Very Simple Freight Analysis

Trucking conditions are in wonderful shape. Fleets can’t keep up with demand and freight rates are high. Sales of trucks and trailers are expected to

approach record levels this year. The need for new truck drivers is huge and fleets and many owner-operators are making lots of money.

What’s going on?

* Total Manufacturing (from the Industrial Production data) is strong. Meaning:

The Freight Is Great!

* Food shipments are robust. People have more disposable income and are spending lots of it at restaurants. Result:

The Freight Is Great!

* Building materials are also healthy, but expected to moderate some in the second half of the year. There is a demand for new houses and office buildings. Causing:

The Freight Is Great!

* Chemical products started of the year slow, but are expected to recover in Q2 and beyond. Manufacturing should boost this sector. Leading to:

The Freight Is Great!

* Fabricated Metals are smoking hot. Manufacturing needs these components in high volumes. Making:

The Freight Is Great!

* Wood products are also up due to the construction sector. Subsequently:

The Freight Is Great!

* Durable Goods manufacturing is way up. Non-Durables are growing. Result:

The Freight Is Great!

* The Oil and Gas sector is exploding as crude oil prices rise. Causing:

The Freight Is Great!

* FTR’s Trucking Condition Index is at extremely high levels and is only expected to moderate slightly this year. Why?

The Freight Is Great!

* FTR’s Trucking Market Demand Index was at a record in April. Indicating:

The Freight Is Great!

* Unemployment just sank to 3.8%. People have jobs. People have money. People are buying lots of products that are moved by trucks. Result:

The Freight Is Great!

* Some economists have forecasted GDP growth of 4% for Q2. Which leads to:

The Freight Is Great!

* FTR’s Active Truck Utilization measurement is near 100% and expected to stay that way throughout 2018. This means nearly all active Class 8 trucks are being employed, because, of course –

The Freight Is Great!

* An industry veteran recently said he has never seen a market this strong in his 28 years of trucking. This is because:

The Freight Is Great!

* When traveling down the highway, you see many tractor-trailers hauling many types of goods. All because:

The Freight Is Great!

* There is a severe shortage of truck drivers to haul all the goods. Due to:

The Freight Is Great!

Demand for new Class 8 trucks and commercial trailers are at record levels. So much so, that component suppliers cannot keep up with orders. All because:

The Freight Is Great!

A German economist analyzing this situation might say:

Die Fracht ist großartig!

Which translated means: The Freight Is Great!

So, to summarize the current state of the trucking industry in four words:

The Freight Is Great!

This post first appeared on the FTR website with minor changes here..  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

Let The Good Times Roll – For at least two more years

GDP is high, and unemployment is low.  Manufacturing is booming, and wages are rising. So, everyone is joyous, correct?  Of course not, you are starting to see articles claiming that if things are this good, a recession must be coming soon.

So it is time to again consider what the truck equipment markets indicate about the timing of the next recession.  In March 2016, I warned that based on historical correlations, the decline in Class 8 truck builds foretold a recession beginning in Q4 2016.  This did not happen due to the following factors:

-         The Class 8 truck market ended up suffering a correction, but not a crash.  Typically when sales start to slide, they keep plunging.  Fortunately this time, they bottomed out in Q1 2017 and began a steady recovery which continues today.  It is important to note that the FTR (Freight Transportation Research) models in mid-2016 showed the market correcting but not crashing.  That’s why our forecasts were much more accurate than all those other one’s which predicted a market crash.

-         GDP for Q4 2016 and Q1 2017 were 1.8% and 1.2% respectively.  While not a recession, the “economic plane” did dip close to the ground before pulling out of the dive.

-         Although the economy had failed to cycle much since 2010, the Class 8 truck market continued to cycle through the period. The substantial difference being that truck demand didn’t cycle as much as in the past (a good thing), which is the difference between having GDP quarters of 1.8% and 1.2% growth versus a recession.

The U.S. economy has been expanding for over eight and a half years; the third longest period since World War II.  But this recovery has been characterized by its slow, plodding growth and muted cycles.

The Good News: The economy is finally experiencing significant growth again.

The Bad News: The economy is finally experiencing significant growth again.

If we cycle way up, eventually the economy overheats and cycles down causing a recession.  But it is even more difficult to predict the timing of the next recession under the current unusual environment. If the Trump administration’s economic initiatives work, then giddyap, we are going to ride this wave for a while.  If this upcycle is the result of the restoration of normal economic fluctuations or in the trade strategies fail, we are quickly coming to an economic peak.

And this may be a return to the “old normal”. I believe that the slow, abnormal economic growth of the past several years was the result of restrictive government policies and businesses being too cautious and fearful after the Great Recession.  President Trump has loosened those restrictions and business and consumer confidence is soaring for whatever reasons.  This may be just a huge economic reset that took eight years to accomplish after the crash.

What Do The Equipment Markets Indicate Now?

It is important to watch the truck and trailer markets because they are leading indicators of the general economy.  Class 8 truck sales is one of the key economic leading indicators tracked by the economists at General Motors.

The Good News: The equipment markets and the economy appear to back in sync.

The Bad News: The equipment markets and the economy appear to back in sync.

As previously mentioned, the equipment markets continued to cycle even though the economy did not change much.  However, now the economy is vibrant, and it is pushing equipment sales to record levels (if you factor out the Class 8 pre-buy factor in 2006).  This is good in that it shows the economy is healthy and getting back to performing “normally”.  It is bad in that the equipment market, driven higher and hotter, will probably experience a perilous drop before and during the next economic downcycle. This type of drop is inherent in truck and trailer equipment and cannot be avoided.

Because of the significant impact of a recession on truck and trailer demand, FTR cannot put a recession factor in the forecast.  For example, in we forecast a recession for 2020, it would drive our equipment forecast way down that year.  But if the recession occurs in 2021, then the forecast for both those years would be highly inaccurate.  So the assumption for the forecasts is for no recession, even as the possibility increases due to the length of this recovery and the surging economy.  If the “master” economists cannot predict the timing of the next recession – than neither can we.

When Is The Next Danger Zone?

Based on history, which doesn’t always repeat and forecasts, which can be inaccurate in the long-term, when do the equipment markets indicate a recession could begin?

If truck/trailer production peaks around June 2019 (the current forecast), and recessions occur 13-18 months after that (based on history), the “danger zone” would be July-December 2020, which is as good as anyone’s forecast right now.  The good news is unless there is an economic or geopolitical shock, we

don’t have to worry about a recession for the next two years.  The bad news is if the economy accelerates the next two years, the eventual downturn is going to hurt.

So, let the good times roll – for now. 

 This post first appeared on the FTR website.  FTR is the leader in analyzing and forecasting the commercial transportation industry.  For more information on FTR reports and services, please click here.)

How the Trucking Capacity Crisis was Born

The U.S. trucking industry is experiencing a capacity crisis, with insufficient numbers of trucks and trailers to haul an ever-increasing amount of freight. FTR’s (Freight Transportation Research) measurement of Total Truck Utilization is currently at 97% (meaning 97% of all trucks are in use). The index is expected to hit 100% later this year. While it is an impossibility for 100% of trucks to be hauling freight, it indicates extreme capacity

constraints in the industry, causing major disruptions for both fleets and shippers. Shippers are having problems to haul their loads and are paying much higher freight rates.

So how did we get into this mess? Well, you can blame the Great Recession. Throughout the oughts, fleets managed their capacity more loosely, maintaining a certain amount of “flex capacity” to handle peak freight periods and not caring much when this excess capacity was idle. This strategy worked well in that era, when freight continued to shoot upward fueled by the housing bubble. Staying ahead of a fast-paced game was profitable.

But then the bubble burst. Most large fleets had enough capitalization to survive. Middle-sized fleets that managed their assets well also lived, but over-aggressive ones and smaller fleets got slaughtered. There were approximately 5,500 fleet bankruptcies in 2008, another 2,200 in 2009, and still a considerable number in 2010. By 2012, an astounding 18% of trucking capacity had been removed from the system.

The long, slow economic recovery that began in 2010 did not pressure the industry to promptly replace the lost capacity. Fleets were able to put trucks back into service at a measured pace. The trucking industry, as well as many sectors of the economy, benefitted from the sluggish recovery because growth was easier to manage, and profits grew.

Fleets were also very cautious after seeing many competitors fold during and after the Great Recession. Businesses, overall, were more cautious, a key proponent of the long, slow recovery. Large fleets managed their capacity more conservatively. Medium-sized fleets strove to be lean, efficient operations. The result was a significant reduction in “flex capacity.” This was very logical under the circumstances, and extra capacity was rarely needed in the slow-growth environment.

Capacity utilization reached the normal range in mid-2013, signaling the industry and the economy were regaining strength. Utilization percentages were fairly stable for a few years, except for a blip due to the Hours-of-Service regulations in late-2014. However, the utilization rate began a definite upward climb in mid-2016 and accelerated through 2017.

During an FTR forecasting meeting in January 2017, our updated capacity utilization forecast graph appeared on the screen. There was stunned silence … and then someone said:

“If this is correct, we’re headed for a severe capacity crunch early next year.”

Our model predicted that accelerated freight growth would combine with productivity-limiting ELD implementation, to push the capacity utilization percentage to near 100% in 2018. Based on this, we began to warn our customers about the “possibility” of a capacity crunch. The expected rise in utilization was a main reason the 2018 FTR equipment forecasts were much higher than other forecasts for almost all of last year.

And then the surge in business confidence after the election started to turn into real dollars. The roll-back of regulations provided more economic impetus. Manufacturing activity revived, and the freight forecasts kept increasing. Now throw in some tax reform. The same forecast graph that caused the commotion 14 months ago appears even more ominous now.

The flatbed fleets saw the surge beginning last May and began to ramp up capacity. Spot market rates started to shoot up last March, flattened out in the second half of 2017, and then spiked at year’s end.

In September, we began hearing complaints from some large shippers that couldn’t find trucks to haul their freight. They had contracts but not trucks. This forced them into the spot market, resulting in higher freight costs and increased late deliveries. The frustrated logistics managers had to explain why the company was paying higher prices for reduced customer service.

But many fleets remained cautious in responding to the capacity crisis. Some people questioned our optimistic 2018 equipment forecasts as late as October, explaining the fleets were not showing any urgency in placing orders for 2018.

However, this was to be expected. It took over ten years for freight volumes to recover after the Great Recession, and fleets had learned to manage their capacity well over that time. It’s difficult to change what is working well. For the industry as a whole, it’s like filling a big barrel with a hose delivering a slow, steady stream. It takes a long time to fill the barrel, and you get bored waiting for it to top out. Just when you are near the top (which you can’t really see), the water pressure increases and now you have an overflow you are not ready for – and a mess.

Now orders for trucks and trailers are pouring in, OEMs are increasing rates, and we all hope that fleets can find drivers for the new trucks they hope to put into service. It’s a mad scramble: shippers trying to find trucks to efficiently move goods, and truckers trying to supply those trucks. And if it can’t be done, economic growth will suffer.