When Will We See Driverless Big Rigs?

The question I get asked the most by people inside, and outside, the industry is: When will there be driverless trucks on the highways?

This, of course, is a difficult question because it not only involves adaptation to technology, but a host of other complicated factors as well. 

But my answer is this:

You will see driverless trucks as soon as the general population accepts driverless cars. When people are comfortable riding in a driverless car, then they will not object to a fully-loaded, driverless tractor-trailer behind them on the highway.

I realize this is not a specific answer but providing an exact year at this point amounts to SWAG. It is difficult to calculate an adoption rate curve because, in addition to economics, there are cultural, political, and other issues to resolve.

I believe most people are currently fearful of self-driving cars. This fear will, of

course, be reduced by all the “self-adjusting/correcting” options (braking, parking, lane-assist, speed-adjust, etc.) available on newer vehicles. In addition, there will be public service campaigns trumpeting the increase in safety provided by self-driving cars. Reduction in accidents, deaths, and drunk drivers will be the main benefits. Improved traffic flow is also an expected plus. 

And traffic safety is of growing importance as millions of baby-boomers with diminishing skills share the road with the texting Millennials. Throw in increased marijuana legalization, and we all may end up demanding self-driving cars.

Personally, I know I will be extremely distressed the first time I am in a driverless car. I have never even used cruise control, because I must always be in total control of my vehicle. However, I do look forward to the day when I summon a car to take me to my doctor’s office. A robot will load me in the vehicle and another robot will lift me out. If I can adapt to this, I think other’s in my generation will also.

But the final push for self-driving cars may come from insurance companies. If you drive your car, your rates are $10,000 a year, but they fall to $1,000 if the car drives itself. “This is America, so it is your choice. We are not telling you what to do, but…”

Why is public opinion so important? Because Congress is not going to approve the use of driverless trucks if people are fearful. It may take years to even write the regulations. Of course if one political party writes them, they will be too lax, and if it is the other party, they will be too tight. But there will be extensive debates and lobbyists promoting various interests, etc.

You can argue that the financial incentive for driverless trucks is so significant it will overrun all the obstructions and objections: “It is so obvious that they have to pass it!” Yes, and the government is working so well, it is currently shut down. And I will refer you back to the history of legislation on freight weight and trailer size. “When is that 33-foot trailer legislation going to pass?”

Now, you can also argue that the truck will always need a “driver,” but that is based on today’s technology and logistics framework. Twenty years from now technological improvements in automation, robotics, and logistics adaptation may change everything. Maybe then you will just need an “attendant” to ride in the vehicle for emergencies. This could even spark a new form of ride sharing. “Ride in the truck for free from Kansas City to Memphis and call us if anything goes wrong.”

I do agree with those who say “platooning” will come first. This involves two or more trucks connected by automated driving technology traveling down the highway in a line, separated by a close, set distance from each other. Successful platooning will also help people to accept the self-driving truck concept. However, this still will need to be legislated, with regulations, etc.

And that’s why it is difficult to put a timetable on it. If you forced me to place a bet, maybe 2027. But driverless trucks will remain a hot topic of discussion until it ultimately happens. As I said, it is the topic I am asked about the most. I was actually giving my opinion on the subject to an anesthesiologist as he waited for me to go under before a recent medical procedure. So, it has to be an important subject because if something went disastrously wrong, those would have been my final words! 

 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.)

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.