Recent US freight decline foreshadows flat rest of the year, CSCMP says

Bill Mongelluzzo, Senior Editor | Sep 30, 2015 8:24AM EDT

SAN DIEGO —Total U.S. freight movement dropped in August, and new orders also declined, setting the stage for flat growth for the rest of the year, forecasts an organization representing supply chain logistics professionals. The message builds on the ominous signs for freight growth seen through high inventories and high sales-to-inventory ratios.

“The rest of the year will be flat, with a little bump in the peak,” said Rosalyn Wilson, senior business analyst at Parsons Corp. and author of the 26th annual Council of Supply Chain Management Professionals’ State of Logistics Report.

Nevertheless, transportation logistics professionals should not panic because the industry is coming off of a good 2014, which in fact was the best year since the great recession of 2008-09, she said. The total transportation and logistics spend last year was almost $1.45 trillion dollars, Wilson told the CSCMP annual conference Tuesday.

The CSCMP report tabulates the total cost of logistics including ocean, rail, trucking, air, barge, pipeline and related services like freight forwarding and logistics management. The $1.449 trillion cost of logistics was up 3.6 percent from 2013. The 2014 numbers were reported in June in the 26th State of Logistics Report, but Wilson updated the trends at the CSCMP annual conference.

In the international sector, containerized imports will continue to perform well, according to a report Tuesday by JOC Senior Economist Mario Moreno, who projects growth of 6.6 percent for the calendar year. However, warehouses throughout the U.S. have high inventories, and this will cap overall transportation and logistics spend for the rest of the year.

Despite the projection of flat growth, the logistics industry is doing well given the significant problems U.S. exporters and transportation providers face in the global economy, especially China. After 15 years of annual double-digit growth, China appears to be stuck at about 7 percent growth, and its leaders are struggling to find answers.

“China has no experience in recovery from down periods, so they are stumbling a bit,” she said.

North America, Europe and the commodity-exporting countries of Latin America are also feeling the impact of China’s slow growth.

The domestic U.S. economy is relatively healthy, with consumer confidence in August at its highest level since November 2007 and consumer spending up 0.4 percent after a similar increase in July. Unemployment continues to edge lower, job creation is fairly strong and gasoline prices are low and will probably stay low for the foreseeable future.

The main economic indicator holding back growth in the logistics sector is that inventories remain stubbornly high. “Inventories are growing faster than retail sales, and I find that troubling,” Wilson said.

As far as the individual sectors are concerned, truck capacity is tight, but with demand expected to remain flat over the next few months, freight rates will not increase significantly. Any increases that truckers do seek will be to cover increasing costs, such as labor.

The rail industry had a good 2014 with most sectors contributing, but 2015 is “basically flat,” said Dean Wise, vice president of network strategy at BNSF Railway. The energy glut has reduced movement of oil by rail. Exports are weak due to the strong dollar and slow growth in China, although intermodal continues to grow, he said.

The third-party logistics sector had an “exceptional year” in 2014, so 3PLs will not suffer significantly due to slowing growth this year resulting from the high inventory levels, said Joseph Carlier, senior vice president, sales, at Penske Logistics. Trucking companies in 2014 replaced older trucks, but this year they have been adding capacity to their fleets, so truck rates will soften a bit, he said.

Repeating a theme heard throughout the CSCMP conference, the transportation and logistics professionals said their industries suffer from a shortage of workers, and this will present a problem when growth resumes. “The driver shortage is real. More drivers are exiting the industry than joining,” Carlier said.

Wilson said the warehouse sector is also experiencing a loss of workers as they seek higher-paying jobs elsewhere. “Turnover is high. Labor rates will have to go up,” she said.

The $1.45 trillion logistics industry must also prepare for the inevitable decision by the Federal Reserve to begin to increase interest rates. Even modest hikes in interest rates will have an impact of billions of dollars in inventory carrying costs, she said.