Driver shortage not getting better any time soon

From our Economist

By James Haughey, Director of Economics, RBI -- Logistics Management, 7/1/2005

BOSTON—The chronic truckload driver shortage is poised to cause more serious cost and capacity problems for shippers over the next two years.

All indicators suggest that the current situation will be a repeat of the driver crisis that gave shipper’s headaches at the top of the last business cycle in 1999-2000. But the problems for shippers this time will differ from six years ago since the trucking market environment in 2005-06 differs from 1999-2000 in two key ways: First, fuel costs will be falling instead of rising; and second, driver earnings have not yet recovered from the impact of the last recession.

We’re expecting oil prices to fall from $60 to about $45 over the next year while oil prices rose from $10 to $30 back in 1999-2000. We can expect easing fuel costs as soon as late summer which will offset the upward pressure on freight rates due to the higher costs for drivers.

Six years ago, both fuel and driver costs were pushing freight rates higher; however, fleet managers will have to raise driver compensation more now than they did six years ago. This has already started with the news that several large carriers have boosted wages 8-10 percent over the past half year. The bigger driver wage boosts expected in 2005-06 are needed since carriers need to reverse the decline in earnings versus construction and manufacturing jobs that occurred in 2001-02—and then add more to wages as the overall labor market tightens.

An annual driver wage increase of 7-8 percent through 2007 is projected in a recent Global Insight study completed for the ATA; but this may be too low since Global Insight projects fewer new construction jobs than the consensus construction outlook would generate. Despite efforts to raise wages and increase retention, the American Trucking Association (ATA) reported that the driver turnover rate was over 100 percent in the last quarter, and fleet owners continue to scramble to recruit drivers.

It’s interesting to note that the flurry of large driver wage increases last year was followed by a pause in the growth of driver earnings earlier this year when freight volume dipped slightly while manufacturers and distributors were working off a small inventory surplus—that inventory bulge is now mostly absorbed.Now, both factory production and freight volume are rising again and fleet managers need more driver hours; in turn, low wage fleets will have to boost wages to maintain enough drivers to cover all of their loads.

Long-term, the driver problem will become less serious in the next slow period in the economy—which is likely to occur in 2007-08—but it will be back at the top of the next business cycle. Chances are that the next driver shortage will be even more drastic than in 2005-06 due to fact that the adult male labor pool that supplies most drivers will be shrinking at that time.