Freight volume gains-not oil- now driving rate increases

By James Haughey, Director of Economics, RBI -- Logistics Management, 8/1/2005

BOSTON—Add sharply rising freight volume to the list of forces that will keep motor freight rates rising much faster than inflation over the next year. 
 
While the recent freight rate increases have been driven from the supply side, mostly oil and drivers cost increases, the impact from $50-60 per-barrel oil is now largely included in freight rates. As a matter of fact, we project that some of the current oil premium built into rates is likely to be reversed by next summer. Nevertheless, the relentless rise in truck driver costs will continue to boost rates—but not by much over the next year.
 
We’re projecting that the expected faster growth in freight volume will be the main driver of freight rate increases moving into 2006. Freight demand will expand faster than carrier capacity and could find carrier’s rationing freight services with higher prices—either directly or by adding premiums for previously included services.
 
Freight volume has been rising for the last two years, matching the 7.5 percent (annual rate) rise in the “goods” portion of U.S. GDP. Enough of the spare freight capacity has now been absorbed to permit carriers to begin to boost their margins. Investors anticipating higher carrier profits have boosted the Dow Jones U.S. Trucking Index 10 percent in the last month.
 
The imminent impact of freight volume on freight rates was masked during the second quarter by a growth pause in both U.S. manufacturing and imports to work off a temporary inventory surplus—but that’s now behind us. 
 
Production and imports will resume growing with the 6-7-percent growth in goods consumption that is consistent with the expected 3.5-percent GDP growth. Preliminary June reports already show a surge in factory orders and a pickup in production.
 
How much can rising freight demand increase freight rates? We’re projecting perhaps 2 percent in the next year on top of the impact from oil, driver costs, and general inflation. But the potential for higher rates will grow quickly if GDP growth continues into 2007 at 3.2 percent or more. Less than truckload rates rose at a 7.5-percent pace during 1997-2000 when GDP growth was above the sustainable long-term growth rate and that was with only a small contribution from higher diesel prices.