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22nd Annual State of Logistics Report: A bumpy ride

The cost of the U.S. business logistics system jumped up 10.4 percent in 2010, making up more than half of the preceding year’s decline. But don’t expect gains like this to continue as the economy begins to slow and all four transportation modes scramble to make adjustments during this period of unprecedented volatility.
By Patrick Burnson, Executive Editor
July 01, 2011

Hard numbers
Total logistics costs rose 10.4 percent in 2010 after tumbling in both 2008 and 2009. Transportation costs are up over 10 percent in 2010 due to higher freight volumes, fuel surcharges, and for some modes, rate hikes. Interest rates continued to drop, while inventory levels inched back up. Lower warehouse costs were more than offset by increases in other inventory related costs (insurance, depreciation, taxes, and obsolescence) resulting in a 10.3 percent gain in inventory carrying costs.

“Logistics as a percent of our nominal GDP moved back up to 8.3 percent, still lower than any year but 2009,” says Wilson. Wilson also notes that volumes have only recovered about half the recession losses, yet industry capacity, particularly in truck and air, is close to being fully engaged. The recession had a “devastating effect” on total industry capacity, which is much lower than it was in 2007, the report says.

“The recovery is not being felt evenly in the economy, and 2010 did little to shore up precarious carriers who have been hanging on hoping to be rescued by a resurgence,” says Wilson.

Business inventories increased in all quarters except the second, which experienced a slight dip. By the third quarter, inventory levels were heading back to levels experienced at the start of the recession, ending the year at the highest point since third quarter 2008. The average investment in all business inventories (agriculture, mining, construction, services, manufacturing, wholesale, and retail trade) increased to almost $2.1 trillion in 2010, a jump of $199 billion as stock was replenished in the first quarter of 2011.

Holiday shopping volumes were reportedly higher than in 2009, but final sales figures showed that people weren’t buying as much as anticipated. And, says Wilson, many waited until late in the season to buy to take advantage of discounted merchandise.

“Ugly” details
Wilson concludes her report on a decidedly candid and downbeat note, telling us that “the ugly details” show how vulnerable the recovery actually is, which will translate into one of the more volatile periods shippers and carriers have ever seen.

The first quarter 2011 GDP growth rate was revised downward in the latest release, with preliminary estimates coming in at just 1.8 percent, well short of the 3.1 percent projection. Consumer spending was revised downward, hitting a six-month low while inventories climbed higher.

“The current economic picture is not indicative of a strong recovery,” she says, “in fact it appears that the recovery is losing momentum. Originally robust estimates for second quarter GDP have been cut dramatically to between 2.5 and 3 percent.”

She points to the fact that the public sector continues to shed jobs as budgets are chopped. A recent survey by ADP, the payroll processing company, showed a sharp decline in the rate of job creation at private businesses. Firms added only 38,000 jobs in May, compared with 179,000 jobs added in April. Also, the number of people filing new claims for unemployment insurance benefits is on the rise again. Pervasive unemployment undercuts GDP growth by reducing consumer demand, which in turn makes it harder to create jobs.

“It used to take six months for the employment situation to get back to normal after a recession,” says Wilson. “This time around the Federal Reserve Board Chairman has said that he expects it could take as long as five years to get back to a pre-recession level.”

Although many industry observers are predicting strengthening of logistics services as we head to the second half of 2011, Wilson says that the pieces are not falling into place to support anything more than weak growth.

For example, retail sales rose in May, but were well below what had been forecast for May and lower than April’s numbers. The Consumer Confidence Index dropped sharply in May from 66.0 to 60.8, reflecting consumer uncertainty and rising pessimism about inflation, their income prospects, and the housing market.

This uncertainty is translating into a slowdown in purchasing. Business spending and manufacturing are declining as well. New orders and production declined in May, 10.7 and 9.8 percent respectively. The Purchasing Managers Index recorded its steepest drop since 1984, plunging 6.9 percent in May. Imports and exports are also forecast to be flat or even a little down in May.

Wilson says starkly: “By the end of 2011 we will see a different looking freight picture. Shippers may be dodging about in a search for capacity during sudden surges in demand, and carriers will continue to look for a sustainable revenue model.

“Which scenario will play out?” she asks. “It could go either way at this point, but my money is on the innovators in the logistics industry who are navigating through the recovery.”

Read the individual mode reports below:

2011 State of Logistics: Air Freight

2011 State of Logistics: Ocean

2011 State of Logistics: Rail

2011 State of Logistics: Truckload

2011 State of Logistics: Less-than-truckload

About the Author

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Patrick Burnson
Executive Editor

Patrick Burnson is executive editor for Logistics Management and Supply Chain Management Review magazines and web sites. Patrick is a widely-published writer and editor who has spent most of his career covering international trade, global logistics, and supply chain management. He lives and works in San Francisco, providing readers with a Pacific Rim perspective on industry trends and forecasts. You can reach him directly at .(JavaScript must be enabled to view this email address).


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