CarrierDirect report looks at intersection of mainstream economic trends and transportation

The title of a report published today by Chicago-based freight transportation and logistics consultancy CarrierDirect puts myriad market themes into perspective when it comes to making sense of both global and domestic economic trends.

Entitled “Change is the Only Constant,” one of the report’s key themes centers around the myriad mixed economic indicators that are influencing the freight economy to a large degree, including sluggish GDP, uneven freight volumes for trucking and rail, declining oil and fuel prices, decreasing manufacturing output and currency valuations, among others.

“One of the things we are seeing is just a general sort of shift in how the economy is functioning,” explained CarrierDirect Executive Vice President Erik Malin. “Even with GDP around 2.0 percent that is $17.4 trillion of U.S. GDP, and oil meanwhile is plummeting, which hurts the economy even through domestic production has surged so drastically, coupled with international demand falling. Over all, this mixed bag of economic indicators lends itself to the notion that the economy is at the beginning of some sort of transformation. There are questions as to what will be the best indicator, what people are purchasing, and what the world needs or does not need.”

Like many other industry stakeholders, Malin maintains that very modest growth is in the cards in terms of an economic outlook. And he said should 2016 GDP come in at 2.6 percent that would be solid as it is nearly $20 trillion.

But even should GDP come in at that level, the employment situation in the U.S. still looms large, with the report observing that the 2015 labor force participation rate is a 38-year low, but buoyed by increased wages, steady unemployment rates and a multi-year high of manufacturing output per hour.

“The labor force participation rate is in the low 60s, and that is not good, with that few people in the workforce,” said Malin. “It really is quite alarming, especially when contrasted with the unemployment rate and the employment cost index. It is getting more expensive to employ people, and there are fewer unemployed people out there, but that rate is unbelievably low.”

CarrierDirect examined how lower import numbers, while having a positive impact on GDP, translates into less freight for transportation and logistics companies to haul, limiting 2015’s tonnage growth and potentially forecasting a spending-habit shift as millennials amass more wealth.

Some of these low import issues still stem from the 2015 West Coast port labor situation, which quelled import flows to a large degree.

“What is really interesting about what is happening with imports and exports is that from a macroeconomic level if imports go down, GDP goes up, but for transportation as imports go down, California becomes a less busy lane,” he said. “There were times when shippers were trying to get assets out of California but there just were not enough freight. It is interesting considering that everybody wants GDP to go up but also wants imports to go up, and it is also oxymoronic in a way. And the economy is becoming more service-dependent, especially with millenials, whom tend to pay for experiences and value a related memory more so than a material.”

Looking at oil prices, Malin noted that as domestic production increases, the U.S. becomes less reliant on foreign oil, with the percentage of OPEC oil in the U.S. mix accounting for around one-third of total stock.

As for how that translates into freight tonnage, he said that in a market that is seemingly soft for carriers if the demand is not there from a tonnage standpoint, and factoring in oil prices being down, is not a great combination for them while it is a good thing for shippers.

“While oil is down, it costs less for shippers to move things, and…while it does not seem great for the economy, it encourages shippers to move more freight, which is needed,” noted Malin.

On a transactional level, the report examined how LTL’s and 3PLs need to focus in the benefits of dimensional pricing as opposed to class-based rating structures, which it said limit profits for carriers and generally counterproductive. The main reason, it explained, is that under the class-based system shipments more quickly take up more weight and less cube that results in a shipment that does not pay well, costs more to move through fuel and wear and tear and limits how much freight can be loaded. But with dimensional pricing, freight costs less to haul even though it is based on a less aggressive rate.

“This is a major opportunity for 3PLs if they engage in it,” said Malin. “One of the primary reasons is that it lowers back office operating costs, with fewer order exceptions and fewer rebills, but more importantly in a [tight] market it is going to be something carriers want, as it is simpler and they will get better communicated information from the brokerage and it is a much more fluid and simple sort of process. On one hand that is going to be part of the economic motive that LTL resellers have and it is a little bit more of a challenging environment. The reality is that it is a trend that needs to happen sooner than later. Carriers need it and will benefit from it drastically. Less consolidation in an LTL word is better for LTL resellers, and making sure carriers are profitable is going to be a key part of this future strategy, because otherwise future consolidation is inevitable with unprofitable companies. “

But he added that the company with the assets in five-to-ten years and a strong non-asset operation is going to be the winner. That is the offering that will be most prevalent as providers can use the non-asset operation to optimize the asset network in order to minimize empty miles and time not spent driving, when drivers are not driving if shippers are slow and they can go to another shipper with a better rate possibly with their non-asset operation.

“Between the two of them and being able to work in a way that is strategic is probably going to be the most challenging thing we see transportation companies try to accomplish, because it is essentially an unsolvable problem,” said Malin. “But it needs to be solved nonetheless.”