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Freight Costs Recover Faster than the Economy

June 18, 2012
Transportation costs are outpacing the slow rise in shipment volumes.

Finding good news in the current freight-transportation environment requires an ability to see only half of the picture. To be sure, manufacturers have to feel encouraged that the economic indicators are pointing in the direction of growth. Projections of more domestic freight being transported via truck and rail later this year means there will be more goods in the pipeline, a positive sign that inventory levels are rising and restocking is becoming more prevalent.

The rest of the story, though, involves several negatives: higher transportation costs; tighter capacity, meaning fewer available trucks to move those goods; and a truck-driver shortage that'll make it difficult for the trucking companies to add more vehicles to their fleets.

North American freight shipments were up 1.8% in May 2012 over April 2012, according to Cass Information Systems, but that good news comes with a big "however," since costs were up even more, at 2.2%. Although shipment volumes are growing, expenditures are growing even faster. Even though fuel prices have moderated lately, labor costs, especially for truck drivers, are on the rise, according to Cass.

"The economy is still growing at its very slow rate, and what looked like a resurgence during the second quarter may fizzle out in the next few months," observes Rosalyn Wilson, senior business analyst with Delcan Corp., a transportation consulting firm. "Overall, still positive growth, but many ups and downs."

Research firm FTR Associates monitors the various market influences that affect companies using domestic freight transportation, and then assigns a monthly "shipping conditions" score to the current environment. A reading above zero means a favorable shipping environment, while a reading below zero means conditions are unfavorable. The index currently stands at minus 5.3, which FTR characterizes as "a moderately unfavorable condition."

According to Larry Gross, senior consultant for FTR, "We expect the balance of pricing power to remain firmly on the side of the [transportation] carriers for the balance of the year," indicating a particularly challenging fall for manufacturers and retailers. But in a preview of the other shoe dropping, FTR believes conditions will actually get worse in 2013 thanks to the implementation of more restrictive Hours-of-Service rules for truck drivers, which could add even more costs into the system if the carriers need to hire more drivers to compensate for the shorter workdays.

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