Transportation Costs are Down -- Will the Economy Follow?

Nov. 15, 2007
In the short term, manufacturers will enjoy cheap and readily available transportation.

Manufacturers are always looking for a way to lower costs, and right now, with the trucking industry caught in a slump, 2008 should see some of the lowest pricing for transportation since the recession at the start of this century. While the price breaks represent good news for manufacturers, the underlying cause for the lower costs is reduced volumes of freight, i.e., less stuff is being made that needs to be transported. And that's not-so-good news. As Bill Zollars, president of trucking company YRC Worldwide, told CNBC recently, the current "soft economy" his company operates in has all the look of another recession.

On the other hand, according to William Greene, an analyst with equity research firm Morgan Stanley, while manufacturers are "more cautious about economic trends, they're not signaling a recession." It could be that manufacturers are still sensitive to the steep price hikes they had to endure a couple years ago when the economy was rapidly expanding and trucks were hard to come by. Out of frustration as much as desperation, many companies ended up shifting some freight to the far less expensive (and some would say, less reliable) railroads. As 2007 comes to a close, while the trucking companies are finding it very difficult to increase their rates, or even hold firm on current rates, the railroads are continuing to ask for -- and get -- rate increases.

Trucking Rate Increases Come to a Halt

Mode Rate Increase Volume Increase
Rail 4.8% 0.7%
Truckload 0.1% 2.0%
Regional LTL* 0.3% 1.5%
National LTL 0.3% 1.1%
Freight Pulse 13, conducted by Morgan Stanley with Logistics Today and the National Industrial Transportation League (NITL). Forecasts reflect expectations for 2008 freight rate increases.
Based on Morgan Stanley's latest Freight Pulse survey of shippers (companies that use various modes of transportation to move their goods), companies are expecting to pay 4.8% more for rail transportation in 2008 than they did in 2007. When it comes to trucking, though, the increases are expected to be in the 0.1% to 0.3% range, which basically translates out to no increase at all. Greene expects that shippers will capitalize on a softer trucking market to shift some volumes from lower-service railroads back to the truckload carriers (the least expensive mode of motor carriage).

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