Spend Matters welcomes another guest post from John Bauman, Principal Economist at IHS.
IHS anticipates that 2014 will see weak prices for trucking, with the truckload sector experiencing flat prices and the less-than-truckload (LTL) sector experiencing only mild gains. The second half of the year is expected to be stronger than the first, but this improvement may be delayed, resulting in a weaker 2014 than forecasted before. This is particularly true in the truckload sector, where rates have had little growth recently.
Trucking rates are diverging between sectors. Truckload rates have been going down since 2012 and are not expected to rise until the second half of 2014. Overall, the producer price index (PPI) for truckloads will decline 0.1 percent in 2014, after a meager 0.4 percent increase in 2013. Next year is expected to see a 2.4 percent rise, however.
Meanwhile, the PPI for the LTL sector remains on an upward trend and will rise throughout the year, albeit at a subdued rate. LTL rates will increase 2.4 percent in 2014, after having risen by 3.1 percent last year. IHS expects price growth to reach 3.2 percent in 2015. There is little to propel rates upwards. Carriers have only a bit of pricing power, while fuel prices are drifting downwards.
Fuel costs are always a large risk to trucking prices. Diesel prices have peaked and are expected to continue decreasing over the next two years, slipping 5.2 percent on average and removing upward pressure within trucking rates. Any rise in costs would be passed along to customers, and fuel prices can certainly shift rapidly and unexpectedly. Geopolitical issues in the Middle East would seem to represent the largest risk to a price spike. Conversely, if economic struggles erode petroleum demand and fuel prices drop sharply, rate increases would slow or halt.
Meanwhile, demand for trucking continues to strengthen. While this has not been happening at a particularly rapid pace, recent history justifies some cautious optimism about the near-term outlook. Traffic has been climbing steadily since 2010, and many industries that ship heavily by truck continue to show improvement. Consumer spending and construction activity will both accelerate in 2014, though the latter sector is hindered by austere government budgets restraining growth in infrastructure spending. Manufacturing expansion remains a bit lackluster, though.
There is growing concern about capacity tightness, and shippers are reporting occasional difficulty in finding space on trucks. Carriers took a significant amount of capacity offline during the recession, and plenty of it was scrapped due to aging. New equipment orders are still primarily driven by the replacement cycle rather than expansion plans. But 2014 will be a better year for equipment orders and carriers will start to place more orders. US medium truck sales grew 6.2 percent in 2013. It’s a slowdown from prior years, but still makes for decent growth. Another 6.0 percent gain is on tap for 2014. Meanwhile, heavy-duty truck sales will jump 11 percent in 2014 and 12 percent in 2015. Capacity tightness is not expected to be a serious issue over the next year, but carriers will have more pricing power and rates will rise if the supply situation deteriorates.