Can you believe it? We are at the start of a new decade in the New Millennium.
2019 seemed to go by so fast. I don't know about you, but I thought I'd be dead by now. What a shock and what a very happy surprise.
Since we're still alive and have a whole new year ahead of us, it's probably a good idea to drag out and dust off my old crystal ball again and see what 2020 has in store for us. Who knows, maybe it will be filled with more good surprises.
Let's first look at the economy because this is what drives trucking and your commercial tire business. 2018 was the best year in history for the trucking industry; 2019 — not so much.
According to the International Monetary Fund (IMF), the U.S. gross domestic product (GDP) — which is an indicator of economic growth — grew 2.9% in 2018 and just 2.4% in 2019.
Tariffs have been the root cause in slowing down not only the U.S. economy but the entire global economy as well. The tax cuts in 2017 boosted manufacturing, a primary source of freight, to record levels, but the tariffs stunted that growth and hastened the economy's return to a more normal level in 2019.
Consumer and business confidence have been affected by political dysfunction and the China-U.S. trade war, which brought a wave of new tariffs that disrupted global supply chains. The uncertainty has prompted businesses, especially those in manufacturing, to be more cautious about investing.
As a result, industrial production, manufacturing, construction and durable goods orders for 2019 were flat or worse.
The good news is that thanks to the growth in e-commerce, consumers are still spending and keeping trucks plying the roads delivering the good stuff they buy and retail and consumption activity makes up 80% of the economy.
As a fun fact to note, e-commerce is about 11% of total retail sales. However, when you drop out automobile dealers, gas stations, restaurants and bars where e-commerce is not a factor, it now accounts for 20% of core retail sales.
The tight labor market is also a concern for businesses. In November last year, the U.S. unemployment rate dropped to 3.5%, which is considered by many to be "full employment." This tight labor market will continue this year.
This is a concern since to maintain a 2% growth rate, 180,000-200,000 new jobs are needed every month. The country will have to either find a way to get more workers or drastically improve productivity.
As a result of all of these factors the IMF has forecast the U.S. economy to expand by 2.1% in 2020, which will be the 12th consecutive year of growth, albeit at a slower pace than the past couple of years.
Freight market, rates
While the economy grew overall in 2019, trucking tonnage experienced a monthly roller coaster ride, rising one month and dropping the next. Nonetheless it was still a pretty good year in terms of freight volume. Carriers didn't do well in 2019, however, because freight rates fell and cost increases such as driver compensation and insurance didn't.
Small carriers that are dependent upon the spot market experienced a sharp drop in spot rates last year which resulted in a surge in for-hire carriers going out of business. (Spot market rates in trucking are the shipping prices that exist right now. They represent how much it costs to ship cargo if you were to get contracted on the spot.)
Sky-rocketing insurance premiums of around 20% to 30% caused by incredibly high jury awards in accident cases also helped push many carriers over the edge. In fact more than twice as many motor carriers (640) closed their doors in the first half of 2019 than in all of 2018 (310).
However, this year the general outlook is for a gradual firming of rates due to truck availability being more constrained compared with 2019. Contract rates should fall 5% to 10% this quarter from last year but firm up as the year progresses by about 2%, which would bring them back to 2018 levels. Spot market rates should bounce back 4% to 6% by the second half of this year.
The driver shortage remains fleets' top concern according to a survey conducted by the American Transportation Research Institute (ATRI) late last year.
According to the American Trucking Associations (ATA), the industry was short about 61,000 drivers at year-end 2018, which was an all-time high. The industry and the U.S. government are looking at ways to address this problem, including opening interstate commercial driver licenses to younger drivers.
Currently drivers must be 21 to drive trucks across state lines, but younger drivers can drive trucks intrastate legally in most states. Efforts are also being made to attract more women into the industry. Women make up 47% of the U.S. workforce but only 6% of truck drivers.
Prices for both gasoline and diesel remained fairly stable and relatively low in 2019, averaging $2.60 and $3.06 per gallon, respectively. However, there will be one exceptional factor that could impact diesel fuel prices this year.
The International Maritime Organization (IMO) sets regulations for ocean-going vessels like container ships. Beginning Jan. 1, it is requiring all ships that used to burn almost 4 million barrels a day of low-grade diesel fuel that is high in sulfur and emits a high level of pollutants into the atmosphere to either convert to low-sulfur fuel commonly used by commercial trucks or use million-dollar, maritime emission scrubbers to reduce emissions.