Freight market and rates
Trucking is one of the few bright spots in the economy. The trucking, freight and logistics industry economy is performing far better than the overall U.S. economy.
Capacity in the industry is as tight as it has been in years. This is due to an undetermined number of fleets that closed early on because of the COVID-19 pandemic, and those that continued to operate did so with fewer trucks due to a worsening driver shortage. (Year-over-year truckload fleets are operating 3.3% fewer tractors and less-than-truckload carriers are down 4%.)
All sectors of the trucking industry are doing well, especially when measured against 2019 numbers, some better than others. The retail side is very strong, e-commerce is exploding, and groceries, cold and frozen foods hauled by refrigerated carriers is strong.
Flatbed carriers hauling lumber and other building materials as well as carriers that make furniture deliveries saw a spike in business as people refurbished or renovated their homes.
At worst dry van freight fell just 3% year-over-year in April but actually surpassed 2019 levels by 5% in August. While inventories hit an all-time low in June, imports began to surge in August in anticipation of a big Christmas selling season. Through November, tonnage was down 3.9% compared with 2019.
In the second quarter, at the height of the pandemic, e-commerce sales surged 44.5% to account for 16% of $1.31 trillion in total retail sales. This compares with the second quarter of 2019, when U.S. e-commerce sales were just 10% of overall retail sales.
The growth of e-commerce leaped 10 years in just a few short months. (Amazon.com Inc. reported its revenue soared 40% to $88.9 billion in the quarter compared with $63.4 billion the year before.) E-commerce was expected to increase 50% year-over-year during the holidays.
The tight trucking capacity has pushed freight rates up. Contract freight (freight that customers sign contracts with carriers to haul) makes up 80% of the freight that is transported in the U.S., and the spot market (one-time shipping price quoted now) handles the rest.
Early in the pandemic, with demand tightening, spot rates surged by 80% to 90% year-over-year, although that dropped by October to a 40% increase. By November, transportation prices jumped by 30.5% since March and were expected to continue to do so through the holiday season. Contract rates are expected to climb as much as 8% to 12% in 2021, compared with 2020.
For most of 2021 the overall freight environment should remain quite strong. However, freight will level off when we get vaccines that end the pandemic distributed to the populace, and there is a shift away from consumer spending and back toward services.
But economic indicators suggest the trucking industry could be poised for growth in 2021, although freight volumes will not return to pre-pandemic levels until sometime in the second or third quarter.
The driver shortage continued to worsen in 2020 and some fleets say the situation is the worst they have ever seen, with the number of drivers being about 80,000 fewer than there were a year ago.
Since last January, trucking lost more than 46,000 drivers in the first 10 months of the new, federal Drug and Alcohol Clearinghouse's operation, and only 4,400 have completed return-to-duty requirements. Some older drivers are also reluctant to drive for reasons related to COVID-19, and many simply retired. Others have left over-the-road driving for local, e-commerce jobs that enable them to be closer to home and be home most nights.
The driver shortage also is being impacted by the slow return to normal at state department of motor vehicle offices, which were shut down or operated for six months or more at reduced levels due to the pandemic. This has reduced the number of new drivers coming into the industry since they cannot get commercial driver license testing.
In addition, truck driver training schools' capacity has been limited by coronavirus-related safety precautions (i.e., social distancing and sanitizing equipment), including some lockdowns during severe outbreaks. It is estimated that the number of graduates has been reduced by 20% to 50% last year, compared with 2019.
In addition, generous unemployment benefits drained the pipeline of new drivers.
And to make matters worse, the industry is still plagued with staggering driver turnover, which averages 88% for large truckload fleets and 65% for medium-size fleets. It's no wonder that for the fourth year in a row, the trucking industry has ranked the driver shortage as its No. 1 top industry issue, according to an American Transportation Research Institute (ATRI) survey of fleets.
The driver situation won't change for at least two quarters, although many believe that a new round of pay increases could work to attract new drivers sooner. By year-end 2020, several large carriers had announced pay increases from 4% to 14%. (Driver compensation was ranked as the No. 2 top industry issue.)
With so many people self-isolating, working from home and limiting their trips out of the house to just the grocery stores, the demand for diesel fuel and gasoline plummeted in the first half of the year.
By the fall, prices for oil started to increase again and continued to rise every week in November and into December.
As of the beginning of December, the nationwide price for diesel was $2.526 a gallon. which was 52.3 cents less expensive than it was the same time in 2019. Also the nationwide price for gasoline was $2.156 a gallon, which was 40.5 cents less than it was the previous year. A barrel of West Texas crude, the industry's benchmark, closed at $45.76, down from $56.99 a year earlier.
With fuel prices creeping up, more and more oil rigs are operating again. During the week ended Dec. 4, 323 rigs were in operation in the U.S., which was down 476 from the same period the year before when 799 were in operation.
In September domestic production reached 10.9 million barrels per day on average; however, it's nowhere near the pre-pandemic level in 2019, when U.S. wells produced nearly 13 million barrels of oil daily.
Much of the increase in oil production came from the Gulf of Mexico, which began to return to normal after an above average hurricane season caused oil well platforms to be evacuated numerous times to get workers ashore to safety.
Texas continues to be battered by the COVID-19 pandemic. Oil production in the state worsened in September as the state produced the lowest amount of oil in more than 18 months, off 21.2% from the previous year.
The U.S. Energy Information Administration (EIA) expects domestic oil production to average 11.1 million barrels per day in 2021 and the price for West Texas crude to average $44.24 this year.
It also expects diesel fuel to average $2.62 a gallon nationwide and gasoline to average $2.27 a gallon with oil production remaining flat through 2021 and not return to pre-pandemic levels until 2022. However, the EIA stated that this forecast "remains subject to heightened levels of uncertainty because responses to COVID-19 continue to evolve."
Truck and trailer sales
U.S. sales of Class 8 trucks dropped dramatically in April and May and for a time vehicles weren't available because manufacturers temporarily shut down plants due to the pandemic.
Sales recovered gradually in the succeeding months, and manufacturers returned to building trucks at pre-pandemic levels by the third quarter. Sales, however, were below the pace of the previous year since almost all fleets paused or delayed orders because of uncertainty.
However, in November, with freight rates surging to record levels for the previous three months and carrier profits certain to follow, orders for new Class 8 trucks soared to 52,600 units up 33% from October and a 197% improvement over the previous year.
Fleets were confident that consumer-oriented freight will remain strong and industrial freight will improve in the coming months so they placed big orders in anticipation of requiring more trucks throughout the year.
They moved to lock up build slots, which they perceived could be in short supply this year. It is expected that sales of Class 8 vehicles reached around 310,000 units in 2020 while orders at the end of November for the previous 12 months stood at 250,000 units for 2021. With more orders expected to come in the next few months, the industry will have a stable, positive year in 2021.
A similar scenario is playing out in trailer orders. Orders bottomed out to nothing in April and stayed well below 30,000 units a month until September when they soared to a record high of 51,208.
The increase was 174% higher than September 2019's count. But then October trailer orders cleared 54,200 to score the third-best gain in industry history. That compared with 31,786 units in October 2019.
The motivation behind these orders was fleets' need to secure next-year slots for trailers, especially dry vans. Trailer manufacturers' lower build rates pushed fleets to submit their orders faster, rather than gamble that any new units might not be delivered until well into 2021. It looks like the trailer industry also will have a stable and positive year in 2021. Government impact
How the change of president from Donald Trump to Joe Biden will affect the trucking and tire industries is murky until we find out who gains control of the Senate — the deciding seats to be determined in a Georgia run-off election Jan. 5.
The 2015 FAST Act is the five-year highway authorization measure due to expire in 2021, after being extended a year beyond its original expiration date.
Congress has been trying to come up with a way to pay for fixing the nation's roads and bridges and reduce chronic congestion on the highways for years, and even though investing in the country's transportation infrastructure has the clear support of the American public, it has not been able to get the job done since it is reticent to increase taxes.
The current fuel tax rate (24.4 cents per gallon for diesel and 18.4 cents per gallon for gas) was set in 1993. It was given a year-long extension when Mr. Trump signed a temporary funding measure that averted a shutdown of the federal government in September.
Moving a massive infrastructure bill through Congress is thought to be part of Mr. Biden's plans for his first 100 days in office, which means, if he is successful, it could theoretically be passed by July.
Creating a sustainable Highway Trust Fund is key in the next infrastructure bill and getting agreement from both sides of the aisle and enough votes to pass it will be a behemoth task.
If another round of COVID-19 economic aid hits a hurdle before Mr. Trump leaves office in January, Mr. Biden will jump on this immediately. House Democrat leaders and Senate Republican leaders agree on the need for another emergency aid measure, but they disagree on topline figures.
Mr. Biden may help them come to a speedy compromise. Back in November he announced the formation of a COVID-19 task force, which he said will shape his approach to managing the surge of reported infections and ensure vaccines are distributed efficiently and equitably. He should be ready to roll out his plans immediately after he takes office.
Mr. Biden wants to keep the Affordable Health Care Act and expand it. It is believed that he wants to create a public option in the marketplace that relies on Medicare with no co-payments that would be available to those who fall below the poverty line and to individuals instead of employee-provided plans.
Under Mr. Biden's leadership, transportation agencies also would adopt a national framework for autonomous vehicles and hold venues that enhance innovation and technological advancements. Providing access to autonomous technology could propel industry efforts that have evolved without congressional policy input and government planning.
Mr. Biden is not expected to roll back tariffs on tire and auto part imports from China.
Truck tire sales
According to the U.S. Tire Manufacturers Association (USTMA), original equipment truck tire shipments for 2020 fell by 29% to 4.6 million units, and replacement truck tire shipments declined by 2.1% to 18.5 million units.
While the association has not released its forecast for 2021, it is safe to say that original equipment truck tire shipments should increase significantly since orders for new tractors and trailers are filling up order boards quickly.
Replacement truck tire shipments should also be strong. With all domestic truck tire plants back up to full production, shortages of truck tires produced in North America should soon be a thing of the past as tire makers rebuild inventories that had been drawn down because of production shutdowns in the first half of the year.
The supply chain is still pretty hosed up for tires coming in containers from Asia, so shortages of these products may linger longer.