2018 Year In Review | Economic Drivers For Transportation And Supply Chain

As 2019 begins, we are taking a look back at 2018 to identify key events from the past that have started to manifest and influence market events of the present—and future. Below are seven of the most important economic drivers for the transportation and supply chain industries we saw in 2018, which include:

• Tight Capacity Environment
• Historically High Truck Orders
• Uncertainties Due to Chinese Trade Barriers
• Unexpected Fuel Price Behavior to Close the Year
• Lowest Unemployment Rate since 1969
• Tightening Interest Rates and Lending
• Proliferation of Data Across Transportation

Read on to see how these trends influenced the challenges of 2018, and how they will likely carry over into 2019.

Tight Capacity Environment

The tight capacity environment seen in the trucking industry throughout 2018 dominated most of the conversations pertaining to transportation. The tight conditions stemmed from a host of factors such as driver shortages, increased freight demand, and consumers’ demand for increasingly faster order cycles, to name a few.

As a result, linehaul rates increased notably, and freight became increasingly difficult to secure regardless of carrier contracts, sending more loads to the spot market.

Though this story line predominated the media and strategic conversations among shippers and carriers alike, evidence of easing capacity is starting to materialize. It is reasonable to believe one of the key reasons for this is an increase in the supply of freight in the marketplace, rather than solely the result of softening demand—we will unpack that in the following section. With recent trade uncertainties and a government shutdown, however, much is left up in the air and the future state of the economy and supply/demand dynamics remain to be seen.

Historically High Truck Orders

One underlying plot line in the capacity story was truck order trends. US Class 8 truck orders hit a 10-year high as dealers placed over 45,000 orders in August 2018. The industry paid close attention to this trend over the last two quarters of 2018, and many looked forward to the potential easing of capacity throughout the industry as a result.

While this influx in orders is important to take note of, it does not, however, give a clear or linear indication of easing capacity—rather it is one among many indicators. A deeper dive into other considerations in the truck ordering landscape tells a more complete story. One of the most important considerations is the replacement rate of newly ordered trucks. It is currently unclear to what extent orders will be merely taking over capacity of older, phased out models, rather than incrementally expanding fleets.

Given historic replacement rates, the ordering environment in 2018 would suggest the likelihood of increasing capacity, however, it may also be a precursor of unanticipated spikes in replacement rates. Due to backlogs in truck order fulfillment, we will need to wait for trucks to hit the road to determine the recent order trend’s effect on capacity and replacement—a task that may take much longer to develop.

In our recent blog post Breakthrough’s Andrew Kundinger breaks down additional considerations in the truck orders story. Read more about the importance of replacement rates, driver shortages, and truck sales here.

Uncertainties Due to Chinese Trade Barriers

Uncertainty surrounding the future state of US and China relations endured throughout 2018 after the first round of tariffs—imposing a 25 percent tariff on steel imports and 10 percent on aluminum—took effect on June 1st. As the year wore on, these impositions threatened only to escalate, as the leaders of both economies engaged in a war of tit-for-tat tariff escalation. This conflict came to a head on December 1st when US President Donald Trump and Chinese President Xi Jinping met to discuss the next steps for trade negotiations and to hold off on the next round of tariffs scheduled to take effect on January 1st of 2019.

The two leaders motioned to postpone a 10 percent increase on $200 billion in Chinese goods, however the agreed upon terms were initially unclear as both parties released conflicting statements in the wake of the decision. As 2018 ended and 2019 began, discussions have been, and continue to take place providing more context and action to what was agreed to at the dinner. There is still much more that needs to be determined between the two countries, however.

Most important to consider in the wider tariff and trade relations story is the affect this uncertainty has on companies’ ability to make long-term strategic budgeting decisions. As the lack of clarity drags on, it becomes difficult for corporations to confidently invest in supply chain infrastructure and make sourcing decisions. This could deter organizations from making any kind of major capital investment decisions in the near term, or it may drive an exodus of manufacturing away from China in search of less costly options. Both possibilities could have more direct and widespread effects on current economic indicators across the US, and more specifically supply chains.

Read more about how equities markets responded to the trade decision, and how we believe this uncertainty could affect economic decisions, based on most recent available information, moving into 2019.

Unexpected Fuel Price Behavior to Close the Year

On October 3, 2018, crude oil prices reached four-year highs at $76.41 per barrel. This spike in prices came on the heels of global speculation of production struggles and tight oil supply due to renewed sanctions on Iranian exports. The general sentiment that supply would soon be limited led to upward price pressure, before suddenly—and steeply—declining by as much as 27 percent in the following month.

This sharp decline was spurred by a myriad of factors alleviating tight supply conditions. Temporary waivers were granted to eight importers of Iranian oil, mitigating a portion of anticipated price premiums initially thought to materialize after the renewed sanctions took effect. In addition, OPEC inflated production to near-max capacity, flooding the market with excess supply and sending prices into a bear market.

While much of the market reacted to the fuel price fluctuations that endured into Q1 2019, Breakthrough clients were guaranteed accurate fuel pricing throughout, saving millions more than they traditionally save by using market-based fuel reimbursements.

Read about the Breakthrough Advantage here, and learn how proactive fuel management saves shippers millions.

Carrying this behavior into 2019, shippers can expect nothing more than the unexpected. All of the factors listed in this piece will continue to contribute to an ever-changing crude oil and fuel landscape, which is why effective strategies look at the entire market holistically to understand how different economic drivers will affect shippers’ bottom lines.

Our Applied Knowledge team keeps close tabs on the global geopolitical climate, relevant legislation, and supply/demand dynamics to keep our clients on the cusp of changes to fuel prices. Interested in learning more? Contact us!

Lowest Unemployment Rate Since 1969

In 2018, the unemployment rate hit 3.7 percent as reported in November—its lowest point since October of 1969—suggesting an economy that is on firm ground.

Simply put, consumers tend to buy more goods when they feel confident that the economy is going to continue to grow and employment will remain strong. This, in turn affected the freight market in 2018 by increasing demand for goods, and consequently increasing demand to move those goods to market. This elevated trend is evident in elevated shipments reported throughout the year—accounting for seasonality, of course.

Another byproduct of low unemployment is a challenging labor market. Companies find it more difficult to attract and retain talent because new hires need to be pulled away from other existing jobs—rather than from non-working conditions. In environments where there are more jobs than there are people to work them, wages generally trend upward to remain competitive, and higher wages contribute to elevated consumer spending as mentioned above.

For transportation, however, there lies an additional facet to the story. Driver shortages were a prevalent theme throughout the duration of 2018. The tight capacity environment was exacerbated not only by a lack of operating vehicles, but additionally by a lack of workers to operate them. Trucking companies are working to alleviate this strain by raising wages and making the driver experience as comfortable and efficient as possible, leading the way for transportation technology start-ups to enter the spotlight.

In an ever-more on-demand economy, promoted by high consumer sentiment and elevated consumption, not only did a larger quantity of goods need to be delivered, but those goods were being delivered faster than ever before. This is an excellent example of how fundamental economic principles can be analyzed to understand and overcome challenges in the transportation industry—ultimately fueling more effective strategies.

Tightening Interest Rates and Lending

For almost a decade after the Great Recession, the Federal Reserve kept interest rates low to spur economic growth. These low interest rates made it very cheap for businesses to borrow the money they needed for capital investments. Some pundits considered it a time of “free money.” At the outset of 2018, the US was still experiencing historically low interest rates that had been increasing at a modest pace. This, again, contributed to the growth of the economy that fueled many of the trends mentioned in this piece.

As the central bank shifted the US economy into a season of quantitative tightening, interest rates began to increase at a more rapid pace causing the cost of borrowing to push higher as well. Increased borrowing costs limits new capital investment which can have downstream impacts on economic growth.

As companies decrease their taste for large expenditures, economic growth may incrementally slow. Is the US ripe for a recession? Perhaps not, considering US GDP growth was notable in 2018, however it is fair to assume that the rate of growth will decline moving into the new year. It will be important to monitor performance indicators of the US economy to get a sense of where GDP is headed—tightening interest rates and lending is one factor contributing to this climate in 2019.

Proliferation of Data Across Transportation

While historically the transportation industry lags other sectors in the adoption of disruptive technologies, 2018 was a significant year in terms of advancing high-tech data capabilities in supply chains. Shippers, carriers, and other key stakeholders are collectively beginning to understand the unlimited opportunities that are unlocked with the right data and a thoughtful strategy. Several factors can be pointed to in this trend.

The first of which is the start-up space, where transportation saw significant increases in venture capital spending, as well as global recognition among other industry verticals. You can read about trends in transportation and supply chain startups here, but what is important to understand is that transportation is on the leading edge of ground-breaking innovation. Those technologies of note include on-board telematics devices that shed light to freight visibility and tracking, and risk management technology.

One device that changed many aspects of transportation management and data collection was the adoption of electronic logging devices (ELDs). As of April 1st, when the use of ELDs onboard class 8 trucks was officially enforced, data regarding driving hours, truck usage, etc. became prolific. ELDs are not new technology, but the difference is that now small and medium-size carriers are using the technology almost uniformly. Years ago, that kind of data was only available for large carrier companies with thousands of trucks due to the up-front costs associated with installation. Requiring the technology promotes a more complete available data-set that gives a glimpse into smaller trucking companies.

This access and quality of data is fueling ever-more efficient strategies and optimization. With the right partners, shippers should be leveraging this data to create comprehensive transportation strategies—spanning everything from fuel to carrier selection and compliance.

Your Fuel and Freight Experts

As demonstrated in previous years, 2018 proved to be volatile in terms of supply/demand dynamics, foreign policy, geopolitical events, and the like. In terms of shippers trying to navigate challenging market conditions, understanding how different corners of seemingly unrelated industries interact and influence their bottom lines is imperative to remaining at the forefront of their industry.

If you have questions about any of our industry leading solutions, or how Breakthrough helps clients understand and navigate the fuel and freight industry, contact us!