Spending for U.S. business logistics increased 3.1% to $1.45 trillion in 2014, and the outlook is favorable for 2015.
In fact, 2014 was the best year for the supply chain industry since the Great Recession, which technically was from December 2007 to June 2009. The previous peak in business logistics spending was $1.42 trillion in 2007.
Those findings were contained in the annual ‘State of Logistics Report’ released this summer by the Council of Supply Chain Management Professionals and discussed by a panel in Washington, D.C.
“The big theme of the report is, after five years of things limping along, we finally got to say it was a banner year for logistics spending,” said Rosalyn Wilson, a senior business analyst for Parsons Corporation, who authored the report.
“I still maintain we’re on the way up,” she said in an interview in July to discuss the report, although it won’t be a straight line of growth. “There will be a bump here and there.”
With shipments going up, business should be good for pallet and container suppliers, she agreed.
“Things are really looking up,” said Rosalyn. “The economy is going to continue to strengthen. The future for freight is really good.”
According to her report, the growth rate for logistics costs was lower than the U.S. gross domestic product (GDP), resulting in a slight decline in logistics as a percent of GDP from 8.4% to 8.3%.
The report tracks and measures all costs associated with moving freight through the U.S. supply chain.
Consumer spending historically drives economic recovery. However, strong consumer spending was absent in recent years — but strengthened in 2014 — because the Great Recession was accompanied by the collapse of the credit market, and household net worth plunged. Consumers were unable to or reluctant to spend money on little more than necessities in recent years. Last year, though, “consumers seemed to get back in the game,” said Rosalyn, and are continuing to spend. Consumer confidence rose substantially during 2014.
Household net worth was up over pre-recession levels, although it has risen for the upper tiers; the rise in net worth fueled consumer spending, generating more work and income for low-income earners.
All told, the U.S. economy was on fairly solid ground for 2014, the report noted: consistent new job creation, real net income and household net worth on the uptick, inflation low to moderate, and falling prices for gasoline.
Although consumers boosted the economy in 2014, there are no signs they will return to their pre-recession buying and borrowing patterns, according to Rosalyn, and she expects consumer spending to level off. “It is unlikely that we will sustain GDP (Gross Domestic Product) growth above 3.5% into 2016 and beyond,” she wrote in her report. Nevertheless, freight volume should enjoy sustained growth in 2015.
Trucking is the biggest component of logistics costs and was at $702 billion in 2014 followed by carrying costs for inventory, $476 billion. Carrying costs include interest, taxes, obsolescence, depreciation and warehousing.
Rates should reach a higher level towards the end of 2015 and increases will be modest to moderate in 2016 depending on the level of economic activity. Carriers should be able to pass on their higher costs to shippers.
Industrial production climbed steadily throughout 2014 and surpassed 2014 levels in early 2015; levels have fallen since the beginning of 2015 but still exceed 2014 levels.
One cautionary note: Inventory levels are very high, she noted, referring to inventories of manufacturers, wholesalers and retailers. Inventories for retail and wholesale increased in 2014, but manufacturing inventories were down slightly.
“I think there is going to have to be a draw-down which, by the way, manufacturing already has started doing,” commented Rosalyn. However, she expects wholesalers and retailers to continue to order goods. Ultimately, that would mean manufacturers will continue producing — and shipping — steadily, which should be good for pallet and container suppliers.
Inventories swelled, she said, because of global market conditions and the recession. Another factor was low interest rates. “It was cheap. It didn’t cost a lot, and carrying costs were low.”
Pallet suppliers that serve customers with export business should take note: the strengthening of the U.S. dollar relative to other world currencies is hurting U.S. export sales. The rising dollar makes American goods more expensive compared to similar goods from other countries.
The global economy is not experiencing the same rebound as the U.S. economy, limiting export growth. Recent global economic forecasts are not favorable for a turnaround in 2015.
“Right now, the strength of the dollar is really killing the export market,” said Rosalyn. The trend will continue at least for the near future, she predicted. “The global market is not recovering very well.”
By contrast, foreign products are cheaper in the U.S., which should boost imports. Imports rose 1.8% in the first quarter of 2015, again pushing GDP down. There has been a big increase in finished goods imported from Mexico, said Rosalyn.
“Same-day delivery models and expanding e-commerce are reshaping warehousing needs,” she wrote in her report.
E-commerce and businesses like Amazon and e-Bay are “changing a lot of things about the way we’re going business, shipping and the location of warehouses,” she added. Amazon in effect has become the warehouser and distributor for thousands of businesses. To support online shopping and ordering, warehouses stock merchandise, inbound trucks bring finished goods to replenish supplies, and outbound trucks are delivering products to individual consumers and businesses. “It’s a completely different model, a much more regionalized model.”
“You can’t have one big warehouse in Pennsylvania and hope to make those deliveries in Virginia or North Carolina in a single day,” she observed.
Another impact of the growth in Internet-related business is that local brick-and-mortar outlets of business are shrinking their footprint, she suggested, and stocking only limited goods as more products are purchased online.
The report noted a shortage of 35-40,000 drivers for trucking, according to the American Trucking Association. Driver turnover remains extremely high for truckload carriers (95% at the end of 2014) while less-than-truckload fleets fare much better (average turnover rate for the year of only 11%).
Smaller trucking companies are still being forced out of the industry because of costs. Three hundred and ninety trucking companies went into bankruptcy in the first quarter of 2014; they averaged 27 vehicles each. Donald Broughton, an analyst for Avondale Partners, said there was a direct link between the rash of bankruptcies by small trucking firms and new federal truck safety regulations.
Most of the problems that the freight logistics industry will face in the next three years will stem from capacity issues, according to the report. “Freight volume is expected to increase at a moderate rate, but capacity is not going to keep pace.”
The rest of 2015 will be marked by capacity issues and bottlenecks for most modes. “Rates should rise faster in the second half of 2015 to cover the higher costs faced by carriers and needed investment.”
“In general, it was a very positive report in that, economically, things are looking up at this point,” said Kevin Smith, president and CEO of Sustainable Supply Chain Consulting, who served as the moderator of the panel discussion and discussed it in early July.
“Everyone is doing a pretty good job of keeping costs down,” he added, referring to logistics costs as a percentage of GDP.
The housing market has a big impact on logistics spending, he noted, because so many consumer and durable goods are connected to housing. As the housing market improves, productivity with the logistics industry will increase and perhaps so will logistics costs as a percentage of GDP.
There has been a significant shift in recent years in imports in terms of coming through ports on the West Coast and East Coast, according to Smith; the shift is to bring more shipments through the East Coast ports because of organized labor work slow-downs and
stoppages at West Coast ports. About 60% of exports are now brought in through West Coast ports and 40% through the East Coast, said Smith; those figures had been about 70% and 30%, respectively.
Smith sees another key trend impacting the pallet industry: a coming population decline and the accompanying need for increased automation. Projections indicate that the population in North America will begin to decline by 2025, he noted. The world’s population is growing, observed Smith, but the growth is occurring elsewhere, such as undeveloped parts of Africa and some developed parts of Asia.
The population decline in North America will spur a need for more automation, he said. “We’ve got to start shifting some of the more mundane work to automation,” said Smith, who singled out logistics activities such as receiving goods, putting them in storage and later retrieving them. “All of those things can be automated.”
The condition and quality of pallets used in automated material handling will be “absolutely critical,” said Smith. It will be more important to have high quality, durable pallets, he said.
