A "banner year." There are many data points in the 25th annual "State of Logistics Report," but those two words—used to describe the 2014 outlook for U.S. logistics—are what will likely stand out. That's because the report's author, Rosalyn Wilson, has been anything but an optimist about the economy and the logistics business since the Great Recession ended in 2009. The report is produced by the Council of Supply Chain Management Professionals (CSCMP) and is sponsored by Penske Logistics.
At first glance, Wilson's bullishness about 2014 seems out of sync with her findings that 2013 was no different than the less-than-stellar years that came before it. Transportation revenues—measured as "costs" in the report—rose just 2 percent year-over-year. Trucking revenues gained only 1.6 percent, making 2013 one of the weakest years for the industry in recent history, the report said. Intercity truck revenues rose 1.8 percent, while the local delivery segment gained 1.2 percent. Truck tonnage gained 6.1 percent year-over-year, a misleading figure because it is skewed by the enormous number of shipments of heavy sand used to support hydraulic fracturing, or "fracking," operations in the Great Plains, Texas, and Pennsylvania.
![[Figure 1] Total U.S. business inventories](/media-library/20140818forecast-2014-ex1.jpg?id=53612034)
![[Figure 2] Calculation of 2013 logistics costs (in U.S. $ billions)](/media-library/20140818forecast-2014-ex2.jpg?id=53612035)
![[Figure 3] U.S. logistics as a percentage of GDP](/media-library/20140818forecast-2014-ex3.jpg?id=53612036)
![[Figure 4] Index of logistics costs as a percentage of GDp](/media-library/20140818forecast-2014-ex4.jpg?id=53612037)
Truck shippers continued to be successful during 2013 in resisting rate increases, according to the report. Although carriers are operating at or near full capacity, shippers believe they have enough service options to hold off rate hikes, the report said. Rates were relatively flat, except for in the spot market when capacity was scarce.
As has been the case for several years, rail revenue growth again outpaced that for trucking. Overall rail revenue rose 4.9 percent year-over-year, and revenue per ton-mile increased 5.3 percent. Total carloadings jumped 8.2 percent, while intermodal volume rose 10.6 percent, the report said. However, strong price competition from truckers dampened intermodal rate growth. Ocean volumes rose 4.5 percent, while domestic and international airfreight volumes each increased by less than 1 percent.
Revenues for the third-party logistics (3PL) sector rose 3.2 percent in 2013, down from a 5.9-percent year-over-year gain in 2012. Most of the softness was in the international sector as a subpar global economic recovery and shippers' reluctance to commit to new business restrained results, the report said. By contrast, the domestic 3PL market showed strong demand as shippers increasingly turned to intermediaries to help optimize their supply chains across a broad front. Marc Althen, president of Penske Logistics, said the company last year experienced strong demand for all of its services.
A surprise rebound
The transportation industry's relatively lackluster performance appeared to end in March of this year. Not surprisingly, the industry struggled for most of the first quarter as bad weather made a mess out of much of the nation's transportation system. But as weather challenges abated in March, the economy and the industry sprang forward. Volumes during that month rose 10 percent year-over-year, partly as businesses that had held back due to the weather and the normal post-holiday slowdown got back in gear.
The big surprise came in April. Based on the average pattern of activity over the past four years, April should have seen a contraction. Instead, business took off. Freight payments rose to their highest point in 15 years. Shipment volumes hit their highest levels since June 2011, according to the report.
The momentum continued through May. Shipments through the first five months were up 13.1 percent over 2013 levels. Payments jumped 11 percent over that span. The surges in March, April, and May led to the strongest freight demand since the recession ended, the report said. More tellingly, Wilson—who generally is averse to taking risks with her forecasts—predicted that 2014 would be the best year for freight since 2006, the industry's last good year before a protracted recession took hold.
Wilson's projections must be looked at with a bit of hindsight. Other years in the post-recession era have enjoyed strong periods only to fade and fall flat. In 2013, for example, a strong showing that extended through the middle of the year was spoiled by a weak fourth quarter that put a damper on the year's overall results. That weakness carried over into the first quarter of 2014, with GDP falling 2.9 percent. The conventional wisdom held that bad weather was responsible for most of the drop; skeptics contended that inclement weather is a regular first-quarter occurrence, but first-quarter economic output in most other years hasn't declined so precipitously.
Despite the first-quarter weakness, Wilson said her full-year forecast remains unchanged. In a mid-June e-mail, she said the weakness in freight traffic during January and February was "a timing concern, not a volume concern." The economic trends that support freight activity have all turned upward, she said. The construction business has been improving, based on the number of building permits issued and housing starts begun. Pickup truck sales are rising, a reflection of strong housing demand. Transportation employment is growing faster than employment in general. Orders placed abroad are growing more slowly than in previous years but have begun to pick up. Consumer spending has increased after a months-long lull. Heavy-duty truck orders have been climbing beyond just replacement rates. And on the financial front, interest rates are low and inflation remains benign. "Most of the people I talk to ... are quite positive," she said.
Wilson cautioned that macroeconomic and supply chain activities are not always in alignment. For example, U.S. imports rose every month through May, a trend that stimulates shipping volumes but detracts from the GDP calculation, she said.
The cost of inventory
The big story of 2013 was the demand for inventory and the absurdly low costs of carrying it. U.S. warehousing costs spiked as retailers, emboldened by low interest rates, stockpiled products ahead of a hoped-for fourth-quarter burst that never came, the report said. Indeed, warehousing expenses climbed 5.6 percent over 2012 levels as rising inventories absorbed all available capacity. Demand for peak-season space in last year's fourth quarter reached the highest level on record, according to the report. The U.S. industrial vacancy rate ended the year at 8 percent, down from 8.9 percent in 2012.
Retail inventories increased 6.2 percent year-over-year, and inventory levels rose sequentially throughout 2013. (See Figure 1.) Wholesale and manufacturing inventories rose by only 2.7 percent and 2.1 percent, respectively, indicating the upstream supply chain flow succeeded in keeping stocks low until late in the year, the report said.
"Cheap money" no doubt played a major role in inventory management decisions. The U.S. Federal Reserve Bank's annualized rate for commercial paper—unsecured promissory notes with a fixed maturity of no more than 270 days—fell to 0.09 percent in 2013 from 0.11 percent in 2012. As of the end of May, the commercial paper rate had fallen further, to 0.08 percent.
The "interest" category of the "State of Logistics Report" fell 22.6 percent in 2013, an astonishing decline given the already rock-bottom borrowing costs. Interest-rate declines offset the cost of taking on more inventory, leaving overall carrying costs just 2.8 percent higher than 2012 levels, the report said.
Wilson said low interest rates encouraged companies to take on more inventory because there would be little economic penalty to warehousing product. However, 2013's up-and-down economy left manufacturers unsure what to expect, she said. "Manufacturing has had a number of sustained growth periods, but so far none have stuck," Wilson said in an e-mail prior to the report's mid-June release.
The cushion of ultra-low interest rates was apparent in the report's analysis. If the annualized 2007 interest rate of 5.07 percent had prevailed during 2013, total logistics costs would have increased by US $128 billion, Wilson's research found. But thanks in part to low interest rates, U.S. logistics costs reached $1.39 trillion, up $31 billion, or 2.3 percent, from 2012 levels. (See Figure 2.)
All told, logistics costs in 2013 as a percentage of gross domestic product (GDP) declined to 8.2 percent, as shown in Figure 3. (For a breakdown by inventory and transportation, see Figure 4.) For the previous two years, costs as a percentage of GDP—a key gauge of the supply chain's efficiency in moving U.S. output—had been stuck at 8.5 percent.
Some of the year-over-year decline in 2013 can be attributed to a 1.9-percent drop in "shipper-related costs" as companies increased their supply chain productivity, the report said. However, Wilson said the decline largely reflected lower demand in freight spending and, by extension, logistics products and services. In years past, a fall in the ratio would be hailed as a sign the supply chain was becoming ever more efficient at moving the nation's output. That is no longer the case.
The sluggish 2013 data makes the strength in the first half of 2014 all the more significant, according to Wilson. As of mid-year, the data curve had dramatically steepened, and the logistics industry appeared ready to break out of what has been a three-year pattern, she said. If that happens, the industry will have enjoyed its best year in nearly a decade. Just as important, it could be looking at several good years ahead of it.
