State of Logistics Report Points to Sluggish Recovery

Editor’s Note: John D. Schulz is a contributing editor for Logistics Management—a sister publication.

In yet another indication of the nation’s slow economic recovery, U.S. logistics costs rose 6.6 percent last year to $1.28 trillion, up $79 billion from 2010, according to the newest State of Logistics report.

But logistics costs have not yet regained 2007 levels and “in truth may not get back there for quite some time,” according to Rosalyn Wilson, author of the 23rd annual SoL report co-sponsored by the Council of Supply Chain Management Professionals (CSCMP) and Penske Logistics.

Shippers and logisticians should prepare to continue to cope with these low-growth numbers, Wilson said, predicting a continuing slow economic slog through the 2012 elections and perhaps for a few more years.

“Slowly and steadily, we are moving upward,” Wilson said. “The economy didn’t grow much (last year) and neither did logistics.”

But she said that the economic improvements do not mean the nation is taking the express elevator to the penthouse. “Rather, we are taking the stairs,” Wilson cracked.

Last year logistics costs as a percent of Gross Domestic Product (GDP) rose a slim 2.6 percent to reach 8.5 percent of GDP. Both inventory carrying costs and transportation costs rose “modestly” last year, Wilson said.

Transportation costs were up 6.2 percent last year because of higher freight rates, not increased volume. Trucking, rail and third party logistics providers were able to increase rates and revenue, according to the report released Wednesday in Washington. But air, water and pipeline revenue fell last year.

Trucking, which hauls 77 percent of the nation’s freight by revenue, posted a 6.2 percent rise last year to $629 billion (intercity and local combined). But the real leader was the railroads, which saw a 15.3 percent increase to $68 billion. The 3PL and freight forwarding sector was up 9 percent “and gaining strength at the end of the year,” Wilson said.

In retrospect, Wilson called 2011 “a rather unremarkable year” for logistics statistics. GDP growth slowed to 1.7 percent last year, well below the 2.8 percent increase in 2010. Truck and rail rates “increased broadly” early last year and held up, allowing carriers to recover some of the increased operating costs they have been experiencing the last several years.

“Capacity in the trucking industry is in a tenuous equilibrium state,” Wilson reported. “True shortages are rare, but available capacity is not abundant.”

Excess capacity is a “major issue” in the ocean sector. The rail industry has invested adequately throughout the recession to ensure it has sufficient capacity as the long-awaited economic recovery gains momentum.

Wilson is predicting continued slow growth with GDP around or under 3 percent this year and perhaps the next several years.

“Logistics will still be a bumpy road,” Wilson predicted. She said while the economics are showing promising signs, there are still “abundant” caution flags aloft.

Higher inventories are clouding predictions of a strong peak season. High and stagnant unemployment figures are adding to the picture of a long and winding recovery.

“The longer the recovery takes without solid sustainable economic growth, the more reticent businesses become about hiring and investment,” Wilson said.

Trucking is an excellent example, Wilson said. Truck rates rose between 5 and 15 percent last year, but costs are rising almost as fast as rates, she added. While truck sales are rising, they have still not reached replacement levels. Used truck prices are soaring and supply of good, late-model used trucks are dwindling.

Wilson said the overall number of registered trucks on the highway has been declining “substantially” over the past couple of years. Capacity should be a larger worry for shippers, she said, rather than rates.

“I think everybody should be preparing for the day when they cannot get a truck,” Wilson warned. “We physically do not have the capacity we had prior to the recession.”

The trucking industry, which has been slow in rebuilding capacity because fleets are unsure of future freight demand, has had capacity issues in some geographic lanes even in this lower volume environment, Wilson said. Truckers could have difficult meeting demand if the recovery picks up—and rails are well positioned to take up the slack with its long-haul intermodal option. Overcapacity will continue to plague the ocean sector, according to Wilson.

That is putting pressure on logisticians to find suitable capacity amid uneven demand levels. Improved inventory management techniques should continue to aid shippers as they emerge from what Wilson called “the very trying period we have endured for almost five years.”

Recent developments are not wildly encouraging. The Institute of Supply Management’s closely watched manufacturing activity index trended down in May, but remains above the 50 level that indicates expansion. On the positive side, retail sales are inching up and consuming spending has risen every month this year. But imports fell during the first quarter and the nation’s ports have seen a drop in the number of containers shipped this year.

Freight volumes are of to a “very slow start” this year and are not forecast to rise dramatically, Wilson predicted. Volumes have risen faster than freight rates in the first quarter, but not by much. Contract renewals are up modestly but trucking spot rates rose throughout the first quarter as demand rose and capacity somewhat tightened, Wilson explained.

High inventories and low demand have held down freight movements so far this year. Truck shipments were rising until April, but have since fallen off. Rail carloads, especially coal, are off. Overall, rail carloads are down 3.1 percent in the first five months, but intermodal is up 2.9 percent year over year.

Domestic air cargo revenue ton-miles fell 3 percent last year, with international off less than 1 percent. More than $400 billion of U.S. merchandise was exported by air, an all-time record. But high inventories have curtailed spending on air freight for replenishment.

Rick Jackson, executive vice president of Limited Brands, a shipper based in Columbus, Ohio, said capacity and capability of carriers were key factors in their choice of carriers. He said intermodal rail is a growing component, even in delivering its time-sensitive fashion goods.

That was music to the ears of John Lanigan, executive vice president and chief marketing officer at Burlington Northern Santa Fe. “We touch every sector of the economy from bulk to consumer products,” he said, noting some sectors (sand and clay, for example) are setting volume records. As an example of its growth, Lanigan said BNSF added more than 5,000 workers last year.

“We continue to invest because the reliability of the network will draw more business to rail,” he said. “We continue to make those big bets despite the uneven economic environment we’ve been operating in.”

Rick Sather, a vice president at Kimberly-Clark present at the release of the SoL report, said truck capacity is extremely tight right now, especially in the Southeast and Northeast. He has used intermodal rail for years, but will be increasing it even for customer deliveries in addition to inbound shipments.

“This whole tradeoff between cash, service and expense will be very interesting to watch over the next few years,” Sather said.

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