Supply Chain Blog

The Economy: The Good and the Bad

 

Dear Friends,

Jr

The bad news: the rest of the world is struggling in a weak economy as China slows and oil prices bottom out. The good news: the U.S is putting along with a barely positive GDP of 0.7 percent annualized in the fourth quarter. After further revision the GDP number could slip further to 0.5percent. The slowdown is impacting the demand for logistics services as we will explore later. 

Manufacturing in the U.S. slipped for the fourth straight month in January although the Institute for Supply Management (ISM) reported its index of factory activity was up 0.2 percent to a reading of 48.2. Readings below 50 signify contraction, it appears manufacturing may have bottomed out and is beginning a slow crawl towards positive territory. U.S. manufacturing makes up 12 percent of the GDP, it would help to see this trend continue. 

The headwinds continue to include the strong dollar (causing export market stress) and the drag of the oil industry and its related debt that’s becoming hard to service at the low price per barrel. 

Durable goods (washers/dryers, autos) along with non-durable goods (apparel) fell 0.9 percent in November according to the Commerce Department. Demand for long-lasting goods tumbled 5.1 percent in December, and were down 3.5 percent for the year, largest annual decline since the recession ended in 2009. 

Inflation remains very low for consumers as it fell in by 0.1 percent in December. 

consumerConsumer spending is considered moderate as income rose 0.3 percent in December and disposable income (inflation adjusted) recorded its biggest increase since 2006. Consumers are banking their cash as savings reached $753.3 billion in December from $717.8 billion in November. 

Consumers are poised to spend with wages creeping up, inflation low, gas prices low, housing prices strong and unemployment low. My concern is the psychology of the political season where candidates tell the electorate how bad things are. The constant media attention of all candidates pounding voters with negative views has the effect of creating fear, which makes people conserve their cash for the unknown. 

This has the potential of being a problem going forward, consumers have the economy in their hands, and their spending drives about two thirds of our nations GDP. Will consumers shake off this negativity and spend once spring arrives? Will they hunker down and play it safe until the country is on a clear path? We all wait to see. 

Inventories on the wholesale and retail level remain high falling only 0.45 percent in the fourth quarter and as a result transportation capacity remains abundant. How long will this last? The answer: when consumers start spending. 

U.S. Postal Service 

USPSUSPS just increased rates on typical online retailers which will put further pressure on the  “free shipping” folks. The hike went into effect on January 17th and affects Flat-Rate Priority boxes. The average increase was 9.5 percent....ouch! 

This is the first increase in three years by USPS on Priority Mail and is expected to put the hurt on small merchants who offer free shipping. Especially when they have to eat the cost on returns as well. Expect some merchants to adjust their pricing to compensate. 

Fixing America’s Surface Transportation Act (FAST Act) 

Last year the President signed into law the FAST Act highway bill. The Federal Motor Carrier Safety Administration (FMCSA) responded to one of the changes FAST brought: the removal of public posting of safety performance. 

The uneven measures and methodology used to create CSA scores caused this change. There will still be roadside inspections and crash investigations to study carrier safety performance. The reporting of this inspection and violation data continue to be public but scores will remain missing until the FMSCA and GAO fix the methods used to create the scores. 

Intermediaries, insurance carriers and shippers will have to use alternative means such as working directly with their carriers to obtain safety data. Vicarious liability and negligent agency lawsuits are still out there so this is going to be a potential mine field for companies as they seek to tender loads to safe carriers. Tread carefully. 

Changes in Trucking 

According to DAT RateView, in the week of January 24th to 30th spot freight rates continued their downward trend. Load-to-truck ratios trended up possibly as “catch-up” loads due to the severe winter storm Jonas. 

Van rates were unchanged at $1.65 per mile but reefers slipped to $1.88 and flatbeds fell to $1.85 mile. Diesel prices fell another 4 cents to $2.03 per gallon a new five year low. 

Freight continues to trend to seasonal flat expectation with Knight and Swift beating their earnings forecast and Heartland missing their projected goal. This story was repeated across several carriers with some doing better than others. The bigger carriers are getting by funneling fuel savings into higher driver wages. 

truckEven with higher driver wages they continue to lag the Consumer Price Index and other wages, it will take a while for driver compensation to catch up. The softer freight market is going to make it hard for carriers to do this as rates remain under pressure.

In order to protect profits and cash, expect motor carriers to reduce fleet replacement and take equipment out of service to “right-size” their available capacity in response to the current market. Instead of growing the number of trucks the focus will be on efficiency during this lean time until the uptick occurs.

Avondale Partners reported that fleet failures jumped in the fourth quarter last year and will climb in 2016. Between October and December 1,380 trucks came out of service and the number is 4,405 trucks for the year. Smaller carriers are simply running out of cash as the surge in business experienced in 2014 fell off in 2015 as spot rates plunged. 

Amazon Affected 

Amazon saw their delivery costs rise $4.5 billion in the fourth quarter last year, an increase of 24.4 percent from the same quarter in 2014. This hit affected Amazon profitability causing their stock price to fall. 

Getting control of their logistics costs is a huge priority for the internet retailer which is driving their efforts to lease their own trucks, jets, build more warehouses and parcel sortation centers. 

Once this huge strategic infrastructure is in place I expect Amazon to become a player in the 3PL space to a greater extent than they are now offering logistics services to their vendors. In the future I look for Amazon to go after UPS, FedEx and DHL as a competitor. 

Railroads 

U.S. railroads in January saw a 16.6 percent year-over-year drop in total carloads according to the Association of American Railroads (AAR). The good news was the 3.4 percent increase in intermodal traffic as this segment rebounded. 

East Coast Port Trouble 

Container terminals at the Port of New York and New Jersey came to a stop January 29th as International Longshoremen's Association workers walked off the job. Everyone from port operators to the union was angry as this was an unauthorized work stoppage during a serious backlog from winter storm Jonas. The matter was resolved in a couple of days but it is a reminder that it’s not only the west coast ports that are susceptible to strikes.  

The World of Warehouses 

According to a report by Cushman & Wakefield, industrial vacancy is down to a fifteen year low. Industrial markets in the U.S. absorbed a total of 62.9 million square feet in the fourth quarter for a total net absorption of 238.6 million square feet. This makes 2015 one of the strongest years on record for low vacancy. 

Industrial warehouse rents were up 4.2 percent in the fourth quarter compared to 2014. As a result there is 180.5 million square feet under construction nationwide to meet demand. 

At Wagner Logistics 

Wagner finished January on a strong note as we remain optimistic on the outlook for the year. A couple of new customers are going through the on-boarding process and we are rolling out new systems to improve the operations. 

Fulfillment opportunities continue to come to us as companies want a service provider capable of shipping to both retailers and consumers. Wagner’s systems can handle these tasks well. 

We also continue to see interest in Wagner’s dedicated client operations for both warehouse operations and trucking. 

If you have a project coming up or are looking at replacing a weak link in your supply chain I hope you will give us a call. We love a challenge and as we say every day, Bring It! 

Have a great day,

John Wagner Jr.

About Wagner Logistics

Wagner Logistics has been honored 15 years in a row by Inbound Logistics as a Top 100 3PL provider, we offer dedicated warehousing, transportation management, packaging and assembly operations across the United States with over 3,000,000 sq. ft. Current offices include Jacksonville FL, Cleveland OH, Pine Bluff AR, Dallas, TX, Omaha, NE, Clinton, IA, Edgerton, KS, and Kansas City MO and KS. We provide genuine customer service to our customers and our superior onboarding process will make your customer’s transition seamless. We work tirelessly to find innovative solutions to reduce supply chain costs while increasing your speed-to-market with our award winning technology. 

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