As we enter 2022, numerous compounding issues are perpetuating the nation’s supply chain crisis, and the transportation sector is still feeling the impact. Demand for freight is high as the country adapts to the reality that COVID-19 is here to stay and consumers and businesses return to a sense of normalcy. While demand for goods remained strong when COVID-19 restrictions were in place, demand for services and inputs are now on the rise as Americans return to restaurants and entertainment venues and begin travelling again. While the rejuvenation of the service industry is good for the economy, it puts additional strain on a supply chain already pushed beyond capacity, especially during the busy holiday season.
GDP is expected to grow by 5.5 percent in 2021, followed by 3.5 percent in 2022, according to FTR Transportation Intelligence. However, COVID-19 remains a threat to projected economic growth as infection rates and COVID-19 variants continue to invoke action from governments, businesses, and individuals. Another risk that comes with significant economic growth, high demand, shortages of supply, and related government policies is inflation. The U.S. annual inflation rate surged to 6.8 percent in November of 2021, the largest 12-month increase since June 1982, according to the Bureau of Labor Statistics. Pressure is mounting on the Federal Reserve to help control this trend by adjusting interest rates and reducing the monthly bond purchases it began in 2020.
The supply chain crisis continues to impact inflation—rates for freight transportation increase as it becomes more difficult for carriers to move the goods, and those increases are passed on to consumers who were fortunately able to save cash during the depths of the pandemic. As a result, Americans are seeing higher prices on everything from a gallon of milk to used vehicles, wood, a tank of gas, and much more. Economists expect these higher prices to last well into 2022, if not longer, while companies struggle to keep up with unmatched consumer demand for goods and services.
Consumer demand will continue to create opportunities for transportation service providers that can generate and sustain capacity to move freight. Trucking specifically, which touches nearly all consumer products shipped in the U.S., has been able to raise both contract and spot rates for shippers who are challenged to get their products onto shelves and into production facilities. According to Truckstop.com, contractual pricing, already at an all-time high, “may increase in the mid- to high-single digits next year because of limited driver availability and the prospects for robust demand created by economic recovery and a prolonged inventory-replenishment cycle.” The spot market has experienced some moderation, but rates remain much higher than historical norms—van, flatbed, and reefer spot rates were up 12, 14.9, and 20.9 percent, respectively, year over year in November. FTR estimates that total truck rates (including contract and spot) increased 19 percent in 2021 and forecasts an increase of 2.2 percent in 2022, driven mostly by rising contract rates.
At the end of October 2021, the national Outbound Tender Rejection Index (OTRI), which measures carrier compliance for contracted moves, fell below 20 percent for the first time since July 31, 2020, and it continues to hover around 20 percent. This could indicate that carriers are getting the contract rate increases they have requested from their customer partners, allowing them to accept contracted loads at the new rates. As a result, those shippers do not need to look to the spot market to find a truck for their otherwise contracted loads. Due to capacity constraints, finding a truck on the spot market is a challenge; DAT Freight and Analytics’ van load-to-truck ratio was 5.2 in November—up 16 percent year over year—indicating a large gap between the number of available loads vs. the number of trucks to haul them; reefer and flatbed ratios were both up 27 percent in the same period. Still, according to DAT, the volume of freight moving on the spot market has doubled in 2021 compared to a pre-pandemic year, representing an average of 24 percent of the total freight marketplace.
Supply Side Challenges
Truck Driver Shortage
High demand and higher shipping rates do not necessarily translate to higher profits for carriers who are significantly constrained on the supply side. The American Trucking Associations recently revised its truck driver shortage estimate to a record high of 80,000, up from 60,000. Should current trends continue, the ATA projects that number to climb to 160,000 in less than 10 years. To attract more drivers to the profession, carriers are charging higher rates, increasing driver pay, and offering significant sign-on bonuses to lure drivers from other carriers. Unfortunately, higher pay and large bonuses are contributing to high driver turnover, as drivers switch employers, stay long enough to receive the full bonus, then switch again.
Increased demand for freight, pandemic-related challenges from early retirements, and closed driving schools and departments of motor vehicles caused the shortage to grow in 2020 and 2021. However, the driver shortage was a threat even before the disruption of the pandemic. Primary factors include:
- Average truck driver age is 59 years old, resulting in a substantial number of retirements each year.
- Women make up only seven percent of all drivers.
- The Drug and Alcohol Clearinghouse has made positive drug tests and failures to test much more visible across employers, making some would-be drivers unemployable. Moreover, while many states continue to legalize marijuana, it is still banned federally and is a prohibited substance for truck drivers.
- Perceived lifestyle issues associated with truck driving limit new entrants. However, the industry is addressing some of these by moving to more regional operations rather than long-haul, over-the-road models.
- The industry cannot attract young people right out of high school because the federally mandated age to drive a truck is 21.
- A low national unemployment rate and competition from other industries further reduces the potential driver pool.
The solution to the driver shortage is multi-faceted, according to the ATA. It will require increased pay, regulatory changes, and modifications to shipper, receiver, and carrier business practices to improve conditions for drivers. Shippers, for instance, can help by getting drivers in and out of their delivery and pick up locations quickly, allowing existing drivers more time and capacity to haul freight. Detention time at facilities is a costly inefficiency for an industry pushed beyond capacity.
Traffic congestion and poor infrastructure also significantly limit trucking productivity by up to 1.2 billion hours of lost time annually for the industry, the equivalent of 425,533 commercial truck drivers sitting idle for an entire year, according to the ATA. That lost time and excess fuel burn creates $74.1 billion in added operational costs. To combat these infrastructure challenges, on November 5, 2021, the U.S. Congress passed a $1.2 trillion Infrastructure Investment and Job Acts designed to improve highway safety, create new career paths into trucking, reinforce the supply chain with overdue investments, and provide a foundation for long-term economic growth. New transportation projects will receive $550 billion from the bill, which means motorists will be navigating numerous construction zones over the next decade. However, once complete, the projects should help fix roads and mitigate bottlenecks.
Moreover, the DRIVE Safe Act is part of the bill and will require setting up an apprenticeship pilot program for commercial driver’s license holders under the age of 21 to operate in interstate commerce. It calls for specific probationary periods and stipulates that an apprentice must be accompanied by an experienced driver in the passenger seat. In addition, the trucks driven by these apprentices are to be equipped with active braking collision mitigation systems, automated or automatic transmissions, forward-facing video event capture systems, and a governed speed of 65 mph. If successful, this pilot program could set the course for lowering the required age to get a CDL from 21 to 18.
Beyond the driver shortage and capacity challenges from deteriorating infrastructure, the industry is also facing equipment constraints. According to Freight Waves, new capacity in the form of new Class 8 trucks will not enter the market for a prolonged period as OEMs continue to be cautious on allocating build slots while they face labor shortages and delays for components like metals, rubber, microchips, and more. OEM backlogs are now stretching well into the back half of 2022 and putting constraints on the used truck market as well. A used three-year-old truck now costs over $95,000, an increase of 67 percent year over year, according to Freight Waves.
Supply chain challenges recently forced FTR Transportation Intelligence to significantly cut its Class 8 truck and trailer forecasts for 2022 from its previous outlooks: Down to 300,000 (from 335,000) new Class 8 truck builds and 315,000 new trailer builds (from 341,000). Demand for equipment is much higher than the supply chain will allow OEMs to produce.
Demand shows no signs of slowing down significantly any time soon, and there is no apparent end in sight for supply chain constraints. Shippers and their carrier partners must continue to strategically overcome a host of issues to successfully deliver goods and services to businesses and consumers.
Need help navigating supply chain disruptions to ensure your products get from point A to point B? Contact our experts today at Solutions@ruan.com.