As we approach 2016, there are a number of forces that are shaping the economics of Freight Transportation. Here are a few to consider.

The US Economy and the US Dollar

The US economy is providing a number of mixed signals in December of 2015. Unemployment is at only five percent. Economic growth, while sluggish, has been able to generate a consistent 200,000 new jobs a month. But some other indices don’t look so good.

The Institute for Supply Management (ISM) PMI Index of economic activity in the manufacturing sector contracted in November for the first time in 36 months, since November 2012, while the overall economy grew for the 78th consecutive month. The November PMI® registered 48.6 percent, a decrease of 1.5 percentage points from the October reading of 50.1 percent and below the 50 percent mark that signals growth. The New Orders Index registered 48.9 percent, a decrease of 4 percentage points from the reading of 52.9 percent in October. The Production Index registered 49.2 percent, 3.7 percentage points below the October reading of 52.9 percent. Ten out of 18 manufacturing industries reported contraction in November, with lower new orders, production and raw materials inventories accounting for the overall softness in November.

The past year started with some solid tailwinds as the economies of the United States and Canada appeared to be in a growth mode. Then a number of unexpected events took place that changed the trajectory of the year. Here is our synopsis of the major freight transportation stories of 2015.

The Collapse in Energy Prices

The rout in oil prices began in late 2014 as Saudi Arabia stood firm in its insistence not to cut production quotas. The downturn in China’s economy produced less demand as oil supply remained at pre-downturn levels, a recipe for low oil prices and other challenges throughout the year. This had a huge impact on Canada’s oil sands companies, producing significant layoffs. There were also spillover effects in other energy sectors such as coal mining. The latter experienced very large price drops and decreased shipping volumes.

The steep decline in fuel and oil prices has, in turn, been a boon to freight transportation and logistics services providers primarily in the form of lower operating costs, while at the same time tremendously aiding carriers and providers serving retail-based customers, as lower fuel prices have dramatically impacted the amount of discretionary income consumers have.

This past year was a tumultuous and transformative year in Freight Transportation. What is in store for us in 2015? Here are some trends to watch.

1. Dimensional LTL Pricing

The National Motor Freight Classification (NMFC) system, developed during the Great Depression by the National Motor Freight Traffic Association, classifies goods based on four elements—density, stowability, handling, and liability—that reflect a shipment's "transportability." However, the ratings from the system are not derived from the dimensions of the actual shipment but from average shipment characteristics. The classification methodology was not designed to accommodate the changes in modern-day production methods, where goods tend to be lighter and generally cube out in a trailer before they weigh out. For nearly eight decades, less-than-truckload (LTL) carriers have been using this system to allocate their trailer space.

Change will come to the LTL freight industry in 2015, driven by so-called dimensionializing, or dimensioning, machines that precisely calculate the amount of space a shipment will occupy in a trailer. The machines measure a shipment's dimensions—arrived at by multiplying length, width, and height—and provide proof of their calculations. A high-end "static" machine designed to measure stationary objects sells in the low to mid-$80,000s. The payoff can be rapid—30 to 60 days, depending on how a carrier uses the machine and how it calculates return on investment (ROI). Carriers like UPS Freight and FedEx Freight, LTL units of highly visible companies that have used dimensioners in their parcel operations for decades, are going that way. Old Dominion Freight Line Inc., that has used dimensioning equipment since 2009, YRC Worldwide Inc., and many of the other leading players in the LTL sector will likely follow the leaders.

2. Low Energy Prices will continue for much of 2015

As the year draws to a close, it is time to reflect on the major news stories in the world of freight transportation. These are the ones that struck me as being the most impactful.

1. The Economy – Two Steps Forward/One Step Back

US GDP grew by over 3 percent in 2014, its best showing in several years. A rise in employment levels, coupled with an increase in consumer spending, helped lift the American freight market. The long, slow post Great Recession recovery finally kicked into a higher gear, driving an upswing in freight activity.

However, November data highlighted a slowdown in the pace of recovery across the U.S. manufacturing sector. At 54.7, down from 55.9 in October, the seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) indicated the weakest overall improvement in business conditions since the snow-related setback in January. Although the latest reading remained well above the neutral 50.0 threshold, the index has now dropped for three months in a row. Weaker rates of output and new business growth were the main negative influences on the headline PMI figure in November.

2. America - the Super Energy Power

In my previous blog, I tried to capture some of the Major Freight Transportation Stories of 2013 (http://www.dantranscon.com/index.php/blog/entry/the-top-freight-transportation-stories-of-2013).  In this blog I will look ahead to 2014 and beyond.  Here are some of the emerging trends that transportation professionals should monitor closely in the coming years.

1. The 10 Miles Per Gallon Truck

Heavy-duty trucks consume 1/5^th of the fuel consumed in the United States.  The world’s freight transportation requirements are expected to consume 70 percent more energy in 2040 than they did in 2010.  As demands for freight transportation rise in developing countries, this is also increasing the level of fuel consumption.

A recent HOS study suggests that the changes made in 2013 in the USA are having an impact on driver productivity.  New measures may further erode productivity.  An electronic on-board recorder (EOBR) mandate is also slated to be rolled out in the next year or two. It will likely eliminate log book falsification across the board and could easily clip another 2% to 5% of industry productivity. Mandatory speed limiters would be next and would eliminate some additional productivity.  New drug testing procedures are also being considered and would eliminate those drivers who are able to pass the current urine-based test despite habitual drug use. Taken together, this influx of regulations will reduce the number of drivers in the overall pool and will reduce the productivity of those remaining in the pool.

At a time when most truckers are striving to operate their fleets at 6 miles per gallon, talk of 10 MPG may seem like science fiction.  The good news is that fifteen industry manufacturers have joined together in the 21^st Century Truck Partnership.  Led by Daimler, Navistar and Peterbilt and a joint venture with Cummins and Peterbilt, they plan to have working prototypes within two years.  The four projects that fall within this initiative are experimenting with engines and heavy duty hybrids, vehicle power demands, idle reducing technology and new lightweight materials such as carbon fibre and high strength steel.  With driver recruitment being such a major challenge, improved vehicle productivity would be of major benefit to the trucking industry.