“Truck drivers: the unsung heroes on the road” read the title of an article discussing the key role served by U.S. truck drivers. Despite the accolades, one thing remains for certain: driving trucks in the U.S. is a demanding job, with fewer and fewer people opting for this career. The resulting truck driver shortage in the U.S. has contributed to a sharp increase in freight rates, and has far reaching consequences across the U.S. economy.
LTX Solutions estimates that around two-thirds of all freight is moved on U.S. highways. The U.S. trucking industry serves as the backbone of the U.S. economy, transporting a multitude of products that enable basic commerce to take place. Any increases in trucking rates ripple across the entire U.S. economy. In other words, transportation costs comprise some portion of the cost base of virtually every firm in the U.S. that produces or sells physical goods; increasing transportation costs negatively impacts the margins of these firms, and can create inflationary pressures throughout the economy. It is thus interesting to analyse this truck driver shortage and whether it is a passing phenomenon, or if it might have a more lasting impact.
At its core, the trucker shortage is about supply and demand. Consider that the average age of a commercial truck driver in the U.S. is 55 years old, according to the Bureau of Labor Statistics. A large number of these drivers will chose to retire over the next decade or so, with many already starting to exit the workforce. However, at the same time, there is insufficient new supply of truck drivers, particularly as many younger drivers shy away from entering the profession. Only 20 percent of truckers fall into the 20-34 age bracket. This is partly driven by the fact that drivers must be over 21 years of age to cross state lines according to federal rules, creating a three year gap between high-school graduates leaving school and when they can enter long-haul trucking as a vocation.
Source: FTR Transportation; via Bloomberg
With the U.S. economy operating at full employment, the tight U.S. labor market has seen construction and manufacturing jobs draw in would-be truckers. In the twelve months to June 2018, payrolls for construction jobs increased 4.1 percent, and rose 2.3 percent for manufacturing jobs. Truck wages over the same period rose just 1.7 percent. Construction and manufacturing industries also have an easier task of attracting workers compared to getting someone behind the wheel of a big rig, given the arduous nature of truck driving work.
U.S. truck drivers endure tough conditions – they are often on the road for many days, and might only return home a few times a month. Sleep deprivation, poor access to healthy food, and showering at truck stops, makes for a challenging lifestyle. Despite truck driver wages increases in the U.S., trucking companies are still struggling to fill vacancies.
Compounding the above issues is the electronic logging device (ELD) mandate that was introduced in the U.S. in December 2017. The ELD rule monitors and regulates the number of hours driven by U.S. truckers, ensuring that they don’t drive for more than 11 hours a day, and take regular breaks. Previously, a pen and paper system was used to log hours, with many truckers falsifying their record of duty logbooks. The ELD is essentially a flash drive that plugs into a truck’s ECU to track when the engine is running, the odometer, GPS, and other pieces of data.
There are reports that many drivers quit the industry once the ELD mandate was introduced, given that it would reduce driver flexibility as well as the number of miles they were previously driving, thus lowering their take-home pay. Ultimately, freight demand is increasing – for-hire truck tonnage was up 7.9 percent in the first half of 2018 – at a time when the ELD rule has limited the pre-regulation hours many truckers were driving, which is putting upward pressure on trucking rates.
Source: Cass Information Systems, via Bloomberg
Source: Truckstop.com, via Bloomberg
The ELD rule represents a structural change in the market that has taken out capacity, in the form of hours driven by truckers. The resulting freight inflation is something that many companies are feeling the effects of, with rising transportation costs a recurring theme across the last two reporting seasons in the U.S. Unless driver wages increase materially to draw in new trucker supply, or if the ELD rule is repealed, the inability of freight supply to keep up with burgeoning demand could see prices remain elevated for some time. As always, this is creating both winners and losers, and the Montaka team continues to take advantage of opportunities to make money from this theme for its clients.
George Hadjia is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.