Common Ground Could Lead To Higher Ground For Logistics In '19: State Of Logistics Report

A weakening demand picture in 2019 may not translate into a decline in U.S. logistics activity or its outlook for the rest of the year, according to the 30th Annual "State of Logistics" report which was released on June 18 in Washington, D.C.

Instead, the authors of the report, which is considered the U.S. logistics industry's annual report card, the sector may reach some level of equilibrium – and understanding – in 2019 as it moves past one of the most turbulent years in memory, one where tight capacity met with the strongest demand in the post-crash era to produce skyrocketing rate increases. Surging rates in 2018 sent many shippers scrambling for capacity relief of any kind as their transport budgets were eviscerated.

With those events not far in the past, shippers and carriers are moving toward some common ground in which deeper use of information technology tools, and a need to find a better way of transacting business, will become the overarching narrative.

"The authors, sponsors, and interviewees in this report have cause for optimism because…neither shippers nor suppliers seem satisfied with business as usual and the opportunity to leverage technology and collaborative practices is driving tangible efficiencies and shared gains," the authors, comprised of a team of consultants at A.T. Kearney, wrote.

If history is any guide, shippers who took it on the chin last year would seize the opportunity spawned by slowing demand and loosening capacity to claw back rate increases, thus triggering another in a series of boom-and-bust cycles. However, in the report, entitled "Cresting the Hill," the authors "see both hope and evidence of a better road being taken. Leading shippers looking to control logistics costs have leaned more in the direction of constructive engagement and innovation than ever before, and carriers have been pleased with the new collaboration while themselves opening up to start-ups and new technologies for novel solutions to transportation challenges."

Underscoring last year's powerful move in all-modal freight rates, the expense of running the nation's business logistics system, measured in terms of overall rate increases, rose 11.4 percent in 2018 to $1.64 trillion, according to the report. Logistics last year accounted for 8 percent of the nation's $20.5 trillion GDP, a 50 basis-point jump over 2017 figures, the report said.

Overall, transportation costs rose by 10.4 percent. However, the increase was not spread evenly across the modes. Costs of running intermodal and private fleets jumped 28.7 percent and 13.1 percent, respectively, as shippers sought alternatives to common carriers. The U.S. Postal Service saw rates jump 9.7 percent as it gained share in final-mile services.

Net absorption of U.S. industrial warehouse and distribution center space, roughly defined as net occupancies by calculating space built minus space vacated, rose 16.8 percent over the previous year to an all-time high of 284.9 million square feet in 2018. Net absorption totals have exceeded 240 million square feet per year for the past five years, the strongest multi-year run on record, according to the report. The national industrial vacancy rate declined to 4.8 percent in 2018, a record low. Average asking rents for all industrial products across the U.S. reached a new nominal high of $6.14 per square foot, according to the report.

Fourth-quarter shipping activity was especially intense as companies struggled with continued high shipping costs, and accelerated the pace of their imports amid the prospects of higher U.S. tariffs on Chinese-made goods. U.S. business inventory reached an all-time high of $2.75 trillion in the quarter, according to the report.

The growth of e-commerce helped fuel modes such as motor carrier, intermodal, third-party logistics (3PL), air freight and freight forwarding, the report said. The U.S. same-day delivery segment, for example, is expected to grow 19.5 percent a year from 2018 through 2022, making it a $9.6 billion per year domestic business by 2022, the report predicted.

At mid-year, the report paints a picture of an economy and industry that could go either way during the second half. The economy's momentum is slowing, trade tensions are still at the forefront, global economies are soft, and climate-related risks could materialize. On the other hand, trends such as e-commerce growth, lower fuel prices and technology-driven efficiency gains could bode well for logistics, the authors said.

Typically, logistics costs accounting for 8 percent of GDP would reflect an appropriate balance of strong demand and operational efficiency. During the report's early years in the mid-1980s, logistics as a percentage of GDP would hit 15 percent. This indicated that supply chains were still inefficient and were still years away from being comfortable operating in a newly deregulated market and from information technology influencing business operations and processes. Not until the very early 1990s did the logistics cost-to-GDP ratio drop below 10 percent.

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