Driver shortage rises slightly in Q2

The driver shortage remains intact at a moderate level. Modest improvement in the labor markets in July did not change the driver environment. Our outlook has been unchanged over the last few months as we expect the shortage to remain near the 100k level into early 2013. The second quarter of 2012 was revised slightly and now shows that the driver shortage got above 100k drivers, at a shortage of 106k, up slightly from Q1. A shortage near 100k indicates a modestly tight level, but one that does not put significant pressure on pricing and wages.

Outlook
We recently lowered our estimates of the impact that regulatory actions are having on the current market. When combined with the weak freight environment of late 2011 we show that the driver shortage is stuck at ~100k for 2012, not at a high enough level to created undue stress on the transportation system. HOS pressures come into play during 2013 and push the shortage near 250k by the end of the year. It is then expected to maintain that high level of shortage throughout 2014, averaging a shortage of 235,000 for the year.

The chances of getting a ‘mother of all capacity crunches’ has significantly waned. When the HOS regulations were initially proposed to be implemented during the same time frame as the cyclical recovery was occurring it led us (and others) to state that a severe capacity crunch was coming. The weak economic environment in 2011, combined with the drastically delayed implementation into 2013, has reduced the industry’s worries. We still believe that the shortages will be sufficient to maintain solid pricing. However, the chances of a true crisis when Hours-of-Service rules cut in is much less likely.

“The driver shortage remains modestly elevated, but is quite manageable. The capacity environment is moderately tight but not critical. In sum, the truck markets are tight, but not critical.”

Analysis
We remain stuck at a driver shortage of ~100k. Weak economic growth is being offset by conservative capacity management. The shortage won’t change meaningfully until HOS introduction in 2013. This level of shortage can be readily handled by normal market mechanisms. Any real stress is now pushed back to 2013 and the introduction of new Hours-of-Service regulations.

Anecdotal reports of tightening markets, along with recent advertisements of significant hiring bonuses, suggest that our assumptions about capacity additions have been too generous.

Weaker freight growth during the middle of 2011 and early part of 2012 has slowed the need to add capacity or drivers. There is no evidence that fleets are trying to add capacity ahead of the 2013 HOS mandate.

The recent lowering of our estimates of regulatory drag has kept our 2012 outlook near the 100k level for the duration of the year, down from the modestly rising numbers we had earlier this year. The labor environment is slowly tightening under pressure from increased capacity utilization and regulatory pressure. Nonetheless, the tightness levels are well below what we expected a year ago.

Will the shortage actually happen?
Our forecasting staff currently puts the probability of moderate, or better, economic growth in 2012 and 2013 at 70%. We put the probability of FMCSA regulation action at 80%, but with delay possible. So use of the current forecast is likely, but represents a high-side shortage scenario.

You should not, however, consider this a “worst case” scenario. Here’s why. If the FMCSA delays their big programs by another year, that puts implementation just before the likely beginning of the next downturn. That means the industry will be dealing with productivity problems in a softening market, where pricing power is falling. It was the opposite in 2004 and the industry sailed through that crisis. This time could be much more difficult.

NOTE:
This metric is intended to identify the number of drivers needed in relation to freight demand. When negative it is basically the backlog of drivers needed to be filled. It includes both the cyclical and regulatory changes occurring in the market. When dealing with the very diffuse trucking industry it is hard to come up with definitive figures – as such, this data is most useful in highlighting the trend and the relative levels.