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Nov.10, 2014

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SURFACE & DOMESTIC TRANSPORTATION TRUCKING | RAIL | INTERMODAL | AIR & EXPEDITED | DISTRIBUTION 56 THE JOURNAL OF COMMERCE www.joc.com NOVEMBER 10.2014 By William B. Cassidy A STRONGER U.S. economy is filling trailers and containers faster than transportation companies can provide them, driving up transportation costs and intermodal and trucking rates, industry leaders told the JOC Inland Distribution Conference in Kansas City, Missouri. A series of shortages — from container chassis at ports to truck drivers at inland terminals — is combining with steadier, stronger U.S. economic expansion in 2014 to push costs higher. Add to that higher regu- latory and operating costs, and the pain is likely to get worse. Those shortages weaken the nation's transportation infrastructure, and raise concern that the economic recovery could stumble if another winter of extreme weather, or another external event hits the U.S. Paradoxically, the U.S. economy is heading toward its best three con- secutive quarters since 2004-05, and potential gross domestic product growth of 2.7 percent in 2015, said James Welch, CEO of $4.9 billion less- than-truckload operator YRC Worldwide. The five-year eco- nomic expansion may be a long way from finished, Welch said in his Oct. 23 keynote speech in Kansas City. "The economy, from where we sit, is moving along at a steady pace and, depending on world events, has a chance to keep going," he said. U.S. GDP increased at a steaming 4.6 per- cent rate in the second quarter, following a 2.1 percent decline in the first quarter, largely attributed to extreme winter weather. The Commerce Department raised the quarterly gain from 4.2 percent last month. Projections for the second half of 2014 have U.S. GDP still expanding at 3 percent or higher, Welch said, and then dropping to 2.4 to 2.8 percent in 2015. The National Association of Business Economists in Sep- tember forecast 3 percent growth for the third quarter. "I think we're about halfway through the current expansion of the economy," Welch said, noting that periods of economic recov- ery or expansion have grown longer since 1980, with the longest expansion on record lasting from March 1991 until March 2001. The U.S. is now in its 66th month of eco- nomic expansion, 54 months short of the 1990s record. To date, that expansion has been slow, which gives some economists reason to think it may last longer than usual. "This economic expansion still has some legs to it," Welch said. The stronger the economy, however, the more pressure on freight capacity, which is tight across the board, from the roads to the rails and ports, speakers at the conference said. Even steady growth in the 2.5 to 3 per- cent range for the next few quarters would be a significant improvement over the previous five years. In that case, supply chains would likely run up against equipment and person- nel shortages that can only be fixed at a cost. For example, Welch said trucking com- panies, including LTL carriers, are still replenishing their fleets with new equip- ment. "Even though we're starting to see LTL tractor counts come up, we're still about 15 percent below the high in 2007," he said. A steady diet of capital spending over several years is needed to replenish truck fleets and allow carriers to recapitalize their businesses, Welch said. "We have 15,000 tractors and 63,000 trailers" at YRC Freight, he noted. "You're not able to replace them overnight." That need to replace aging equipment is one factor driving up LTL and truckload rates, Welch said. "We've not always seen a rational pricing environment, especially in LTL, but we're certainly seeing it now because companies have got to replace their assets." Higher rates and an inf lux of freight helped YRC Worldwide report a third-quar- ter net profit of $1.2 million, its first quarterly net profit in eight quarters, on revenue that climbed 5.6 percent year-over-year to $1.3 billion. This was only the fourth profit- able quarter for YRC Worldwide since the third quarter of 2008. In September, YRC Worldwide said its YRC Freight subsidiary increased tonnage per day by 2.4 percent year-over-year in July and 0.8 percent in August. Revenue per hundredweight, or LTL yield, rose 2.8 and 3.3 percent in those months, the carrier said in a rare mid- quarter statement. That indicates YRC was able to raise pricing as demand increased. A shortage of qualified, experienced truck drivers remains the biggest check on truck- ing growth, however, even for LTL carriers that typically have less trouble hiring driv- ers than their truckload counterparts. "It's getting harder and harder to find qualified drivers," Welch said. "At some point in the supply chain dis- tribution process, a truck is involved," he said. "This is going to be a big thing for all of us." JOC Contact William B. Cassidy at wcassidy@joc.com and follow him on Twitter: @wbcassidy _joc. TOO HOT TO HANDLE? Freight rates are climbing on strong economic growth and equipment shortages. Will the market overheat? "This economic expansion still has some legs to it." James Welch

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