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Jan.9, 2017

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www.joc.com THE JOURNAL OF COMMERCE 101 SURFACE TRANSPORTATION 2017 ANNUAL REVIEW & OUTLOOK T he so-called capacity crunch — with its promise of tighter trucking capacity, higher shipping rates, and an era of prosperity for intermodal rail — has dominated discussions for the past two years. But consider this: The so-called capacity crunch is a myth. That crunch relies on a slate of circumstances that run the gamut from the implementation of federal trucking regula- tions and a shortage of available truck drivers, to a full-scale economic recovery and a nationwide right-sizing of his- torically high inventories. The likelihood that these factors, individually, could occur suddenly is slim. The likelihood that these factors could occur simultaneously is slimmer still. Capacity likely will tighten this year, to the intermodal industry's benefit after a year of volume loss across a wide range of segments. But that tightening is likely to be gradual, giving trucking operators time to adjust and shippers time to plan ahead for higher rates. The shippers, transportation providers, and industry analysts that have been waiting at the station all this time shouldn't be shamed. After all, reliable sources have been trumpeting the arrival of a capacity crunch for years. Those same sources, however, have been rolling back their fore- casts month to month, quarter to quarter, and year to year. Larry Gross, a senior transportation analyst at FTR Asso- ciates, has likened himself and other analysts to Chicken Little — pundits often asked to play prophet. "Some shippers have gotten tired of hearing from folks like ourselves who keep saying things are going to be tighter," he told The Jour- nal of Commerce. "This forecasting business is difficult." FTR Associates predicts capacity will tighten by the middle of 2017. But the word "crunch" is no longer being bandied about. The state of US freight growth in 2017 and beyond hinges on inventories that have been piling up for years. Although some in the industry say a long-rumored destocking is in the works, at least in some industries, larger inventories may be the new norm until shippers in general improve their ability to forecast sales and track goods as they move through the supply chain. "I think maybe that inventory is going to settle at a level that is higher than the trough we saw a few years ago," Gross said. "Inventory levels have been moving up for quite some time, and they have remained stubbornly high. There is a real question of how much of that is structural and how much of it is cyclical overshoot." The West Coast longshore labor dispute, which dis- rupted supply chains in late 2014 and early 2015, often gets the blame for the inventory buildup, and there's no doubt it played a role. But rather than dropping back to mid-2014 levels, inventories climbed further in the months after labor groups and waterfront employers agreed on a new contract, with inventory-to-sales ratios hitting seven-year highs. That points to other factors contributing to the long-term buildup of inventories. E-commerce is clouding the picture, changing the amount of inventory retailers need to keep on hand to fulfill increas- ing online consumer demand. Fear of running out of product during peak sales periods also helped maintain higher stock levels in 2015 and 2016, despite slower-than-anticipated sales. An even bigger factor, perhaps, is difficulty in forecast- ing demand. US consumer spending has been advancing at a healthy pace, but that spending includes a variety of so-called goods, not all shipped by container on road or rail. "Consumers are consum- ing more services like travel, data plans, or health care," Union Pacific Railroad CEO Lance Fritz told investors in Octo- ber. "We need consumers to buy a house and fill it with goods." But the past two years have shown it has become increasingly difficult to pin- point when and if consumer spending of that nature will return to pre-recession highs. What the industry can say with confidence is that the trucking sector, already struggling with a chronic driver shortage, is about to be hit by a tsunami of federal regulations that could push even more drivers out of the industry and constrict capacity. "The driver shortage issue is real and is only going to get worse, and by 2025 we'll see 25 percent more traffic on our roads," said Mike Regan, chief relationship officer at logistics firm TranzAct Technologies and advocacy chairman for ship- per group NASSTRAC. The industry has about 48,000 fewer drivers than avail- able jobs, according to the American Trucking Associations. The group estimates that the industry will need 890,000 new drivers through 2025 to meet rising demand. Regulations, from hours-of-service requirements to new mandates for electronic logging devices in truck cabs, should hasten the shortage. But industry insiders now say even those sure-fire factors won't be the reliable harbingers of a capacity crunch as originally thought. There's no doubt intermodal rail would benefit from a capacity crunch. But relying on an uncertain economic recovery and a chronic driver shortage worsened by regula- tions that may or may not also do damage to the rail industry has left rail carriers playing a waiting game. "Waiting, however, does nothing to improve the quality of service you offer," Tom Finkbiner, a noted intermodal ana- lyst and CEO of refrigerated intermodal rail provider Tiger Cool Express, told The Journal of Commerce. JOC Contact Reynolds Hutchins at reynolds.hutchins@ihsmarkit.com and follow him on Twitter: @Hutchins_JOC. REYNOLDS HUTCHINS Crunch: Dispelling the Myth

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