Have you noticed a change in the cost to purchase goods and services lately? It could be a direct impact of rising freight costs. One Big Question on the minds of many these days is this: What factors impact freight cost?

But do you know the underlying reasons behind this increase in the cost to ship goods? In fact, there are four factors which play a strong role. Here is a closer look at each:

Overall demand for manufactured goods and services

The Institute for Supply Management tracks important figures here. For example, data from October 2018 showed that economic activity in the manufacturing sector expanded in September, and the overall economy grew for the 113th consecutive month. This is based on input from supply managers across the country and is largely based on three important figures: New Orders Index, Customers’ Inventories and Backlog of Orders. For example, let's take the data from this same October 2018 report:

a) The New Orders Index registered 61.8 percent, a decrease of 3.3 percentage points from the August reading of 65.1 percent. This index has been above 60 percent for a long stretch, which shows strength. 

b) Customers’ Inventories Index registered 53.3 percent, a decrease of 2.1 percentage points from the August reading of 55.4 percent. This remains very low.

c) The Backlog of Orders Index continued to expand, but at lower levels compared to the previous month.

Put together, these three indices are showing strength in manufacturing.Strong demand, means a greater volume of shipments. 

Contract and spot market rates

The rising demand for goods and services is causing a spike in demand for freight, thus tightening already scarce capacity and pushing rates higher faster. Over-the-road truckload and less-than-truckload (LTL) carriers are feeling the effects. According to Trans-Logistics Group, contract rates are up roughly 11% on average. 

The Cass Freight Index is a good index to watch here. For example, data from September 2018 showed shipment volumes up 8.2% versus the year ago period, and 1.1% from the previous month. These percentages have come down from those earlier in the year, but still represent an expanding economy, according to the report.

The Cass Freight Shipper Expenditure Index is another to watch, and the data from September 2018 signals continued strength in pricing power for those in the marketplace that move freight. This index was up 19.3% year-over-year and 2.5% month-over-month. According to the authors of the report, demand is exceeding capacity in most modes of transportation by a significant margin. In turn, pricing power has risen significantly in those modes.

In addition, spot market rates continue to jump. The U.S. average dry-van spot rate reached $2.29 per mile in early June, an increase of 10 cents, while the average flatbed price hit $2.81 per mile—an increase of six cents. Overall, spot rates are up 26% on average year over year. Stay up to date on the latest spot trends with monthly updates from DAT.

Capacity

With unemployment at its lowest level in decades, shipping companies are feeling the effect in the form of searching for drivers. According to the American Trucking Associations, there's a shortage of roughly 50,000 truck drivers across the country; this despite the fact that the median salary for a truckload driver working a national, irregular route has increased 15% and 18% for a private fleet driver, respectively, since 2013. This is causing a domino effect in which shipping companies must pay their drivers higher wages to retain their services, and as a result are charging a higher rate to ship goods.

Driver restrictions

Dovetailing with the shortage of drivers are new government-mandated restrictions being placed on current drivers. The U.S. electronic logging device (ELD) mandate, introduced at the end of 2017, limits the time a driver can be on the road to 11 hours, further magnifying the shortage of drivers. The use of electronic devices to track hours ensures drivers adhere to the rule.

Do you want to learn more about other factors that impact the price of metal? Check out The Gauge Monthly Market Report. Available exclusively to registered Ryerson.com users, this report is released the first week of each month and provides insight from product and risk managers on the latest data driving the market. This downloadable report helps you keep track of the latest economic indicators and market indices that are shaping both current and future pricing on metal.

 The Gauge Ideas

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