Are we really on the brink of a freight recession? I’ve seen countless gloom-and-doom forecasts and analyses from some very smart people, but I’m not buying it.
I look at the data, and I see a continuing pattern of growth in freight volumes, both in the spot market and in the U.S. truckload segment overall. Trucking freight tonnage is up, according to the ATA’s not-seasonally-adjusted index, and more spot market loads are moving this year than in the first five months of 2018.
Granted, the growth is slow and gradual, in the range of 2% to 4% compared to last year, and spot rates have reverted to 2017 levels after last year’s record highs. But contract rates are only a few cents lower than they were in 2018. This is not going to be another peak year for carriers, but it’s not a crisis, either.
Spot market rates have been drifting down since July 2018, but the volume of van loads is increasing gradually, year over year.
Many carriers and freight brokers are surprised to learn that volumes are holding up so well. This year feels like a struggle because some companies are growing rapidly, but others are hurting. For companies that can bid on shipper freight directly, low spot rates can lead to new business opportunities. For non-asset intermediaries, lower rates mean reduced costs, which helps the bottom line. There’s not as much upside for small, asset-based companies that depend entirely on spot freight, however.
It’s the capacity, stupid
If freight volume is greater than it was in 2018, why are rates looking like 2017? To paraphrase a long-ago presidential advisor: “It’s the capacity, stupid.”
The Federal mandate for electronic logging devices (ELDs) kicked in during the final weeks of 2017, which led to stricter enforcement of Hours of Service rules. It took a while for carriers and drivers to adapt to the new devices, so total capacity was effectively throttled for the first half of 2018. It was tough for shippers and 3PLs to find trucks. Meanwhile, demand was heating up due to economic growth. The combination of scarce supply and increased demand boosted freight rates to record highs, especially for spot market transactions.
For their part, asset-based carriers re-invested 2018 profits back into their businesses, buying record numbers of trucks and trailers, and improving driver compensation and working conditions. By the beginning of 2019, the new trucks were being delivered, and driver retention had improved significantly, so there were more trucks available. Small fleets had a great year, too, and owner-operators took the opportunity to get their own authority and run independently. Those trends boosted truck capacity across the country, but demand didn’t grow nearly as fast. Steady demand and abundant supply combined to drive spot rates down in the second half of 2018, and contract rates followed but more slowly and gradually.
Load-to-truck ratios on DAT load boards show the balance of demand versus supply, and ratios have declined sharply since July 2017.
Spot market trends lead contract rates
Spot rate trends follow the direction of the load-to-truck ratio, sometimes within days or hours. Spot market players are typically negotiating rates for loads that are picked up within a day or two. Contract rates are negotiated directly between the shipper and the carrier, and the contract lasts for months or years at a time. It takes 3 to 6 months for the national average contract rate to follow a sustained trend in spot market rates. Contract rates also tend to rise more gradually, because the new rates don’t go into effect at the same time for all shippers and carriers.
When contract rates shot up in late 2017 and through 2018, shippers were caught by surprise. If they had been watching spot market indicators, they might have had more warning. Even the largest carriers diverted more trucks to the spot market to take advantage of the high rates. Shippers blew through transportation budgets to secure spot market trucks at ever-higher rates. When it came time to renegotiate transportation contracts, those shippers were willing to pay more for reliable, predictable sources of capacity.
The sharp increase in contract rates in 2018 provided a correction after an atypical slump from January 2016 through Q3 2017.
2020 headwinds: Tariffs, bad weather, and ELDs (again)
What will happen to freight in the next 12 to 18 months? It depends. There is still potential for continued growth in the freight economy. Unemployment is at record lows, wages are rising, and interest rates are pretty low. There is uncertainty around trade issues, and if tariffs increase between the U.S. and it’s most important trading partners, prices are likely to rise on a long list of goods and services. Some items may become more scarce in the short term.
Eventually, either the U.S. will renegotiate those trade agreements and reduce the tariffs, or American companies will find alternative sources for business-critical materials, parts, and finished goods. Either way, most of the trade-related issues could well be resolved before the end of the year.
On the other hand, new home construction is slowing down, which is never a good sign. Can we blame the weather? It has certainly been a crazy year so far, with late-winter snow and ice, bomb cyclones, flooding, and tornadoes. Those weather patterns ate up a lot of productivity in the first half of 2019, and the impact will be with us for a while. Midwestern agriculture won’t recover this year, and California cherries may be ruined due to late spring rainstorms.
Domestic oil field activity is slowing again now due to upheaval in global markets, and other industrial freight has also slowed, so the flatbed segment is in a lull.
ELDs could be an issue again in 2020, as the clock runs out — literally and figuratively — on fleets that were permitted to continue logging drivers’ hours for two more years on a less-exacting electronic onboard recording device (EOBRD.) As many as 40% of trucks may still be running with EOBRDs, but the changeover is not expected to have the same impact as the start of the ELD mandate two years ago. On the other hand, if the repeat of the ELD mandate does cause capacity shortfalls, freight rates could bounce back next year.
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