Covenant Transportation Group lowered its earnings guidance for the first quarter, telling investors the trucking market isn't as good as the company anticipated in 2019. Photo credit: Covenant Transport

Shippers are tendering less freight to truckload carriers than a year ago in early 2019, prompting industry analysts to wonder whether the tables have flipped towards lower rates and a buyer’s market this year.

Brian Reed, formerly of Niagara Bottling and now with Geodis, refers to the current market as the “muddy middle” because it’s not clear whether underlying freight fundamentals are slipping or last January and February were just unusually strong. Business conditions are vastly different from a year ago, however, and contract rates will likely be the next to suffer.

Outlook unclear, try again later

The latest indicator of a declining market comes from the Cass Freight Shipments Index, a measure of North American freight volume moved by truck and rail, which dropped 2.1 percent in February, the third straight month of year-over-year declines. Dry van spot rates are down between 10 percent and 17 percent, according to a JOC.com analysis of DAT Solutions and Truckstop.com data. Contract rates are still growing between 5 percent and 7 percent, according to DAT, but history shows that spot rates are a leading indicator of what will happen in the contract market.

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“While we are still not ready to turn completely negative in our outlook, we do think it is prudent to become more alert to each additional incoming data point on freight flow volume and are more cautious today than we have been since we began predicting the recovery of the U.S. industrial economy,” said Donald Broughton, founder of Broughton Capital and author of the Cass report.

Covenant Transportation Group provided a similar analysis in lowering its earnings expectations for the first quarter.

“The truckload freight environment has been weaker this year from late January through mid-March. We attribute the softer demand to factors such as late-2018 inventory growth in advance of the perceived impact of tariffs, the effects of the partial government shutdown on spending, and extended periods of inclement weather that impacted the timing of shipping seasonal goods,” Covenant CEO David Parker said Monday.

The situation has not gone unnoticed by the shippers. Several told JOC.com during the 2019 TPM Conference in early March that carriers were calling them asking if they had freight, and similar sentiments have been shared with Morgan Stanley industry analyst Ravi Shanker in his bi-monthly surveys.

“We continue to get a large amount of cold calls from both asset carriers and brokers to haul our freight. They are offering much lower pricing than eight weeks ago. It has the same feel as it did after the trucking peak in the winter of 2014,” one shipper told Shanker.

“Compared with this point in 2018, this year is much easier on shippers,” another said. “But we’re more cognizant of the fact that things could change very quickly after being burned last year.

Freight markets often do flip quickly, as they did in 2017, surprising shippers, and in 2018, surprising carriers that expected the first half’s boom to roll through December. The first quarter traditionally is the weakest period of the year for trucking, except in years such as 2018. And produce season, spring shopping, and construction activity are all due to heat up in the next 30 to 45 days, so this could be just a momentary lull before another bump.

“Bottom line, the data in coming weeks will indicate whether this is merely a pause in the rate of economic expansion or the beginning of an economic contraction,” Broughton said, citing declining air freight volumes from Europe and Asia and lackluster rail shipments of chemicals, autos, and building materials. If the inundation of empty containers at the ports of Los Angeles and Long Beach signifies that cargo will finally move out of Southern California warehouses, however, dry van trucking volumes stand to benefit.

Mark Montague, industry pricing analyst at DAT, expects the second-quarter surge could be “more than seasonal,” following the slow first quarter. “This marketplace can shift really quickly, if there’s a slight decrease in capacity in one area,” he said.

The damage caused by Midwest flooding, currently affecting capacity in Nebraska, Iowa, and surrounding states, is another factor to consider. Like other natural disasters, recovery from the floods is likely to absorb some truck capacity once roads in the region are dry again.

“Currently, we’re in a relatively soft market,” said Rachal (Snider) Jordan, vice president of customer supply chain at third-party logistics company GlobalTranz. “At this point of the year it shouldn’t be difficult [to find capacity]. But come June, once produce season kicks in, and the food and beverage industries start their ‘100 days of summer,’ that’s when it gets difficult.”

Based in Detroit, Jordan said she sees automotive companies preparing for a downturn, but the freight economy “is still strong.”

“Moving into the second quarter, I don’t see many customers slowing down,” she said. “We’re budgeting for another growth year. Freight has been strong since 2017. As far as we’re concerned, we’re not prepping for a downturn.”

Playing the market

Transactional shippers are changing how they tender cargo to take advantage of falling spot rates. Supply chain executives are extending their bid cycles and pitting asset-based carriers against brokers such as C.H. Robinson. Shippers have always played the two against each other, but spot markets hadn’t fallen far enough last year to make it cheaper than contracting directly with a carrier.

“When I talk with our large shippers, they’re not talking about doing less business in 2019, they’re talking about doing more,” said Bob Biesterfeld, chief operating officer and soon-to-be CEO of third-party logistics operator C.H. Robinson Worldwide. “There’s an evolution in how they do that, but people are still buying food, buying bottled water, buying TVs, [so] we really don’t see a slowdown in demand.”

If a truckload broker offers a cheaper all-in price, then the shipper gains leverage in direct negotiations with carriers, so the 5 percent to 7 percent increase in contract rates since Jan. 1 might be unsustainable going forward.

“For the whole calendar year, we’re maybe in a 3-5 percent range for [growth in] contract rates. That’s a win for contract carriers because a lot of shippers thought, ‘Hey things have loosened up and we’re going to hold these carriers to 0 percent increases,’ but that’s not realistic,” Montague said.

Regardless of who is “winning,” the hyper-tight trucking environment of 2018 has passed, and there is a good chance shippers will see some rate relief in the near future.

Contact Ari Ashe at ari.ashe@ihsmarkit.com and follow him on Twitter: @arijashe. Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy.