US truck shippers are enjoying the feast stage of a feast-and-famine cycle, as last year’s tightest trucking market on record gives way to an all-time capacity glut this year. Spot dry van truckload rates are down by double-digit percentages from a year ago (18.8 percent on average in July, according to DAT Solutions) as the autumn shipping season approaches, and contract rates are nearly flat year over year, pulled down by the collapse in spot rates.
Where rates are still rising, in the less-than-truckload (LTL) market, for example, they’re climbing much more slowly than a year ago. Shippers say LTL carriers that initially seek high single-digit percentage rate hikes in annual contracts often settle for much lower increases.
There’s debate over how long this shipper’s market will last, however, with some optimistic trucking executives expecting a rebound in the second half of 2019. Others don’t expect much change until 2020. In addition to coming off an exceptional comparison in 2018, US trade disputes, high inventory levels, and uncertain industrial and consumer demand make longer-term projections trickier than ever.
But 2019 is not 2016, the last prolonged period of shipper pricing power. Shippers burned by skyrocketing rates when spot and contract prices leaped in the 10 to 20 percent range or even higher are getting some price relief. But they’re also dealing with uncertainty about demand, total supply chain costs, and increasingly tough customer delivery requirements. Trade wars with China, and potentially Europe, were not even on the map in 2016.
Extreme price cutting in this environment can hurt shippers as much as it can help them. Low rates don’t guarantee on-time delivery — quite the opposite, on occasion. Shippers may see prices drop by low single-digit percentages year over year in some regions or lanes this year and increase by similar low amounts in others.
Shippers, freight brokers, and truckers are eyeing three possible routes to 2020: first, a bounceback as freight demand rises and the economy picks up some speed; second, a flattening in freight demand and pricing; and third, a continued decline in pricing and shipments. The latter likely would put more small and medium-sized trucking firms, those that have a harder time adjusting pricing to match rising operating costs, off the road or out of business.
Truck market’s bottom is lower, but still there
Most trucking and logistics executives expect either a bounceback of some degree or a flat freight market heading into 2020. The two main factors that will tip the scales to one side or the other are economic activity and the sheer amount of available capacity added to the truck market, especially by truckload carriers, in 2017 and 2018.
“Industry-wide truckload transactional volumes and spot market pricing are markedly below year-ago levels,” Bob Biesterfeld, CEO of global logistics provider C.H. Robinson Worldwide, said in a July 31 earnings conference call with Wall Street analysts transcribed by Seeking Alpha.
The US economy expanded 2.1 percent in the second quarter, according to the first of three estimates from the US Bureau of Economic Analysis. That compares with a 4.2 percent expansion in the year-ago second quarter and a 3.1 percent expansion in the first quarter, which largely was buoyed by lower imports and higher inventories, rather than production or consumer spending.
At the same time, C.H. Robinson’s truckload contractual volume increased at a low single-digit pace in the quarter, Biesterfeld said. Coupled with sequential quarterly increases in truckload and LTL volumes per day, that indicates the bottom hasn’t fallen out of the US truck market, although it’s certainly lower.
“Our truckload and LTL volumes outpaced industry indices, such as the Cass Freight Index, where volumes declined mid-single digits in the second quarter,” Biesterfeld said.
Price per mile net of fuel paid to C.H. Robinson’s carriers declined 14.5 percent year over year in the second quarter, while the rates charged to customers dropped 11.5 percent.
The company’s routing depth tender index, a measure of the number of carriers a shipper had to reach out to in order to book a shipment, dropped to 1.2 in the quarter. That indicates that on average the first carrier in a shipper’s routing guide, a list of carriers ranked in order of preference, handled the shipment. “In this marketplace, from a contractual standpoint, if you’re not first in the routing guide, you’re last,” meaning you don’t get freight, Biesterfeld said.
He doesn’t see signs of a stronger freight market on the immediate horizon. “We do expect this softer freight environment to persist for the balance of the year,” he said. “In truckload, after the rapid run-up during 2017 and 2018, pricing and costs are now at or below 2016 levels. Tariff concerns and fears of recession are resulting in weakening shipper demand,” he told analysts.
There’s data that supports those fears, although it’s not conclusive data. The Cass Freight Shipments Index, which tracks cargo volumes, has dropped for seven consecutive months on a year-over-year basis, going negative in the first two quarters of 2019, which indicates a “freight recession.” The “R” word has been thrown about frequently in recent months, as the US economy slowed and year-over-year comparisons with 2018 freight activity became tougher.
However, a contraction in freight demand and pricing does not always foretell a contraction in the overall US economy. The Cass Freight Shipments Index declined in 2013, 2015, and 2016 on an annualized basis. None of the earlier declines was followed by a recession. Instead, they reflected periods of slower economic growth in an uneven recovery.
In 2015 and 2016, for example, the Cass Freight Shipments Index decreased year over year for 19 straight months and no recession followed. Further, the average index reading for the 2019 first half was the second-best since the Great Recession, second only to the first half of 2018.
A quicker market flip coming?
The broad picture is one of slower annualized growth after a record-breaking 2018, the kind of year most trucking executives said they see just once in a 30- to 40-year career.
“I think is very different from what we saw in some of the prior cycles where it was true sort of widespread slowdown and overcapacity at times,” Derek Leathers, president and CEO of truckload operator Werner Enterprises, said in a July 25 earnings call. “We've had a lot more white noise or external influences on the market this year between tariffs and trade talks.”
Add to that list harsh winter weather, a delayed produce season, and other factors “that are not macro-economic in nature,” but more “fits and starts within the larger economy,” Leathers said. The underlying economy, he said, is still “chugging along,” which means “the opportunity for this to turnaround is before us and I think it could be quicker than what we've seen in prior cycles.”
Leathers isn’t the only one scanning the horizon for a turnaround. Third-party provider Coyote Logistics, a subsidiary of UPS, in the second quarter forecast truckload rates will shoot up either in the fourth quarter of 2019 or first quarter of 2020 and hit a new peak either in late 2020 or early 2021. “If you’re a buyer, the good news is you won’t exceed your 2019 freight budget because of spot market exposure,” said Chris Pickett, chief strategy officer for the Chicago-based broker.
But much depends on how quickly carriers can reduce excess capacity. That task may take several months or quarters, but it’s doubtful carriers can just cut their way to a balanced market; they need higher freight demand.
One reason freight volumes are weaker in 2019 is a rise in US retail and industrial inventories that began last year as importers brought freight from China into the US months earlier than usual to avoid Trump administration tariffs. Those goods sat in inventories for months, depressing truck shipments, and companies are still building stockpiles.
US business inventories rose 5.3 percent year over year in May, and were up 0.3 percent from April, according to the US Census Bureau. The total business inventory-to-sales ratio in May was 1.39, compared with 1.34 a year ago, indicating it is taking longer to clear warehouses this year. The seasonally adjusted retail inventory-to-sales ratio was 1.46, the same as in April.
The higher inventory levels may partly explain why truck volumes seemed so muted in April and May, months when freight shipments are usually higher. A pre-summer inventory drawdown in June also might explain some of the spot market gains seen during that month.
Strong spot volumes reported by digital truckload marketplace DAT signal US shippers are still taking advantage of lower-than-contract spot pricing, although C.H. Robinson estimates that 85 percent of truckload freight has shifted to the contractual market, with carriers competing for that first ranking in their customers’ routing guides.
LTL, truckload pricing trajectories differ
As competition for available freight intensifies, US truckload and LTL pricing are headed in the same direction, but at different speeds, according to data from IHS Markit’s Pricing and Purchasing Service. JOC.com is a unit of IHS Markit.
On average, the truckload pricing growth is slowing more rapidly than LTL. The IHS Markit US truckload producer price index (PPI) dropped 1.45 percentage points in the second quarter from the first quarter, while the LTL PPI fell only 0.2 points on a sequential basis. The truckload PPI now has declined sequentially for two consecutive quarters. Both indices still indicate rates are rising on an annualized basis, but at a much slower rate than a year ago, supporting data from other economic indicators and anecdotal information from carriers and shippers foretelling steep decline for truckload pricing.
Truckload pricing will contract on a year-over-year basis by the fourth quarter, but flatten sequentially, increasing less than 1 percent by the end of the year, according to the IHS Markit forecast. LTL price hikes will resume growth sequentially and annually, but by low single-digit percentages. The 0.2 percent decline in the LTL PPI was the first sequential drop for that index since the third quarter of 2015.
The LTL pricing index soared from 2015 through early 2018, indicating that LTL trucking companies managed to raise rates well ahead of their truckload competitors. The truckload PPI was negative year over year for eight straight quarters in 2015 and 2016, the most recent economic slowdown, while the LTL PPI dipped into the red for only three quarters in 2015. The LTL index has been in positive territory for 14 quarters and the truckload index, 10.
The different pricing trajectory of the two sectors is due in part to the concentrated nature of the LTL business, in which the 25 largest carriers accounted for 91 percent of the total LTL industry revenue of $42.6 billion in 2018, according to data from SJ Consulting Group. The Top 25 truckload carriers represent a fraction of the truckload market, which is dominated by companies with fewer than 100 trucks. But the 25 largest fleets command significant capacity, fielding large fleets that haul high volumes of freight for the largest US shippers.
Also, since the 2008-2009 recession, LTL carriers have exercised what they and Wall Street analysts call “pricing discipline,” avoiding the rate wars and discounting that scarred carriers in 2009. Truckload carriers are still catching up with LTL operators in that regard and appear more vulnerable to cycles that see rates soar and then plummet, as they did in 2014 and 2015-2016, as well as in 2018 and 2019, thanks to the nature of their spot and contract markets.
Some large truckload carriers have shown more discipline this year, however, when it comes to measuring costs and assigning capacity to the most profitable and valuable accounts and services. Companies such as J.B. Hunt Transport Services and Werner Enterprises are expanding their dedicated contract divisions and, over time, reducing their exposure to the “one-way truckload” market.
“We've worked and scrubbed and gone through a pretty stringent review of our customer list and tried to make sure that we're growing with those that are growing and are financially strong,” Werner’s Leathers said. “We feel pretty good about what we see in front of us.”
This is the lead story in the 2019 JOC Guide to Trucking, which will be published with the Aug. 19 edition of The Journal of Commerce.