US trucking market flashes a turn signal

US trucking market flashes a turn signal

Pricing power could swing back to truckers next year, if the US economy continues to grow. Photo credit: Shutterstock.com.

There’s a change in the air at truck stops and freight docks across the United States, and not just the arrival of fall breezes. After months of decline, spot truck rates are creeping upward, not to the heights of 2018, certainly, but out of the depths they plunged to by mid-2019. The price hikes are due to higher seasonal demand and some storm-related disruption in September.

Unlike the sudden explosion of freight demand in the fall of 2017, which tightened truck capacity and sent rates soaring, this year’s expansion is “muted,” said Lee Klaskow, Bloomberg Intelligence’s senior freight transportation and logistics analyst. “We don’t expect 2019’s peak will be particularly strong,” he said. “lt won’t overwhelm or underwhelm, it might just whelm.”

Shippers already have their eyes on 2020, however, and small changes in truck pricing, capacity, and demand now may signal bigger shifts next year. Last fall, signs the economy was slowing after a breakneck first half last year were at times overlooked with imports pouring into the US, and the impact on truckload capacity and rates wasn’t clear until 2019.

Although truckload spot rates are more than 10 percent lower than they were a year ago, they are higher than in May, according to a Journal of Commerce analysis of 115 competitive truckload and intermodal lanes. The unweighted average all-in shipper spot rate was $1.59 per mile in May, but it has climbed to $1.75 per mile through September, a 10.1 percent increase over four months.

Events that limited truck capacity in key markets in September helped reverse a long decline in spot market rates, according to load board operator DAT Solutions. Importantly, demand remained strong throughout the month, and tighter capacity and higher fuel prices pushed spot market dry-van rates up 4 cents per mile on average from August to September.

Despite that increase, the $1.84 per mile average dry-van rate for September was 30 cents lower than the average DAT reported in September 2018. However, dry-van volumes on DAT’s load boards were up 15 percent year over year. “Truckload volume has been strong all year long, but pricing hasn’t always kept pace,” said Peggy Dorf, market analyst with DAT Solutions.

“That’s because truckload rates are tied more closely to capacity than volume, and last month a number of events limited truck availability in key markets for shippers and freight brokers,” she said. Relief and recovery efforts in the Southeast following Hurricane Dorian and Tropical Storm Imelda absorbed some truck capacity, and so did fall produce harvests and Halloween.

Through a glass, darkly

US shippers planning next year’s budgets say they are taking an early look at transportation contracts, using their present pricing leverage to guard against a potential swing of the pendulum sometime next year. An uptick in pricing may not mean a turn in the truck market is around the next curve, but it may signal one is slowly — very slowly — approaching.

With 2020 less than three months away, trucking appears to be heading toward a more balanced market than seen in 2018 or most of 2019, an equilibrium, perhaps, between freight and capacity. Where shippers, freight brokers, and carriers go from there depends on consumer confidence, industrial production, and how US trade wars unfold in an election year.

The high level of uncertainty in the US economic outlook is forcing shippers that rely on trucks to become more nimble when it comes to supply chain planning and more flexible when it comes to budgets. More than ever, they need to plan for a variety of different scenarios, from economic resurgence to recession and, perhaps most likely, slow-growth expansion.

“I don’t think anybody fully understands the ramifications of all the uncertainty around trade,” said Jeffrey Tucker, CEO of Haddonfield, New Jersey-based third-party logistics (3PL) provider Tucker Company Worldwide. “We in freight; we’re close to it because our customers are either building or shipping, or not. Let’s hope we get a little bit of certainty in these areas.” 

The tentative agreement reached by the US and China Oct. 11 should give shippers some breathing room, taking higher tariffs that were scheduled to take effect Oct. 15 and later in December off the table, at least for now. The “phase one” agreement, which will take weeks to draw up before being signed, is just one step toward a broader, final trade agreement.

“Although this is a step in the right direction, the uncertainty continues,” David French, senior vice president for government relations at the National Retail Federation, said in a statement after the agreement was announced Oct. 11. “We urge both sides to stay at the negotiating table with the goal of lifting all tariffs and fundamentally resetting US-China trade relations.”

Time to plan for transition

Chris Pickett, chief strategy officer at Coyote Logistics, recommends shippers approach 2020 as a transition year similar to 2017, when spot and contract rates began to recover from an industrial recession that hurt trucking in 2016. Industrial growth slowed considerably in 2019, with a similar impact on truck freight and rates as the 2015-16 slowdown.

Trucking already hit an inflection point, Coyote believes, in the second quarter of this year. The 3PL expects truckload spot rates to continue to rise and perhaps turn positive year over year as early as the first quarter of 2020. Contract truckload rates could start 2020 down as much as 5 percent year over year, and flip in the second half of 2020. 

“From a historical standpoint, 2020 is still shaping up to look and feel a lot like 2017 — the biggest wild card being whether we get an economic recession next year or not,” Pickett told The Journal of Commerce. “The stronger the economy, and therefore the demand for truckload transportation, the higher and longer we expect the next inflationary leg to run.”

Shippers who wait until next year to lock in 2020 rates could experience sticker shock, he warned. Most annual trucking contracts are negotiated in the first quarter. In 2017, many shippers held negotiations well in advance of 2018, attempting to get ahead of expected truck pricing increases. In the end, the rate hikes were so high they were practically inescapable.

One less-than-truckload (LTL) shipper pursuing requests for quotation (RFQ) from its carriers this fall put the question simply: “Is it better to do this now, or wait to see what next year might bring?” He decided to move ahead with the RFQ process without delay. LTL rates may have softened from last year, but they didn’t rise as quickly as truckload rates, and haven’t fallen as far.

In fact, many LTL carriers have been adding capacity, betting that demand — which had gradually increased over the past ten years before dropping this year — will increase again. The large public LTL carriers say they have been able to win mid-single-digit contract rate increases in 2019, and as long as slow growth continues, there’s no reason they should expect less from 2020. 

“There is still time to take action as budgets get dialed in and annual bids kick off in the coming weeks and months,” said Pickett. “Your transportation budget is likely to be under more duress than it was this year, so be sure to plan for it. Award volume carefully and try to foresee how each of your carriers will behave in an inflationary spot market.” 

Trucking companies, which viewed the sharp price hikes of 2018 as a market correction, are likely to seek rate increases in 2020, as their costs rise faster than inflation.

“It’s not going to be possible for carriers to roll back all these driver pay increases,” said one trucking executive, who requested anonymity. Equipment and insurance costs are also rising, he pointed out, putting more pressure on smaller trucking companies with less capital. Inability to meet or recover those costs may lead to more carrier closures, and more parked trucks.

However, it’s hard to see another spate of double-digit rate hikes absent a much stronger and more certain US economy. Although economists aren’t predicting a US recession in 2020, they’re not predicting a boom either. IHS Markit, the parent company of JOC.com, expects US real gross domestic product (GDP) to expand 2 percent this year and 2.1 percent in 2020.

The International Monetary Fund (IMF) predicts US GDP will expand 2.3 percent this year and 1.9 percent in 2020. All forecasts show a big drop this year and next from the 2.9 percent GDP growth reported for 2018. The US appears headed for a period of below-trend growth. US GDP has expanded 2.3 percent on average annually since the end of the recession in 2009. 

“A lot of folks thought 2020 would be a stronger year than it’s shaping up to be,” Tucker said. “There’s not a lot of inspiration out there.” Tucker Company Worldwide works with many engineering, procurement, and construction (EPC) firms and shippers that work on large projects, such as energy projects and plants. They’re not very confident heading into 2020, he said.

“You’ve got people not building the big stuff because they don’t know what to expect,” Tucker said. “We’re seeing them push off projects until more certain times. When the ‘superloads’ don’t move, when these projects that involve 250,000 to 900,000 shipments are postponed, that has a trickle-down effect on everything else, including a big mess of legal flatbed loads.”

In trucking, what goes down always eventually comes up, but not without stimulus. Transportation is an early indicator of economic performance because the effects of a turn in the economic cycle often are first seen in transportation volumes and pricing.

‘Not out of the woods’

The health of US manufacturing, a big source of volume, is a concern for trucking. The IHS Markit manufacturing purchasing managers index (PMI) rose from 50.3 in August to a seasonally adjusted 51.1 in September, a slight improvement attributed to a faster pace of new orders and production. But for the quarter, the US PMI was at its lowest point since the third quarter of 2009.

The Institute for Supply Management (ISM) PMI contracted for the second straight month in September, dropping to 47.8 from 49.1 in August. In both the ISM and IHS Markit PMIs, any reading under 50 represents contraction. The ISM said the drop in manufacturing did reduce over-stuffed inventories and order backlogs, which could herald more freight shipments.

“Manufacturing is not out of the woods yet,” said Chris Williamson, chief business economist at IHS Markit. “The September improvement failed to prevent US goods producers from having endured their worst quarter for a decade. Given these PMI numbers, the manufacturing recession appears to have extended into its third quarter.”

Rail chemical shipments, an underlying indicator for manufacturing, were up 4 percent year over year in the week that ended Oct. 5 but declined in 21 out of the past 39 weeks. The last sustained period of growth in rail chemical shipments was in January. That chemical shipment decline corresponds to the sustained drop in US manufacturing activity this year.

In the eight months from January through August, global air cargo demand fell 5 percent year over year, according to WorldACD. The decline for Asian air cargo carriers was 6 percent. Broughton Capital’s proprietary Asia Pacific Air Cargo Index is down 9.5 percent year over year, managing partner Donald Broughton said on CNBC’s Worldwide Exchange program Oct. 10.

“You tell me how that’s representative of a growing economy,” Broughton said. “It’s not.”

‘What it’s all about’ 

Rising retail sales, however, do represent economic growth. Just as an industrial boom fueled the early recovery, retail sales have kept the wheels on the economy in 2019. “This is the bucket of freight that is doing well, and why contract rates are holding up,” Bob Costello, chief economist for the American Trucking Associations (ATA), said at the Sept. 23 ATA Economic Summit.

“Consumers are still fairly confident, they’re still spending money,” said Charles W. Clowdis Jr., founder and managing director of Trans-Logistics Group, a supply chain research firm based in Chattanooga, Tennessee. “E-commerce is what it’s all about. I’ve talked with a lot of carpet and furniture shippers who sell online, and they’re having a banner year.”

With news reports of big retailers such as Sears and chain stores such as Payless either shutting down stores or going out of business, it’s hard to imagine 2019 as a banner year for retailers. But seasonally adjusted retail sales — as opposed to retail stores — are expected to rise more than 4 percent this year.

That growth is filling the tractor-trailers Clowdis sees traveling between Atlanta and Chattanooga. “Take that route and you’re going to see a lot more trucks on the road,” he said. “I call that seat-of-the-pants economics. It’s a good sign.”

If freight demand is the first lever controlling truck pricing, the second is truck capacity. In the boom period of 2017-18, trucking companies ordered a large number of Class 8 tractors and straight trucks, pushing truck registrations in early 2019 up by double-digit percentages. Those trucks hit the road just as freight demand began to slip, putting pressure on rates.

Truckload carriers have been working to eliminate some excess capacity for most of this year, even as new trucks hit the highways. As seasonal demand picks up, their efforts may be showing results. “Capacity is clearly better than it was in 2017 and 2018, but we have weeks where it’s hard to find a truck and weeks where it’s easier to find a truck,” Tucker said.

“I see the marketplace segmenting, and I’m getting more validation of that wherever I go,” Tucker said. “The temperature-controlled carriers and the higher-quality carriers that can achieve the on-time delivery results retailers need, they’re doing better. But the spot market is a lot less rich and a lot less lucrative. The trucking market is becoming far more diverse.”

That will mean more choices, as well as more complexity, for shippers in the 2020s.

Contact William B. Cassidy at bill.cassidy@ihsmarkit.com and follow him on Twitter: @willbcassidy.