Are We Heading Into Another Freight Recession?

 Global Economic Outlook

Early this month, the International Monetary Fund downgraded its outlook for growth in the United States, Europe, Japan and the overall global economy and pointed to heightened trade tensions as a key reason. U.S. trade talks with China continue without resolution, and there are indications that the rate of Chinese economic growth is slowing. The IMF expects the world economy to grow 3.3% this year, down from 3.6% in 2018. That would match 2016 for the weakest year since 2009. In its previous forecast in January, the IMF had predicted that international growth would reach 3.5% this year.

U.S. Economic Outlook

Economists expect U.S. first-quarter growth to decelerate less than previously thought even as they cut forecasts for the rest of the year, projecting a second-quarter rebound will fade as the effects of tax cuts wane. The median estimate for growth in the first three months of the year increased to 1.6% from 1.5% seen last month, according to an April 5-10 Bloomberg News survey. At the same time, forecasts for the second quarter held at 2.6% while those for the third edged down to 2.2% and were lower for the fourth, at 2%.

For the United States, IMF economists downgraded their growth forecast for this year to 2.4%, down from 2.9 percent in 2018 — followed by 1.9% in 2020 — indicating most economists remain skeptical that President Donald Trump will enjoy a second straight year of around 3% expansion. The projections also reinforce the Federal Reserve’s patient stance on interest rates as policymakers gauge slowing global growth and subdued inflation.

The State of Manufacturing in the U.S.

March manufacturing output finished on an upswing in the first quarter, according to the monthly manufacturing Report on Business, which was issued by the Institute for Supply Management (ISM). The report’s key metric, the PMI, headed up 1.1% to 55.3 (a reading of 50 or higher indicates growth), following a 2.4% decrease from January to February and a 2.3% increase from December to January. Despite the uneven pattern in recent months, the index has now grown for 31 consecutive months, with the overall economy now having grown for 119 consecutive months. The March PMI reading is down 2.4% compared to the 12-month average of 57.7, and the first quarter PMI is 55.4.

ISM reported that 16 of 18 manufacturing sectors reported overall growth in March, including: Printing and Related Support Activities; Textile Mills; Food, Beverage and Tobacco Products; Petroleum and Coal Products; Computer and Electronic Products; Electrical Equipment, Appliances and Components; Furniture and Related Products; Chemical Products; Plastics and Rubber Products; Wood Products; Nonmetallic Mineral Products; Transportation Equipment; Miscellaneous Manufacturing; Fabricated Metal Products; Primary Metals; and Machinery. The two industries reporting contraction in March were: Apparel, Leather and Allied Products; and Paper Products.

Including the PMI, most of the report’s key metrics saw gains in February. New orders, which are commonly referred to as the engine that drives manufacturing, rose 1.9% to 57.4, growing for the 39th consecutive month, with gains recorded for the top six industry sectors and 14 of the 18 sectors tracked by ISM. Production, at 55.8, was up 1%, growing for the 31st consecutive month, and employment, at 57.5 saw a 5.2% gain, on the growth path for the 30th consecutive month and hitting its highest rating since checking in at 57.7 in November 2018.

The Trucking Economy

The trucking economy added capacity and learned how to recoup most of the financial impacts of ELDs. It is beginning to see demand for OTR (over the road trucking) improve as lower diesel prices shift routings off domestic intermodal to OTR. This appears to be happening at a meaningful pace with 650 to 700-mile length of haul loads, which represents approximately 1.2% of the dry van loads in the U.S. truckload marketplace.

Trucking companies pulled back from hiring in March as freight demand softened and job growth across the logistics sector slowed. Carriers cut payrolls by 1,200 jobs last month, according to preliminary figures the Labor Department reported, halting a nearly yearlong expansion amid signs a hot streak that boosted transportation companies’ profits in 2018 is cooling.

Sectors that feed goods into freight transport networks looked weaker, however. Factories cut 6,000 jobs, the first decline in the sector since July 2017, even though the ISM report shows U.S. manufacturing activity expanding. Retail payrolls plunged by 11,700 as the service-sector expansion slowed. The overall pace of logistics hiring slowed during the first quarter. Trucking companies, parcel-delivery firms and warehouse operators together added 144,500 jobs over the 12-month period ending in March, down from 167,200 in the 12 months through February and 191,200 through January. The slowdown comes as other signs suggest the freight market is retrenching.

North American heavy-duty truck orders plunged 66% last month compared with March 2018. The Cass Information Systems Inc. Freight Index for U.S. domestic shipments declined year-over-year in February for the third straight month.

Demand for logistics workers is still outstripping supply, however, especially for skilled positions such as truck drivers and forklift operators, said Doug Hammond, zone president at Randstad US, a subsidiary of Dutch recruiting firm Randstad Holding NV. “We are seeing a number of clients, especially in the retail and retail distribution space, making significant moves in their base wages,” with increases of between 8% and 10%, Mr. Hammond said.

A look at the latest DAT Trendlines report also suggests that the freight market is cooling. The van load-to-truck ratio is down 63.3 percent on a year/year basis while reefer load-to-truck ratio is down 62.2 percent; the flatbed load-to-truck ratio has declined 13.6 percent. Now that capacity has caught up with demand, freight rates are dropping. According to DAT, the national average for dry van spot rates has dropped from $2.08 per mile in December 2018 to $1.87 per mile in March.

The Economic Outlook for Freight

The consensus view among freight professionals is that the freight environment is slowing down, but it still remains good, and slow isn’t necessarily bad. ACT’s experts are predicting Class 8 retail truck sales above 250,000 this year and orders of about 335,000 – very good numbers.

“Freight to start 2019 has been a bit sluggish,” stated Thom Albrecht, executive vice president, chief financial officer and chief strategy officer for Celadon Group. “I think over the next year-and-a-half there will be a disconnect with how carriers describe [the environment]. I think there has been more growth in supply than carriers want to admit.” Albrecht said he had spoken with a large brokerage firm that acknowledged it had seen an 11 percent increase in capacity last year, but freight demand is now returning to “more normal levels.” As the increase in supply is coupled with a weaker demand for freight, the market feels a bit softer.

Albrecht noted that freight is not bad, just not as good as it was last year, and rates are being affected by increased competition. “The market has gotten more competitive than a lot of folks are willing to say,” he said. Based on this set of indices, it is our view that we are not heading into a Freight Recession.

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