After a banner year in 2018, the freight economy regressed towards the mean in 2019, but more downside risks lie ahead in 2020.
The turning point came in the middle of May 2019. Freight volumes during a six-week period through July 4 dropped by 5% year over year, according to industry data tracked by Freightwaves’ SONAR platform. A number of carriers also filed for bankruptcy during this crucible period.
“If you are not making money in that part of the year then it leaves a big hole in your budget,” says Dean Croke, Chief Insight Officer of FreightWaves, which provides freight market information via online media and its SONAR data and analytics platform.
After the third week in July, freight volumes rose 3 percent, year-over-year, before the busy fall retail season began in September.
Excess capacity in the market remains after the buildup in 2018 and freight volumes slowed in 2019. Carriers with strong exposure in retail freight have been somewhat insulated, although retail sales—despite strong consumer confidence—dipped in September for the first time since February 2019 by 0.3 percent, he says.
“I think there will be a capacity readjustment after the holiday period,” he says.
Overall, freight rates backtracked in 2019. Rates in the spot market returned to 2017 levels. Contract rates have also been hit by downward pressure. Going forward, Croke remains “fairly optimistic” that freight volumes and rates will hold steady, but sees warning signs ahead.
“I am pretty bearish for the first quarter and the first half of 2020,” he says.
Chinese Trade War
Beyond retail, carriers tied to manufacturing have seen freight volumes decline. The Institute of Supply Management (ISM) index that measures manufacturing activity dropped to 47.2, its lowest level in 10 years.
“There are lots of warning signs out there that have been telling us that demand is weakening, but capacity hasn’t realigned so quickly to change the outlook for motor carriers,” he says. In 2020, Croke thinks capacity may loosen up and the number of trucking failures could accelerate if carriers aren’t careful with their cost control and asset optimization strategies.
“It would be great if freight volumes magically picked up” after the retail holiday season, he says, but this seems to be a remote possibility given larger forces in the economy, chief among them being the trade war with China
Imports from China increased prior to the United States applying tariffs in July 2018. This pre-tariff activity created a “pull forward” effect in truckload freight volumes, he says.
A high volume of pre-tariff imports were stored in warehouses on the West Coast, he says. This built up freight inventory has been trickling out during 2019. For example, the Los Angeles to Chicago freight lane, which represents about 25% of national rail intermodal volumes, has risen nine percent year over year.
Truckload volumes have increased by three percent, year over year, despite overall imports from China going down by 15%. As West Coast inventory levels have depleted, the decline in imports from China is a telltale sign that a “big drop-off is coming” in freight volumes from the West Coast, he says.
Croke predicts the impact on freight volumes will be seen during the fourth quarter of 2019 into the first quarter of 2020.
Tariffs also have impacted global trade routes. Companies are moving their supply chains away from China to countries in Southeast Asia to save time and money. As a result, more shipments are going through the Suez Canal into ports on the East Coast of the US.
Marine import shipments are down 21% in Los Angeles, 23% in Oakland, and 35% in Seattle, year over year, but have grown five percent in the Port of Savannah. The ports of Miami and Norfolk have seen moderate growth as well.
“You are going to see more truckload freight on the East Coast,” Croke says. Most of this increase will be in 20 and 40-foot intermodal containers powered by dray operators “Obviously it’s cheaper to ship certain freight straight off a boat than it is to transship it into a 53-foot dry van,” he says.
New Costs and Regulations
In addition to the impact of the trade war, motor carriers could be hit by fuel price increases in 2020 due to a new regulation that requires marine operators to use the same grade of ultra-low sulfur diesel (ULSD) fuel as trucks.
The regulation from the International Maritime Organization takes effect in January 2020. Demand for diesel or diesel-like products in the ULSD market will increase by approximately two million barrels a day to service the ocean liners, Croke says.
“To me, that is a big wild card that every trucking company needs to be watching in terms of the potential impact on diesel prices at the pump,” he says.
On a positive note, proposed changes to the hours-of-service rules could give motor carriers and drivers a break—literally.
“Any flexibility we can get into the hours-of-service regulation would make it better for drivers, and safer for drivers, particularly if they had to stop the 14-hour [on duty] clock,” he says.
The recent announcement that Ray Martinez will be leaving the agency has “kind of thrown a wrench in that,” Croke says.
Other major legislation that could have an impact on truck capacity is the FMCSA’s CDL Drug and Alcohol Clearinghouse. After January 6, 2020, fleets will be required to query the database when making new hires and once a year for existing drivers.
Looking beyond compliance, Croke welcomes new technologies that fleets can use to improve safety. As an expert in sleep science, he is especially keen on products that use hours-of-service data and predictive models to identify driver fatigue. As with any product that delivers safety data, “to operationalize it is always the challenge,” he says.