A Recession in Sight?
Has the industry experienced a permanent increase in cost?
Help me with these squiggly lines, Mr. Economist.
This is how an economist looks at the latest spot market data from Truckstop.com. First off, he or she is pleased to have such data in the first place. It is comprehensive and timely, something we seldom experience in the chancy world of trucking data. One can draw real conclusions from such data, especially if you can compare the current data with a relevant benchmark.
That’s why the data you see below is referenced to the “Recovery Average.” It shows how the market compares to “normal” or “average.” Oh, yes! Lest you don’t know Truckstop.com data. This data that I call Market Tightness Index is the Truckstop.com Market Demand Index, the ratio of loads posted to trucks posted. The higher the number, the tighter the market. It is called an ‘Index’ because it does not represent a literal description of market tightness. The market was not two-and-a-half times as tight as normal in January of 2018. But it was very tight, a record for this index.
Some things are easy to see.
So, let’s start with the most obvious conclusion. The dark blue line was falling for almost all of 2018. It tells us, without a doubt, that the spot market is not as tight as it was last January or in June. But the bars that represent 2019 data are still 100% above the recovery average. The market is still tight, just not as tight as it was. This data matches up with what else we know about the current market. The regulatory changes, which were so important a part of industry dynamics in early 2018, are over, so conditions are improved. Still, freight growth remained strong throughout 2019, hence the market is still tight. Logical! Clear as a bell!
But what about the end of 2018 – no fall there?
Of course, no economist will settle for that kind of easy answer. You can also see, beginning in week 41 of the data, that the decline stopped and the data moved up. Moreover, the increase persisted for ten weeks, more than enough to take seriously. Remember Perry’s Law: if the data is consistent for three or more observations, take it seriously. So, we are presented with three possibilities (economists love possibilities):
One is the chance that the trend has reversed permanently. Maybe Mr. Trump’s regulators are actually improving productivity for trucking, or the economy has accelerated. The ATA’s tonnage index was very strong in November. I don’t buy that because the numbers started down again in January and the ATA tonnage index was weak in December.
A new normal.
Two is the chance that we have reached a floor, permanently above the previous norm – a “new normal,” as it has become fashionable to say. The argument here is that the fleets have reached their limit in recruiting and will have to wait until an economic slowdown before finally eliminating the big deficit that appeared in late 2017 and early 2018. This view is possible. We won’t know for at least three or four months.
Just a pause.
My vote goes for number three, the chance that we had a temporary slowing in the trend. Look at the 2018 data in weeks eight through twenty-four. The downward trend paused there too – before resuming for another eighteen weeks. That is the nature of such data; it moves in spurts, not in nice steady trends. This view is important because, if right, it means that industry conditions will continue to moderate in 2019.
What about pricing?
Such a discussion of economic uncertainty has benefit because the three different interpretations have decidedly different implications for service and pricing. We have no service data, unfortunately, but Truckstop.com also collects reliable real-time spot market pricing data – which I display here with the same reference to the recovery average, as above.
Let’s take fuel out of this equation.
Before I discuss what the data says, note that I have displayed the pricing data “before fuel.” An economist always tries to factor out confusing, unimportant data in order to isolate the critical factors. Since in 2019 we are interested in the effects of the market tightness from the previous chart, out goes fuel. I could also take out inflation, but sometimes such “real” data is confusing, so I have left that effect in. It is worth about 2% per year right now.
One like the other!
Okay, as to conclusions, you can immediately see that the pricing data is moving just like the tightness data. Duh! When the market is tight, people pay more, and vice versa. Economists call that a positive correlation: one data set moves with another. We conclude that prices have fallen, just as they should; they remain above normal, just as they should; they stopped their down move in December, just as they should; they have started going down again, just as they should. Note also that events on the pricing chart occur about a month after they occur on the tightness chart. Economists call that a “lag.” It takes time for people to react to changes in the market – in this case, a month. Contract prices lag by four to six months.
Oops! A Christmas surprise.
Finally, there is the curious issue of the spike, just at the end of the year. In 2017 we attributed that to the start of the ELD mandate – but it happened again in 2018. Maybe we are seeing the start of a new seasonal effect having to do with post-Christmas on-line ordering. That hypothesis is interesting because, by benchmarking this data to the recovery average, I attempted to eliminate seasonality. If the 2010-2017 recovery average had this spike, no spike would show here. So, it is possible that we have a spanking new seasonal effect, thanks to Jeff Bezos and his hoards at Amazon. Either way, the data demonstrates the importance of dealing with seasonality. For instance, the fall in the 2019 bars in this chart are “seasonally-corrected.” The nominal data is falling even faster.
So what’s the bottom line?
As with the tightness data, we have three possibilities going into the new year: trend reversal, new normal for the average (prices will hit a floor above the old normals), and a pause before falling more. I am an economist, so I get to choose more than one outcome if I like. I choose a combination of options two and three. I believe that the industry has experienced a permanent increase in cost, due to productivity loss and driver pay increases that will halt the current decline above the old normal – but – I think we have a ways to go before we hit that new normal.
Oh yes, economists always have to add some qualification. People are talking increasingly about recession. If we begin to head that way, even if the actual recession is not until 2020 some time, spot prices will fall a bunch more – they always do. But for the time being, no recession is in sight. There is good hope for acceptable spot market pricing through most of 2019, probably lower than now, and certainly waaaaay lower than last year, but okay.
If you want more than that from this economist, dream on.