End of First Quarter Update 2019

 In Brokerage

We are in times of strong cyclical changes.

Dealing with Directional Uncertainties

What a difference a year makes! At this time in 2018, the economy was about to enter two quarters of 3%+ growth, and the trucking market was approaching its all-time peak in tightness. Intermodal was following right behind trucking, with a boost from a booming import market. Even rail carload was up after the difficult declines in the previous several years. Of course, what is good for carriers is not always good for shippers. The spring of 2018 was a time of rail delays and, especially, scrambling for capacity on the truck side, plus difficult budget adjustments with prices up by double digits.

Interestingly, the spring of 2018 was a time of relatively certain expectations. We knew that capacity tightness was nearing its peak. That meant budget pressures on shippers would peak shortly thereafter for spot movements and in mid-fall for contracts. Despite the doomsday comments of some commentators, peak markets always recede – and usually with fairly predictable timing. Same thing with weak markets: they always move back up. That meant high shipper budgets for most of 2018 but declining costs in 2019. More importantly, we expected that the extreme difficulties in capacity acquisition would recede once we were past the end of the mid-year peak, just after July Fourth. So, last year in April we could look at the following six-to-nine months with considerable confidence. It might be a difficult time for shippers, but, since we knew what would happen, it was a time for which you could plan easily.

This year, not so. Here’s why: There are two aspects to the uncertainty. The first is the economy. It was strong a year ago. Now its growth has dropped back to the modest expansion that has dominated the current recovery. That is, in itself, not remarkable, unless, like the current American White House, one expected a continuation of the strong growth of 2018. Rather, the uncertainty concerns a downside from the modest growth we have become used to since 2010. The current recovery is now the longest in history, raising questions about how much longer we can go before we have a recession. There is just enough trouble in global markets and some U.S. data reports to give the pessimists grist for their predictions. The good news is that there is little reason yet to expect a plunge in 2019. The uncertainty is for 2020.

Not so for freight demand and other specific transport conditions. That is the second issue. Within it, we have two concerns. The first is the retreat from the peak capacity conditions of a year ago. With the slowing of economic growth – and, ergo, freight growth – and the shift of regulatory oversight to a positive effect on productivity, we should be getting a continuation of the softening in capacity conditions that appeared so certain in April of 2018. Indeed, the Truckstop.com data shows a major retreat from the peaks of last year.

But! Those metrics have paused in their descent since last November. We expected a continued decline until the market returned to normal levels, with some chance of an undershoot. That is still likely, but the current pause in the decline raises questions about when that decline will resume. The direction of capacity conditions is important because pricing follows capacity. The current capacity data indicates that prices will stabilize, at least until the beginning of the summer, when prices usually begin to fall each year.

The second issue with transport conditions is the normal decline in freight volumes late in recoveries. During those times, the economy is driven by service demands, not the freight-intense manufacturing and investment demands that dominate early in recoveries. This recovery has had unusually strong manufacturing activity, particularly when compared to the overall growth in the economy. Will that continue in 2019 and 2020, as the optimists expect? Or, will freight growth fall below GDP growth as it usually does in these late times?

I forecast that freight growth will slow. We see some of that in the ATA trucking numbers and the latest rail volumes. The intermodal numbers are the most troubling right now, although their weakness might be just a make-up period following early ordering to avoid the possible second round of tariffs.

So, if the economy is relatively predictable in 2019, the freight environment is not. It is full of down-side exposures for the carriers in demand and pricing that translate to up-side possibilities for shippers. Capacity is already better than last year. There could be surpluses by the fall, with the inevitable response of falling pricing. The current trajectory is sideways, with little sustained changes. Is that a temporary pause or something that will persist like the expected modest U.S. economic growth? I hold that the pause will be with us until mid-July before a resumption of the declines in tightness and pricing begins anew.

The outlook for 2020 has the same directional uncertainties but with an important difference in the absolute levels of conditions. In 2018, we expected a loosening of 2019 capacity conditions back to normal levels. We were moving from a stressful year to a less stressful year. We are about two-thirds along that path for most data now. In 2019, we are worried about a loosening of 2020 capacity conditions to recessionary conditions, particularly by the end of 2020. If so, we will move from a less stressful year to a stressful year. While that will look good on shippers’ budgets, the accompanying carrier stress will make managing those budgets and carrier relationships difficult. Stress is always challenging.

Such times of strong cyclical changes in markets remind us that the big challenge in logistics is not taking the most advantage of conditions at any given time, be they loose or tight. It is, rather, learning to manage through the cycle: going from loose to tight, then back again, so that, when conditions inevitably turn against you, your logistical partners will favor you as you favored them when conditions last favored you. In that regard, the improving conditions likely for shippers over the next eighteen months are both a chance to cut costs and also to make relationship investments that will bear fruit in 2021 or 2022, when tight conditions return.

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