Something is Happening
Time to be Vigilant!
Another week of soft data – what does it mean?
We now have two weeks of softening data in early July. This data tells us one thing and suggest another. It tells us that the four strong weeks in late June were likely not the beginning of an additional surge in market tightness, on top of what the market has already endured. Unless the numbers dramatically reverse this week, we are, at best, back in the uneasy equilibrium of a market teetering on the edge of real capacity problems. Reports from the field indicate that the recent spike was from shippers and carriers pushing to get work done before July 4th. That is the normal peak of the shipping season, a peak frequently followed by vacations. As such, the dramatically lower numbers from the last two weeks may be an offset to the peak, making a bump up likely in the next several weeks.
Is this the beginning or a new trend?
However, our research suggests that the last two weeks may signal a turning point in this capacity event. First off, freight softens seasonally in July, as you can see in the recovery average line in the above chart. More importantly, the regulatory environment has quieted down after the shock of the electronic logging device (ELD) introduction. In fact, the relatively permissive regulatory policies of the Trump Administration should be increasing productivity on the freight side – although the economy is strong, generating good freight growth, so it was a year ago. The fleets have already beefed up their recruiting efforts to cover such growth and are, apparently, slowly whittling down the driver shortages.
Finally, this capacity crisis is about at the age (one year) when previous crises (2004, 2014) made their turns back towards normalcy. Apparently, it takes that long for the adjustments to begin to bear fruit. That said, two weeks of data is not enough to firmly establish a new trend. It simply gives a strong signal that something new may be happening and signals us to begin making plans to make our adjustments should the coming weeks show the same pattern.
Be careful how you calculate things!
Even if conditions remain very tight into 2019, the remaining chart in this discussion shows an important fact about this event and expectations for the next year. The chart present current rates, going back a year and forecast out a year, holding the underlying trend of that forecast flat. The movement in the red line going forward is just seasonal shifts. The blue line presents rate levels from a year before, allowing us to see why year-over-year growth calculations vary. Those YOY calculations are presented by the columns on the chart. You can see immediately that the big acceleration of growth during this event occurred in 2017, when rates were rising but when the year before comparison points were flat. Security analysts call that phenomenon “soft comps.” That trend peaked in early 2018. Since then, although rates have been increasingly sequentially, the 2017 comparisons were increasing at about the same rate.
So, the YOY numbers have stayed high, but flat. If, however, the forecast is for rates stabilizing at the current level – as this chart assumes – then the YOY numbers will begin to fall as the year-before rate levels get closer and closer to current rates. That is what happens when one has “strong comp” – previous-year data that is rising. That pattern has tended to understate the emotional effects of the rate increases so far in 2018. Rates are up almost fifty cents a mile, with no change in YOY growth rates. But, going forward, if rates stabilize, those strong comps will tend to cause strong emotional effects in the opposite direction. Rates will be very high in absolute terms but may even show negative YOY growth during those weeks that had particularly strong growth a year earlier. For instance, late June next year may present that risk.
Let’s manage our emotions.
We bring these dynamics to your attention because the stress in this market is very high, making it vulnerable to strong swings in emotions. The current frenzy of new tractor orders is a great example. This problem is especially strong at times of market turns, times we may be entering. The solution to such problems is to acquire solid data and analysis that gives you an objective picture of what is really happening, not depending on the “fake news” swirling around the industry. The revolutionary expansion of spot market data provided by Truckstop.com and the companion analysis from Transport Futures should be an indispensable part of your suite of managerial tools in times such as these.