Outlook for transports deemed weaker in 2016 as supply outpaces demand

The transportation and logistics sectors are often viewed as bellwethers for the overall economy and if that’s the case 2016 doesn’t look so rosy – which an Arkansas-based logistics company CEO says is part of a normal business cycle.

Analysts with Baird Equity Research and J.P. Morgan recently published notes to investors indicating 2016 will be see only modest growth from the lackluster back half of 2015. Brian Ossenbeck, analyst with J.P. Morgan, said the North American trucking industry might see its worst year since 2007 play out over the next 12 months. He describes freight demand as “tepid” citing a pullback in consumer spending as fuel prices tick higher, taking away dividends consumers have benefited from in the past nine months. Ossenbeck said this presents added risks in the consumer retail space.

On the supply side of the equation, he expects pressure will weigh on shipping rates following the increased capacity on near-record new tractor orders in the back half of 2015.

Benjamin Hartford, an analyst with Baird, described 2016 freight volumes as “less bad” than they registered in the last quarter of 2015.

“Demand outlooks remain muted among shippers and carriers, particularly during first half of the year. Though industrial end-market trends have stopped deteriorating during this first quarter, trends remain below seasonal,” Hartford said.

He said intermodal rail remains more resilient to begin the year but spot truckload volumes and international airfreight trends continue to be soft. The automotive and construction sectors are expected to contribute positively to freight volumes in 2016.

“Both carriers and shippers with whom we have spoken in recent weeks continue to have very muted outlooks regarding demand, particularly during first half of 2016,” Hartford added.

There are expectations that freight volumes will increase this month added in part from an earlier Easter holiday on March 27. With that, April is expected to be softer from a year ago with the absence of Easter.

Hartford also said bids are competitive to start 2016 with contractual rates trending flat for the year. He describes a system where shippers are requesting rate concessions, or going elsewhere given the higher capacity today.

“We continue to believe core contractual truckload pricing growth during 2016 will be up between 1% and 2% year over year. This is down from the 4.5% growth in 2015.  We expect smaller, private carriers are likely to experience core contractual rate declines in the low-single-digit range during 2016.

‘RETURNING TO NORMAL’
Analysts agree that the rise in third-party logistics firms and brokerage divisions among a growing number of carriers are helping to fuel the competition. Dan Sanker, CEO of Fayetteville-based CaseStack, said his third-party logistics firm continues to expand and he sees the muted overall freight demand as part of a normal business cycle.

“Our business, each part (freight brokerage and warehousing for retail suppliers) continues to grow about 20% a year,” Sanker told Talk Business & Politics.

CaseStack has grown its Fayetteville office to 105 employees since opening in 2008 with more growth coming, Sanker said.

When asked his 2016 expectations for the logistics and freight sectors, Sanker said when looking at the entire business cycle dating back to the 2007 meltdown, it’s important to put things in perspective.

“There was very little economic demand in general from the 2007 meltdown on. Finally, in 2014 and 2015, things started heating back up with demand returning to a more normal pace. Meanwhile, most industries, including transportation, were gun-shy about investing into growth after such a deep and long down cycle. So we had a capacity shortage that got really bad in 2015. We are coming out of it as supply and demand return to something more normal in 2016. That makes it look like there is a softening market, but it just returning to normal,” Sanker explained.

He said CaseStack is seeing this shortage capacity in its warehousing unit which lags even more because people need to build, permit, rack and equip buildings and that cycle will likely run another two to three years as new capacity is built to support demand.

“If I were an analyst, I would try to have a little perspective on understanding that the concept of a business cycle hasn’t changed since the beginning of time. This is normal economics, so expect freight to slow down a little,” Sanker said.

BRIGHT SPOTS
Hartford said a bright spot is the transportation sector with robust auto industry fundamentals that support on the upside of 20 million U.S. auto sales this year. Employment, income, confidence and credit availability also are all supportive of rising demand, he said.

Baird also expects nonresidential construction to stay positive with growth in the low-to-mid single digits this year.

“We recently attended the International Roof Expo where industry participants noted a solid commercial backlog with expectations for 2016 growth ranging from 3% to 8%. Growth appears broad-based,” Hartford said.

He said the residential recovery is also steady. Most industry participants expect residential markets to grow mid-to-high single-digits in 2016, supported by 10% new construction growth and mid-single-digit repair/remodel growth. These growth rates imply a continuation of growth in 2015 into 2016.