Peak season for the trucking industry arrives, spot market moderates

Carriers should benefit from premium freight opportunities in the fourth quarter as they did last year, but leading up to peak shipping season, spot truckload demand fell from levels earlier this year, analysts said.

Volume growth across transportation modes, including truckload, rail and ocean freight, has slowed in recent months compared to the same months in 2017 when freight demand was strengthening, said senior research analyst Benjamin Hartford and research analyst Andrew Reed, both of Baird.

American Trucking Associations’ (ATA) For-Hire Truck Tonnage Index declined 1.8% in August, from July. The index rose 1.9% in July, from June. Compared to August 2017, the index rose 4.5% in August. Between January and August, tonnage has risen 7.6%, from the same period in 2017.

“Truck freight remained solid in August despite the monthly decline,” said ATA Chief Economist Bob Costello. “However, the year-over-year increase was the smallest since July 2017. The deceleration in the year-over-year increases has begun due to more difficult year-over-year comparisons. It was a year ago when freight began to surge. We should all expect smaller year-over-year gains going forward than we witnessed over the last year.”

Spot truckload volume and pricing trends have moderated at a quicker pace than usual through the third quarter as ocean freight volumes at ports along the U.S. West Coast have been below seasonal levels, according to Hartford and Reed. Truckload spot rates have fallen nearly 25% from the peak levels in the second quarter. Historically, rates decline about 15% through the third quarter. Yet, expectations remain for a healthy peak season in the fourth quarter.

In September, spot rates rose 9.1% from the same month in 2017, according to DAT Solutions. Dry van and refrigerated freight rates have returned to May levels as shipping resumed out of the Carolinas last week followed the disruptions caused by Hurricane Florence.

“Three months ago, we increased our realized contract pricing forecast for 2018 from a range of 6% to 8% to a range of 6% to 12%, and current data is clearly signaling that the risk to our estimate may still be to the upside,” said Donald Broughton, analyst and commentator for the Cass indexes. “We believe that this is the strongest normalized percentage level of truckload pricing achieved since deregulation (normalized meaning except for extreme periods of recovery from recession).”

The existing levels of freight volume and pricing show the U.S. economy is growing, but the growth might have reached its near-term expansion limit, according to the Cass Freight Index. Many transportation modes have limited capacity or no capacity at any price for which shippers would pay. But consumers are starting to spend yet not as much with brick-and-mortar retailers. Millennials are establishing households, and this drives consumer spending. Broughton, who noted there are more Millennials than Baby Boomers in the United States, said “the consumer economy is not only alive and well, but growing robustly.”

In a recent industry note, transportation/trucking analyst Brad Delco and associate Scott Schoenhaus, both of Stephens Inc., reviewed retailers’ earnings reports and related conference calls and were encouraged by signs that sales trends continue to outpace inventory trends this year, compared to last year; a decline in the national inventory-to-sales ratio to the lowest level in nearly four years; and commentary about having leaner inventory levels heading into peak season. The leaner inventories, especially compared to sales, will be a positive for carriers as retailers will need to start building inventories for the holiday season in the coming weeks and months.

A group of retailers Stephens follows, including Walmart, Amazon and Home Depot, reported sales rose 5.3% while inventory levels increased 1.2% in the second quarter, according to Delco and Schoenhaus. The retailers decreased inventories from the previous quarter by about 2%. Amazon, however, has increased its inventory nearly 29% this year, from last year, and it represented about 35% of Walmart’s total reported inventory. Amazon’s sales growth of 39% continues to outpace its inventory growth.

“We believe these leaner inventories in relation to strong sales should support ongoing re-stocking (and) higher inventory turns providing a positive setup for the (truckload carriers) heading into peak season,” according to Delco and Schoenhaus.

The U.S. inventory-to-sales ratio has fallen since peak levels in mid-2016, and the lower level was a result of a 7.1% increase in sales this year, from the same time last year. The increase has outpaced a 3.6% rise in inventory growth and in line with the trends of the retailers.