Continued weakness in freight volumes leads analysts to consider recession

Freight volume through the first two weeks of July was “sluggish,” and that continues a trend that has been ongoing since February as talks of a freight recession manifest, analysts said.

In a recent update on the transportation industry, senior research analyst Benjamin Hartford and research analyst Andrew Reed, both of Baird, said the volume across all freight modes, including spot truckload, less-than-truckload, rail and international airfreight, has fallen in the second quarter of and into the third quarter, from the same periods in 2018.

Spot rates for dry van truckload fell 18.5% in June, according to DAT Solutions. The decline in rates has put pressure on contract rates for truckload and domestic intermodal pricing, Hartford and Reed said. In P.A.M. Transportation Services’ second-quarter earnings report, President Daniel Cushman said the Tontitown-based carrier has been challenged to retain existing customer rates to cover increased driver wages and other costs. The company has yet to reduce rates on existing lanes, but it’s not been able to add new business at margins similar to 2018, he said.

Contract rates rose in the 2019 bid season, but they face the risk of a decline in the 2020 bid season, during which Hartford and Reed expect rates to fall 5%.

Rail volumes have fallen 4.4% so far in 2019, and Hartford and Reed noted the tough comparisons start to ease in the second half of the year as rail volume rose 4.2% in the third quarter of 2018 and 2.6% in the fourth quarter of 2018. Since January, intermodal volume has fallen 3.5% to 7.69 million intermodal units, according to the Association of American Railroads. In J.B. Hunt Transport Services’ second-quarter earnings report, revenue in the Lowell-based carrier’s intermodal segment fell 1% to $1.15 billion, from the same period in 2018. Volume fell 8% in the second quarter, with transcontinental loads declining 5% and Eastern network volumes down 11%. The intermodal segment accounted for more than half of the company’s total revenue and 64% of income in the second quarter.

Increased levels of inventories have contributed to the soft industrial and intermodal volumes, according to Hartford and Reed. Also, lower temperatures late in the first quarter and throughout the second quarter have impacted volumes. Inventory levels rose at a higher rate than sales in the second quarter, leading to an increase in inventory/sales ratios. The ratio was 1.32 in May, up from 1.28 in 2018, but the May levels were below five-year averages.

Capacity has started to leave the market with the closure of carriers, and net orders of Class 8 trucks, the largest class, have been falling. In a recent report, Tim Denoyer, vice president and senior analyst for ACT Research, said the market is in a freight recession and expects spot rates to continue to fall in the short-term. “The good news is that for the first time in this cycle, we see evidence on the horizon for an eventual bottoming and upturn in spot truckload rates, thanks to low new truck orders and improving capital discipline from the trucking industry,” Denoyer said. “The Truckload Rate Gauge is currently signaling significant overcapacity, favoring shippers in rate negotiations. But based on our expectation for a decline in U.S. Class 8 tractor build rates later in the year, the supply side should begin to improve.”

Donald Broughton, the author of the Cass Freight Index, noted in the June report that the declines in the shipments index have been significant enough to ask, “Will the (second-quarter 2019) GDP be negative?” In June the shipments index fell 5.3%, while the expenditures index rose 0.9%.

With regard to the upcoming peak season, carriers expect a more average season, according to Hartford and Reed. Volume outlooks for the second half of the year have been reduced as demand has been weaker and truckload capacity has limited domestic intermodal demand. But outlooks have been stable.