Trucking industry outlook improves in second half of 2020

Low retail inventories and a healthy spot market have contributed to improved expectations for the second half of 2020 as the freight market tightens.

UBS analyst Tom Wadewitz updated his projections for a better than expected second half of the year for truckload carriers, according to a recent FreightWaves article.

“Truckload spot market data have shown a better-than-normal seasonal pattern with continuing strength in spot loads in July and August,” said Wadewitz, noting low retail inventory-to-sales ratio and declining inventories of big-box retailers.

According to the most recent data available from the U.S. Census Bureau, the inventory to sales ratio for retailers fell significantly between April and June. The ratio rose to 1.68 in April before falling to a low of 1.23 in June. The ratio indicates the number of months that retailers have in merchandise to meet sales demand.

“We note that inventory replenishment is a key driver of truckload and intermodal demand, and low inventories point to strength in demand in [the second half of 2020] and likely into 2021,” Wadewitz said.

He also said rising demand has contributed to a 30% increase in spot rates recently.

According to DAT Solutions, the spot rate for dry van freight rose to a record level in August as disruptions related to Hurricane Laura pushed more freight to the spot market.

“The freight market has tightened over the last two months, and we see transportation rates beginning to increase faster than expected,” said analyst Daniel Imbro of Little Rock-based Stephens Inc. Imbro recently released a note on how the freight market’s strength might impact the retail industry.

“In light of this, we have spoken with our industry contacts in the retail landscape to gauge the potential exposure to this trend,” Imbro added. “While we do not believe that near-term numbers are at risk, we believe this factor is not being appropriately considered by many consumer investors and could pose a risk heading into 2021 if capacity remains tight.”

In a recent webinar, Seth Holm, senior research analyst for FreightWaves, said U.S. GDP declined by a record 32% in the second quarter, but the trucking industry is “booming.” Overall, consumer spending is flat, with goods spending up and services spending down. That makes for an ideal backdrop for the trucking industry, he said.

Carrier profitability is facing pressure from nuclear verdicts, and insurance rates are rising, comprising 5% of expenses, said Holm, noting that it’s up from 3% to 4% a few years ago. In 2019, carrier bankruptcies quadrupled from 2018, and a tightening truckload market is contributing to rising spot rates. Intermodal spot rates are increasing following the spot rate increases for the truckload market, he added.

According to senior research analyst Benjamin Hartford and research associate Andrew Reed, both of Baird, the strength in the freight industry continues to rise, especially on the West Coast and in Southern California. The strengthening conditions can be attributed to a rise in ocean freight imports and tight labor conditions at ports and rail terminals. These conditions will have the most direct impact on the spot truckload market as prices continue to rise, but other transportation modes have established surcharge programs amid network constraints.

“Above-seasonal trends that began following the April bottom in trends have continued throughout the typically seasonally weak months of July and August,” Hartford and Reed said. “Our conversations with channel partners and recent data points point to one common underlying theme — the freight market remains robust, and the supply situation continues to tighten, notably off the U.S. West Coast. Investors began to discount a ‘peak’ in freight fundamentals following [second-quarter earnings] reporting, reflected in relatively muted stock reactions to broad-based [earnings] beats during reporting; however, above-seasonal strength has persisted now into mid-to-late August, creating tailwinds for the group, despite noted risks/lack of visibility to demand during [the second half of 2020].”

According to Hartford and Reed, retailers expect sales to rise in the second half of 2020, which supports strength in freight demand while nonessential freight demand improves. An extended peak in freight demand is expected.

Wadewitz expects “a strong peak season, which should support a boost to trucker revenue from project freight, mini-bids and strong spot rates.”

Hartford and Reed said e-commerce sales rose more than 100% at several large retailers amid the COVID-19 pandemic. That might become a new normal as carriers adjust to higher levels of e-commerce as a percent of total retail spending, a trend that has been highlighted throughout the pandemic.

“As global supply chains have resumed and sought to ‘catch up’ from COVID-19-related shutdowns during the peak of the pandemic, constraints off the U.S. West Coast have intensified, despite usual seasonal lull historically experienced during summer months,” the analysts added. “Adding to the constraints, Class 8 net order activity through much of 2019 and 2020 was fragile and, even despite recent strength, has remained below normal replacement demand, providing an incremental catalyst for larger, scaled carriers as 2020 progresses.”

According to Hartford and Reed, over-the-road truckload capacity is expected to remain tight in the short term despite the recent rise in Class 8 truck orders, the largest class size. Net orders rose 97.7% in July, from the same month in 2019; however, the number of trucks manufactured fell 40.7% over the same period.