Economist highlights freight industry misconceptions, soft peak season

by Jeff Della Rosa ([email protected]) 313 views 

Peak shipping season is expected to be weak amid high inventory levels and holiday spending uncertainty, a supply chain economist said.

In a recent project44 webinar, Jason Miller, professor of supply chain management at Michigan State University, said consumers have spending power but are strained. Still, they’ve yet to reach a breaking point.

“The real question is going to be how much gets spent on goods for the holidays versus gets spent on experiences and services,” he said.

Miller explained multiple misconceptions in trucking activity, including that “we’ve fallen off a cliff. Now, we are in a freight recession and have been since the third quarter of 2022.”

Based on ton-miles, U.S. freight demand across multiple freight-generating industries is down about 2% from peak demand during the COVID-19 pandemic, he said. Ton miles is the measure of transporting 1 ton of freight 1 mile. He noted the metric doesn’t measure load counts.

In 2021, partial truckload shipments increased, but as fuel prices rose in 2022, he said this shifted to full truckload shipments.

“When we look historically, the falling off a cliff effect — let’s take out COVID — you have to go back to 2008-09 during the global financial crisis,” he said. “While things are down now…we’re not even close, nothing like that where we saw a true 20% decline of ton-miles over an extended 18-month period.”

He said trucking demand is nearly at “peak 2018 levels…But at 7% more payrolls at truck/transportation firms. We essentially have a lot more capacity today. That’s why the market has been so soft. It does feel that rates have bottomed out. We’ve seen that for spot pricing… We’re very much likely at a bottom.”

While demand has reached a low point, he doesn’t expect “a major shock to get us out of this trough in the near term.”

The decline in wholesaling activity is also indicative of a freight recession, and until the activity starts to grow, he said he doesn’t expect the freight recession to end. Wholesaling activity includes business-to-business sales, and wholesalers comprise a large portion of U.S. imports. He noted the inventory challenges some toy wholesalers have faced.

“Hasbro today is taking 60% longer to turn their inventory, and Mattel’s taking 37% longer to turn their inventory than relative to this time in 2019,” Miller said. “If you’re taking that much longer, that means far fewer containers coming in… We binged in 2021 and early 2022 on imports, and now we’re paying the consequences a year later. We’re likely paying those consequences I’d say into the middle of next year.”

Another misconception is that U.S. container imports have “fallen off a cliff.” He said the change is more of a “regression to the mean.” U.S. imports tonnage is down at least 15% from 2021 and the first half of 2022. “But we are a little bit above 2019 levels.”

Looking at trends since 2003, the import growth was underestimated before the Great Recession, and the growth in 2021 and the first half of 2022 “were outliers,” he said. “2022’s imports through the first six months of the year were where we would have expected them to be in 2032, so 10 years ahead of that trendline.”

He doesn’t expect volumes to be “well below 2019 levels” but is projecting a soft peak season this year. He noted that he doesn’t expect volumes to reach 2018 levels when imports were rushed ahead of the tariffs on China.

He also tempered expectations about the impact of reshoring on the freight industry. He said manufacturing activity has yet to reach the early 2000 or 2007 highs. And since the pandemic, the activity has yet to return to 2018 highs. It’s down about 1.5% from last year.

“We’re not seeing any effects yet on reshoring in terms of bringing back output,” he said. “I think a best-case scenario would be 10 years from now, we get back to 2000 levels.”

As a result, he said a surge in freight demand is not expected to take place anytime soon.

He also highlighted various economic indicators, such as consumer spending and debt and unemployment levels. He said consumers still have spending power and pointed to Taylor Swift’s most successful concert series this summer — but they might not be spending as much on goods. He said this might explain why the broader economy has not entered a recession.

Miller said new unemployment claims are similar to 2017-19 levels. They are lower than from 2014-16 when the economy wasn’t in a recession, and the workforce is larger than it was then. He noted a freight recession took place from 2015-16, but the broader economy didn’t enter a recession. The economy also didn’t go into a recession in 2019, during another freight recession.

Continued unemployment claims also are similar to 2017-19 levels. He said they’re higher than in 2022 during an “unnaturally tight job market that was not sustainable. But we’re not seeing any type of increase that would be indicative of a recession taking place soon.”

Consumer credit card debt recently rose to more than $1 trillion for the first time, and he said it’s at the level that it was expected to be had COVID not happened.

“If you project the 2015-19 trendline forward, it would essentially put us right where we are today,” he said.

The debt metric doesn’t account for the number of credit card accounts, he noted. The shift to e-commerce during the pandemic led more people to open new credit card accounts. He said some skeptics might say the rise is attributed to people maxing out their cards and receiving new ones.

“Yes, that could be possible,” he said. “But the rate of people getting new credit cards, again if we project pre-COVID trendlines forward, is very similar to what we would’ve expected. If there’s more accounts, you’d naturally expect debt to go up because people are likely using those accounts. It’s just a change of we’re paying with a credit card rather than cash.”

He said credit card debt relative to total disposable personal income “is back to where it was in 2019. It looks nothing like 2006 when we were living beyond our means, and credit card debt was 30% of disposable personal income at a monthly level.”

A troubling figure was that credit card delinquency levels surpassed pre-COVID levels at 2.77%. The levels were at about 2.5% before the pandemic. Before the Great Recession, they were nearly 4% and peaked at 7% during the recession.

Banks are writing off about 3.15% of the debt, which is below pre-COVID levels. Charge-offs are down from 2019 levels. During the Great Recession, charge-offs exceeded 10%.

He said the higher delinquency but lower charge-off rates might be attributed to newer credit card customers who got behind on their payments but have lower balances.

“The upward trends are troubling,” he said. “It is certainly a sign that consumers are not in the positions they were in 2021. But this is not yet panic time to say consumers are just going to stop spending, and we’re about to have a deep recession. We’re not seeing indicators of that.”

Student loan debt rose to about $1.4 trillion before the pandemic started, but the rate of increase has declined since then. He attributed the good job market to this as people don’t need to go to college to find jobs, such as in construction. He noted that the 7% of borrowers who account for 40% of the debt comprise physicians and attorneys who can afford to pay the debt.

The debt payments are starting again, but new programs since the pandemic started are expected to limit monthly payment amounts.

He said home loan refinancing has kept mortgage debt at pre-COVID levels. While home loan rates have risen to about 7%, borrowers on aggregate are paying 3.6% interest on their mortgages. The rate was about 3.9% before COVID.

Another metric he noted was wage growth at levels not seen in 30 years. In July, it rose by 5.7%, which is comparable to the level it was in the late 1990s. The level peaked at about 4% before COVID.

“This suggests the job market is still very tight right now because otherwise you wouldn’t expect 5.5-plus percent wage growth,” he said. “That’s helping to offset some of that inflation.”