Freight demand softens, spot prices fall as trade uncertainty looms

Freight demand in the trucking industry has been healthy in the fourth quarter, but it’s softer compared to the same period in 2017 as spot rates have declined and impacts related to slowing global growth and trade uncertainty have come into focus, analysts said.

In a recent industry update, analysts Benjamin Hartford and Andrew Reed, both of Baird, said rates have fallen 5%, from the same period in 2017. Spot rates have strengthened recently but were below seasonal averages in the first two months of the fourth quarter. Hartford and Reed expect contract truckload pricing in 2019 to rise in the low-single digits. This is below expectations three months ago, but it remains positive while shippers desire to secure committed capacity.

Spot rates rose 0.5% in November, from the same month in 2017, but between the weeks ending Dec. 8 and Dec. 15, the rates fell 2.8%, according to DAT Solutions. “In recent years, spot market rates have spiked in December, but that hasn’t happened in 2018,” according to DAT. “In fact, the national van rate dipped a few cents to $2.08 per mile, matching the average rates for both November and October.”

The peak shipping season has been healthy but not as strong as expected. One industry contact told the Baird analysts that “we’re not seeing the extra push” in freight through the peak season, and another said domestic intermodal volumes have been slow recently after a strong fourth-quarter start. One railroad recently removed peak season surcharges, which indicated the intermodal peak was winding down.

The uncertainty related to tariffs had led to an inventory pull-forward, and volume growth in intermodal and industrial railcar loads. The volumes have risen 2.1% so far in the fourth quarter, from the same period in 2017, but the rate of growth is starting to slow. In the third quarter, the volumes rose 4.2%. Growth is expected to continue to slow in the first half of 2019.

The outlook for the first quarter of 2019 has been guarded, and the industry is concerned that softer volumes could be on the horizon, especially in February and March, as a result of the inventory pull-forward related to tariffs, according to Hartford and Reed.

Donald Broughton, the author of the Cass Freight Index and founder and managing partner of Broughton Capital, wrote in the November report on the index that the transportation economy continues to expand at an above average pace but “not at the scorching pace attained earlier this year.” The November index showed shipments rose 0.6% and expenditures increased by 8.4%, from the same month in 2017.

However, Broughton noted industry concerns of tariffs and threats of higher tariffs and the decline in the price of West Texas Intermediate crude oil. The previous has hurt volumes in areas of the U.S. economy, especially agricultural exports and raw materials, and the latter has made it less profitable to produce crude oil and decreased the incentive to drill more wells, slowing the growth rate in the industrial economy.

“These potential problems acknowledged, we maintain a cautiously bullish outlook given the freight markets, or more accurately goods flow, have a well-earned reputation for predictive value without the anchoring biases that are found in many models which attempt to predict the broader economy,” Broughton said. “Bottom line — even if it is at a slower rate, as long as the volume of freight continues to expand, we see no reason to turn bearish in our economic outlook.”

Another economic indicator that continues to remain positive is the American Trucking Associations’ advanced seasonally adjusted For-Hire Truck Tonnage Index. The index rose 7.6% to 118.9 in November, from the same month in 2017. The index also was up slightly from October, when it was 118.4.

“The fact that tonnage rose in November after a strong October is impressive,” ATA Chief Economist Bob Costello said. “It was likely due to some continued pull forward of shipments from China due to the threat of higher tariffs as well as solid retail sales last month. With continued strength in November, tonnage growth is on pace to be the best year since 1998.”

Between January and November, tonnage has risen 7.2%, from the same period in 2017.