Is it just us, or has 2021 flew by? It seems like just yesterday it was January, and now we are rapidly closing on June. So, the question is, how has trucking done in 2021 and what’s ahead? To answer these questions, we took a deep dive into the latest trucking indicators and developments in the trucking and supply chain sector. First up, we will look at truck tonnage and what it means for the health of the sector.
The Latest Truck Tonnage News
Now that May is here, the industry has been getting updated numbers for truck tonnage in March and April, and the news is certainly mixed. Truck tonnage has actually been falling, dipping in February, March, and now April.
In March, seasonally adjusted for-hire tonnage dropped 5.1% after falling 2.3% in February. The March tonnage number came in at 106.8, compared with 112.5 in February. For many industry insiders, the March drop came as a bit of a surprise. Many trucking companies reported solid end-of-quarter numbers, yet early March still came in soft.
Many point to lingering supply chain issues as the source of the problems. From a lack of microchips to a lingering hangover from the COVID-19 pandemic, the global supply chain is going through a series of convulsions that ripple down from OEMs to the trucking companies that rely on them.
Still, for many, the downside does not change the positive outlook they have for the sector. With so many people and companies flush with government money and construction and manufacturing experiencing a boom, the trucking sector is not in any danger to the downside any time soon. Of course, no one knows what the future holds, but if one looks at economic indicators, we are in for a boom.
Comparing Against Past Performance
When you look at comparisons against past performance, the discrepancy comes into full view. Why? Because compared with March of 2020, just as the pandemic was hitting, the tonnage index was 9.5% higher. During the first quarter, seasonally adjusted tonnage fell 0.4% from the final quarter of 2020 and 5% from a year earlier.
To really understand the numbers and get a holistic view of the state of trucking, one needs to look at freight consumption and production. In the past 12 months, consumption growth has blown through the roof. The pandemic has fundamentally changed the way people shop, and as a result, delivery-based products are exploding.
In fact, the largest month-over-month gains in retail sales all came after April of 2020. Consider how incredible this data is. Retail sales were the highest they have been while everyone was in lockdown. This really displays how the pandemic has changed the way people eat, shop, and associate. Even worse, the problem stems from the fact that production has not been able to match consumption.
Industries from aerospace to manufacturing are facing the same problem: Orders for durable goods are far outpacing the supply of such goods. When it comes to the supply of materials, components, and labor, everybody is facing a huge shortage. Another problem has been the big adjustment providers have had to make addressing the inventories-to-sales problem.
Despite the slowdown in freight volume that typically occurs after the Christmas holidays, the widely used Market Demand Index in mid-February remained at an elevated level of 138, implying a very tight market for spot truck capacity. Consider that a normal range for these readings come in anywhere from 30-40. (normal ranges are in the 30-40 band).
Even more, all one needs to do is look at activity at California ports. There are few other metrics that can be used so consistently to measure the health of the trucking sector and supply chain as a whole. And right now, there are a lot of container ships waiting at the dock in the ports of Los Angeles and Long Beach, which suggests that there is still a healthy backlog of freight that has already sailed to the U.S. and needs transportation to their end markets. Look into the crystal ball and it isn’t difficult to use this data to glean that markets are likely to continue to be tight over the next couple months as retailers continue to restock.
Inventories Are All Over the Place
When you look closely at freight transportation, the issue is with the ratio of goods on hand to the number of individuals and entities purchasing said goods. Most transportation industry analysts use the inventories-to-sales ratio to assess the health of the industry. While there are many different markers analysts can use, this ratio is remarkably historically accurate.
The reason for this is that individual sectors, such as manufacturing and retail, have different standards for how much inventory they keep on hand related to the level of sales they are producing. But as ratios fall, many companies operate the same way because they feel the pressure to ensure inventory replacement, especially if sales are picking up.
As we all know, the COVID-19 pandemic created extraordinary swings in the inventory-to-sales ratio simply because of the rapid changes in both production and consumption. The most recent inventory data available comes from February and shows that wholesale inventories are far slimmer than they had been prior to the pandemic.
For obvious reasons, the most dramatic change has been in retail inventories. While there were record low retail inventories in January, the massive jump in retail sales in March – thanks to the latest stimulus – had huge impact on the inventories-to-sales ratio for most companies. And for trucking companies moving all this freight, times are heady.
In the long term, industry insiders should not worry too much. If freight demand is still high, regardless of retail market fluctuations, this means that freight demand will likely outlive the higher levels of consumption we have seen, especially after all these stimulus dollars have landed in consumers’ bank accounts.
Car Sales Skew the Data
There is a problem in the numbers, however. When looking at retail sales and inflation, one need not look further than at car sales. Changes in inventories where motor vehicles are concerned have an outsized impact on total retail inventories. And while sales have been robust, the motor vehicle retail segment has largely been in line with retail sales in general, and this is mostly because of the inventory-to-sales ratio.
While total retail sales were down in February, inventories of motor vehicles and associated parts were down by double digits, or over 17%. Still, where trucking is concerned, there is not much to be worried about. Retail sales have been so strong that the ratio of inventories on hand is still quite low. But if demand does weaken in the future, there won’t be as much need for inventory replenishment.
Outside of the automotive sector, the only retail segments that saw big inventory declines during the pandemic were clothing and department stores. Fortunately, these segments can cope with lower inventories and accompanying sales pressure than e-commerce businesses, which are dealing with a giant surge.
Still, the automotive sector is looking at a potential crisis in inventory. While inventories for car sales were down quite a bit, retail sales of motor vehicles and parts were the highest on record in March. This also comes at a time when vehicle production is seeing one of its lowest readings, down 8% in March over the February data. But to get an even broader view of the sector, look at intermodal data.
What Should Companies Expect?
Many trucking companies were optimistic about growth in 2021, yet still they operate with caution. While some expected single to double-digit growth this year, there are still far too many uncertainties brought on because of supply chain changes. The pandemic has upended the way business gets done, both in America and abroad.
You can see this play out by evaluating spot and contract rates. As of mid-February, the trucking sector was recording an approximate 12% difference in spot and contract rates. And while rates do change quickly, many are paying close attention to truck driver pay with fleets continuing to struggle to find truck drivers to fill their cabs.
There are two sides to this analysis. The first is the data surrounding freight that needs to be moved. The second is the supply of equipment available to move said freight. We already know that supply is incredibly tight, but will cargo demand also be put under the same squeeze? As of right now, that question is still an unknown.