According to transportation research organization ACT Research, there may be an economic downturn during 2020. Still, many pundits were claiming there would be a downturn in 2019, and that is now looking increasingly less likely. While the trucking industry has had a fantastic run over the past 10 years, could I be that both he industry and the economy has reached its peak?
Broad economic indicators and trend lines specific to the trucking industry seem to point in this direction. Still, while ACT Research and other organizations do not predict a full-blown recession, it still cannot be ruled out entirely, especially with the trade war heating up and geopolitical hot spots flaring. According to ACT Research, there is currently a one-in-three chance a recession will happen at some point in 2020.
Furthermore, ACT Research fleet survey numbers showed that approximately 60 fleets crossed into negative territory in November of 2018, which represents the first time those numbers have reached that level since July of 2016. There is also some level of regional softness, which could be impacting the numbers. With tariffs negatively impacting agricultural exports in the Midwest, headwinds remain.
Spot total rates for freight have also slumped, averaging $1.85 per-mile in March, according to DAT Solutions, which is the lowest reading since 2017. The truckload freight environment has certainly been weaker this year from the January to mid-March period. Large, public trucking companies are also seeing lower shares year-over-year. But does all this data portend something worse to come? Frankly, there is a lot of confusion in the numbers.
Truck Orders Blink
One signal could be truck orders in March, which were the lowest for that month since 2010 and dropped a whopping 67% over March 2018 numbers, according to FTR. And while the numbers are not yet final, ACT Research projects the final number will be just under 16,000 truck orders for the month.
The problem is this data signals the fourth consecutive month of orders coming in below the current rate of build. While demand is far lower than recent trend lines, slowing order intake makes current market conditions obvious. Still, despite the dip in orders, FTR reports that demand is still strong. The confusing numbers are a result of a lower number of build slots for 2019, which is squeezing availability.
OEM production slots were already limited in 2018 due to supplier constraints, as we have reported on before. And now that the situation has leveled out, fleets are rushing to place orders but have limited options available to them. And while backlogs are declining, fleets are still struggling to put more trucks in service in a hyper-competitive freight market.
The Cass Index has pointed to big declines in international airfreight volumes in Asia, a reduction in railroad volumes and drops in auto manufacturing and building material deliveries. Truck drivers are also beginning to notice a drop in miles driven and overall per-mile pay from the same period a year before. It is widely agreed that the trucking sector experienced some softening in 2018.
This data is reinforced by the Cass Freight Index Report, which was released in March. It is important to note that the Cass Freight Index was one of the first freight flow indicators to turn positive way back in October of 2016 and signal a rapid heating up of the U.S. economy. Now, with the Cass Freight Shipment Index showing negative year-over-year growth, this could show either a pause in economic expansion or the beginning of an actual contraction.
Fortunately, levels of economic confidence are still quite strong, with the American consumer feeling good about the direction the economy is going in. Positive economic indicators include a continued strong market, historically low unemployment, high corporate profits and a strong level of loan availability and overall business and personal credit. While economic and political worries remain, such as the ongoing trade negotiations, rising interest rates, and a slowdown in manufacturing, there are still more positive indicators than negative.
Slowing truck orders and a cooling off the overall freight environment is putting a pinch on fleets’ pricing power in the overall marketplace. Put together, ACT Research believes all of these could portend a potential downturn in the coming 12 – 18-month business cycle.
Production could see further declines due to new regulations put into effect by the California Air Resource Board, which specifically target heavy-duty motor vehicles. OEMs should now be preparing to file new certifications and update their warranty reporting standards, for both tractors and trailers, beginning in 2020.
The trailer market tea leaves are also difficult to read. It is important to consider that trailer orders peaked at the end of 2018 and have been on the decline since. A huge industry backlog has created a softer marketplace for new trailers. Even so, trailer production is still at near-record highs. Will this level of production be sustainable in the long term? Likely not.
Still, ACT Research expects that OEMs will build around 331,000 units in 2019, with 2020 production levels falling to around 275,000 units. Still, ACT Research and FTR are not the only outfits making bold predictions for the trucking industry. The ATA’s Freight Forecast takes an even longer look at the state of the industry, and it looks good as we expand the view out to the next decade.
ATA 10-Year Freight Forecast Looks Rosy
The new Freight Forecast released by the ATA has taken a close look at the transportation sector and made some bold predictions about the future of freight. This year’s edition of the report suggests that freight volumes will increase over the next decade by 35.6%. They expect total tonnage to hit 21.7 billion.
The ATA’s annual Freight Forecast looks at how the freight economy is growing, evolving, and adapting to economic conditions over time, whether at home or abroad. Considering how important the movement of goods is, freight demand represents a reflection of the overall strength of the economy.
According to the report, over the five-year period from 2019 – 2024, truck volumes are expected to rise by approximately 2.3% per year. From 2025 – 2029, growth is expected to over around the 2% range year-over-year. Still, the total tonnage delivered by truck is expected to decrease from just over 70% in 2019 to just under 66% in 2029, with the main reason being expected demand changes for commodities moved by pipeline.
The projected increase in freight volumes demand does not change the overall outlook for the market. Even more, planned infrastructure improvements, workforce development changes, regulatory shifts, and other factors could create a different environment for the freight sector over the next decade and could invalidate all the current projections. The problem is, there is some confusion in the data.
Inconsistencies in Economic Indicators
Looking at the first half of 2019, there was some inconsistency in overall economic indicators. Economic data has varied widely from month-to-month. So, what gives? According to economists, the confusing picture points to a volatile situation. Or, it could simply be a higher level of seasonal adjustment
Take retail sales as one example, which dropped unexpectedly in December by 1.2%. Yet, in January, retail sales took an unexpected jump, expanding by 1.3%. February showed another drop. Job growth in February was also quite anemic, yet in March it took a huge jump, adding 200,000 jobs. Is there a problem with the economic data or is there some other inconsistency at play?
Many economists and industry watchers recommend using non-seasonally-adjusted data to reveal a clearer picture. Unfortunately, most data reported is seasonally adjusted, which means it is based on someone’s estimate of a 10-year seasonal trend. Rampant industry disruption has also created unknowns in the overall economy and transportation sector.
Take the rapid growth of Amazon Prime, e-commerce, and home delivery trends as one example. Consumer buying habits are undergoing a massive shift, and labor employment across multiple industries are facing higher levels of automation. Using 10-year seasonally adjusted averages to make economic predictions does not reflect the changing realities of the past 3 – 5 years. As trends have changed, so has the economy, but much of the current data does not reflect that change.
The same should be applied to truck order data. While the headline may scream that orders are down and the industry is in for a shock, consider that this is often a result of someone’s seasonally adjusted number. With truck OEMs sold out through 2019, there is no reason to be surprised if the data shows a weaker outlook than the normal seasonal trend.