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Our bear and bull cases for the freight market’s mixed signals

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It’s an interesting time to be an observer of freight markets in the United States: everyone is trying to guess whether Peak Freight is ahead of us or behind us, and how severe a slowdown will be when it occurs. The best data that we have is decidedly mixed. There are really two major questions here: what do the freight markets tell us about the macroeconomic picture, and what kind of outlook do they give us for transportation companies? We’ll go through the numbers and try to characterize the current state of the market, identifying risks and opportunities.

The national outbound tender volume index (OTVI.USA) is well off its June high at 11,080, but has recovered in the past few weeks to 9,726 today. This volume metric is indexed to March 1, meaning that March 1’s volumes are equivalent to 10,000 and subsequent movements are measured relative to that benchmark. It’s fair to characterize overall volume as fairly weak (just lower than the average in April/May and significantly lower than August volumes). 

The equities market senses the softness in volumes—today CNBC reported that transport stocks in the Russell 2000 have entered correction territory, falling 10% off their highs. 

Meanwhile, as volumes softened, the trucking industry added capacity. Goldman Sachs estimated that 31,000 new drivers have entered the industry in the past twelve months, amounting to an increase in overall capacity of 2%. More trucks and fewer loads encouraged carriers to stay off the spot market and stick with contracted freight, which is moving at premium rates, up double-digits from 2017. 

The rate of tender rejections nationally (OTRI.USA) is at the lowest level it’s been all year: only 13.58% of all tendered loads are being rejected by carriers. By comparison, at the end of July, turndown rates exceeded 25%. Flatbed rejections (FTRI.USA) in particular have fallen off, which could be a leading indicator of a slowdown in construction activity, housing starts, and industrial production. 

Deteriorating turndown rates signal that spot loads are less desirable than contract freight. DAT’s RateView data confirms this: spot rates for dry van linehaul moves crossed below contract prices in February, and in September the spread had widened to 23 cts per mile. 

The case for peak freight already behind us starts with those facts and makes projections into the future. In theory, the widening imbalance between demand and capacity would suddenly crash spot rates and thrust pricing power back into shippers’ hands just in time for new contract bids. Carriers who have already made substantial wage increases will feel pressure on their margins when they lose leverage over contract rates and are forced to accept very low increases or decreases. 

In reality, freight markets are inefficient, and shippers usually have the least amount of visibility into current market conditions. In our view, it is more likely that carriers will be able to secure low to mid single digit increases on paper. The downside risk for carriers would be if the economy slows down and freight volumes drop. In order to maintain high asset utilization rates, carriers will become willing to accept lower-priced freight. 

Now for the bull case. North American West Coast ports just posted their strongest September volumes ever, topping 1.2M TEUs, and U.S. industrial production growth is still climbing, above 5% year-over-year.

“September West Coast port volumes recovered from their August disappointment, confirming the peak season pickup that most transport providers are suggesting they’re finally seeing and boding well for a better demand backdrop for N.A. surface transportation than during 3Q,” Susquehanna transportation equities analyst Bascome Majors wrote in a research note Monday morning. Container rates from China to the West Coast (FBX.CNAW) continued their upward trajectory, reaching $2,487 per box and demonstrating how much progress the steamship lines have made toward achieving price and capacity discipline. While growth in the volume of tendered loads outbound from Los Angeles has been anemic so far, there are signs that capacity is somewhat unbalanced: DAT dry van spot rates from Los Angeles to Dallas (DATVF.LAXDAL) spiked 19.3% since October 11, back up to $1.92/mile.

“The industrial sector has been one of the highlights in the US economy, as the strong demand for business capital equipment and strength in the mining sector has translated into manufacturing and industrial activity,” wrote FreightWaves chief economist Ibrahiim Bayaan last week.

Low unemployment and high consumer confidence, coupled with record port activity, could combine for an unusually strong holiday shopping season. West Texas Intermediate is off its October 3 high at $76.41, but still high enough to encourage growing investment in exploration and production. Majors thinks that the late onset of peak port activity could bode well for continued action through December.

“While some see this performance as simply a rush of imports to get ahead of the January 1 tariff increase,” Majors wrote, “our checks suggest that this dynamic could actually drive a stronger tail to the peak season (i.e., running full tilt through December vs. typical holiday tail-off), which has frankly started slow but is clearly beginning to ramp up here and now.”

Further bull trends for the trucking cycle would include structural capacity constraints like infrastructure bottlenecks and difficulties large carriers have in sourcing and retaining drivers. We do see indications that the FMCSA is fast-tracking revisions to the hours of service that could open up capacity by 5-6% in our estimate. The railroads’ poor intermodal service metrics limit the rails’ absorption of trucking freight to time-insensitive cargo. 


John Paul Hampstead

John Paul conducts research on multimodal freight markets and holds a Ph.D. in English literature from the University of Michigan. Prior to building a research team at FreightWaves, JP spent two years on the editorial side covering trucking markets, freight brokerage, and M&A.