The freight industry experienced continuously loosened credit standards over the last five years, but the rising concerns of an economic downturn are now causing lenders within the trucking industry to start tightening credit standards. In many ways, this could be a tell-tale sign of things to come, as receding volumes and falling per mile rates signify an economic storm that is due to make landfall over the freight sector.
FreightWaves spoke with Robert Misheloff, president at SmarterFinanceUSA, to understand the warning signals that can be spotted within the freight industry, and how the tightening of credit standards could possibly be the start of a domino effect.
“We work with around 25 different sources that fund trucking purchases for owner-operators and small fleets. Our funding sources tell us they are tightening credit standards now because they do not see the performance they expected out of their trucking portfolios,” said Misheloff. “This is because the defaults are rising and delinquency rates are rising. From the lender’s standpoint, it is not necessarily about economic forecasts but about people not making their payments like they used to.”
The market has seen a significant volume reduction due to several worrying macroeconomic trends, like the U.S.-China trade tariffs fallout. “There’s simply a lot more competition for loads now. A year ago, guys could run their truck as many hours as they could stay awake. But with the ELD mandate and the economic slide, the small fleets are finding it hard to stay afloat in the market,” said Misheloff.
The Bureau of Labor Statistics’ producer price index (PPI) has shown a steady decline in truckload and less-than-truckload (LTL) rates since late 2018, with rates falling steeply in 2019. Long-distance truckload rates fell by 1.3 percent month-on-month in July, while LTL rates fell by 1.5 percent in the same time period.
This can also be seen in FreightWaves SONAR’s outbound tender reject index (OTRI) and inbound tender reject index (ITRI) charts. They show the depths to which the rejections have fallen – signifying how loose capacity is and the inability of truckers to control the rates at which they haul freight.
“About a year ago, you might have heard of truckers being paid $2.10 to $2.25 per mile, with fleets having healthy operating margins of around 25 percent. But it has dropped now, with truckers seeing as little as $1.80 per mile, taking away a huge chunk of the profit and the wiggle room they had for an emergency – like equipment breakdown or any such unexpected event,” said Misheloff.
With some lenders looking to get out of the freight market, securing credit will become more arduous for smaller trucking companies. “In the short-term, the trucking recession could get worse. For instance, there were a lot of fleets that saw the oil industry to be very lucrative, especially in hauling frack in Texas. But the situation is not what it once was, and the guys hauling oil are no longer doing it. But they still have a payment to make,” said Misheloff.
Driven by desperation, these truckers now shift to hauling flatbed or dry vans, which in turn puts downward pressure on the per mile rates, because there is more capacity in a market that already has lower volume to haul. However, Misheloff contended that this is the cyclicality of the market and it will eventually end up correcting over time.
“This is a cycle that feeds upon itself. As it gets tough for the lenders, they tighten credit standards, which will lead to the weaker hands leaving the business after a while, bringing the demand for capacity back again,” said Misheloff. “After this period is played out, the per mile rates will start to rise once more.”