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Fuller & Bayaan reflect on an unusual year for freight, forecast 2019

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On Tuesday afternoon, FreightWaves CEO Craig Fuller and Chief Economist Ibrahiim Bayaan hosted their monthly market update webinar for November. FreightWaves presented the webinar in partnership with Convoy. In these free webinars, Bayaan typically discusses macroeconomic data while Fuller handles freight markets and trends—in the November update, the two focused on the outlook for 2019. The agenda for the hour-long webinar included recent economic performance, 2019 outlook, trends in capacity and rates, and then regional granularities. You can listen here.

Bayaan said that while GDP growth is expected to slow in 2019, he largely agreed with forecasts estimating that rate at 2.6% next year and 2.1% in 2020. Bayaan said that he considered GDP growth rate of 2.5% annually to be ‘average’ growth for the U.S. economy. Economic expansions don’t die of old age, Bayaan reminded the audience, they’re usually murdered, and he didn’t see any areas of the economy that were troubling enough to pose an imminent threat of recession. The emergence of an exceptionally strong American energy industry in recent years had the effect of diversifying the economy, in Bayaan’s view, which he said insulates the economy from localized risks.

“That the economy has gotten a lot more diverse makes a full fledged recession a lot less likely. It’s much more likely that industrial or housing has a localized downturn,” Bayaan said. 

Bayaan went on to look at key drivers of freight demand, beginning with industrial activity. Recent performance has been very good, Bayaan said, pointing out that growth has hit multiyear highs. Year-over-year growth in industrial activity dipped recently, but the economist said that was due to tougher comps. One of the stand-out industrial sectors has been drilling and mining, which includes oil and gas.

“One of the things to keep an eye on is the recent decline in oil prices. Since the second half of 2017 through most of 2018, we’ve seen a steady increase from $40 to $75, but over the last month you’ve seen the price of oil fall off a cliff,” Bayaan said. “Over the past year, the rise in oil prices helped the industrial sector, but if the price stays low you’re going to remove one of the key supports for industrial activity in the economy.”

The break even point for many WTI producers has fallen in recent years to the low $30s/bbl and in some parts of the country to the low $20s, which should keep the market healthy for the time being. Still, “this is one of the key risk areas for the [industrial] sector,” Bayaan noted.

Fuller said that even as the cost of crude oil and diesel fuel rose over the past year and a half, Truckload Carriers’ Association benchmarking data has shown that carriers’ net fuel expense (cost minus surcharge recovery) remained flat, indicating that carriers have largely succeeded in mitigating their exposure to fuel prices.

Shifting gears to retail, Bayaan said that YOY growth has been choppy in 2018, but generally speaking it’s grown at about the same pace as the overall economy. The holiday season is now underway, and early results have been strong: Americans spent more than $8B on Black Friday alone, and Fuller said that for the first time, e-commerce sales exceeded brick-and-mortar sales. 

“That has big implications for LTL and parcel carriers,” Bayaan noted, “and it will be interesting to see how they keep up with demand.” Then Bayaan warned that the next wave of tariffs imposed on Chinese goods, beginning January 1, is expected to affect retail goods significantly more than the previous duties. At a certain point, increasing prices could form a retail headwind. On the inventory side, overall inventory-to-sales ratios have been drifting down, although that trend was interrupted by tariff pull-forward where companies brought in more inventory than they normally would.

“Prologis said their warehouse utilization rate is about 87% while the optimal rate is 85%,” Fuller said, suggesting that interior warehouse space was becoming crowded with inventory.

“We asked Convoy to provide data from their internal metrics, the Convoy Market Supply Index,” Fuller said. “It looks to me that reefer is certainly not as tight as it was a couple of weeks ago, but dry van in the South-Central region is very tight. Off the west coast, refrigerated mellowed out. Christmas trees in the Northwest are tight but that should drop off quickly. We see a lot of demand for holiday food goods.”

Bayaan said that housing was pretty disappointing in 2018, reminding the audience that this year was expected to be very strong, but a combination of high prices, rising interest rates, a shortage of construction workers and development sites had suppressed housing starts.

“Flatbed carriers exposed to construction and oil markets are probably feeling more pain than other parts in the trucking economy,” Fuller said.

“Let’s talk freight,” Fuller said. It’s been a “really unusual year. Typical summers are big; this one was huge. We had a really strong end of the first quarter, a lull in Q2 into late May, a June-July surge, summer softening, then market stabilized into September.” 

“Then we saw something really strange,” Fuller continued, “we got into October and someone turned off the faucet. Demand really started to slow down, which had implications for spot pricing and Wall Street sold off [trucking stocks]. Typically in late October and into November you see higher than average volumes, but we just didn’t see peak.”

“Asset-based carriers have been increasing the total percent of their revenues associated with brokerage, but in latter part of the year it dropped off the cliff, from 14% to 6%,” Fuller said. “What it likely means, as the market has slowed down, is that trucking companies themselves are using their organic capacity to take those loads versus buying capacity from the open market. It’ll be interesting to see how it looks after Q4 reports.”

Other topics discussed included the evolving North American automotive industry, how to use employment data to estimate trucking capacity, shipper versus carrier leverage, and the future of trailer pools for easing hours of service pain. One listener asked how we reconcile sequentially strengthening contract rates with sequentially softening spot rates.

“Spot is spot,” Fuller said, “but ‘contract’ doesn’t tell you whether you’re in first position or fifth position in the routing guide, and the variance in paying the lowest guy on the route guide could be 100%. It’s hard to look at contract rates to understand everything in the market. CEOs say they only have 5% exposure to spot, but it’s all exposed to spot, which is direction in price.”

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.