What is a recession?
One of the textbook conditions for recession is two consecutive quarters of contraction in a particular metric. The status is most typically applied to gross domestic product (GDP), a measure of overall economic output, to gauge whether an entire country’s economy is in a recession. However, the headline GDP number does not apply to all industries, which may be performing better or worse than the overall economy to all industries. Certain sectors — freight included — may be performing better or worse than the overall economy.”
How is the freight industry different?
Economic segments that typically aren’t large enough to tip the overall U.S. economy into recession impact the freight industry disproportionately. For example, heavy machinery and components tied to the industrial and construction sectors can significantly affect freight volumes, while economic activity linked to the service sectors can be enough to uphold economic expansion. Large sectors of the economy that generate relatively little freight volume include education, technology and health care. In addition, while consumer spending — the largest part of the economy — generates freight activity, a massive portion of consumption is of products that have been miniaturized or otherwise generate little freight demand. Consider how many iPads could fit in a 53-foot semi-trailer.
How do we know if the freight economy is healthy?
Freight volumes are a real-time indicator of demand while seated truck availability is likely the best way to visualize the capacity to handle it since truckload is the largest domestic transportation sector. When there are consecutive quarters of decline in freight volumes, this can be considered a freight recession. This typically means that both freight volumes and tender rejections are low, suggesting there is overcapacity in the industry. Low tender rejection rates are indicative of spot rates that are low enough to encourage the acceptance of previously agreed-upon contract rates, which typically lead to lower contract rates during the next round of negotiations. Those market conditions are associated with truckload carriers seeing their margins diminish and portions of their fleets going idle.
A key segment to monitor to measure the health of the freight market is manufacturing. A contraction in year-over-year growth for industrial production typically coincides with declines in freight volumes. Another way to evaluate whether we are in a freight recession is to look at railroad traffic volumes, excluding coal and grain (which are impacted by noncyclical factors). After excluding coal and grain from railroad traffic, what’s left is a fairly representative sample of the freight economy.