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Will retail season deliver?

FreightWaves’ SONAR chart of the week (August 4, 2019 - August 10, 2019)

(Photo credit: COSCO)

Chart of the Week: DAT Dry Van Spot Rate — Los Angeles to Dallas, Freightos Daily Container Rates — China to North America West Coast (SONAR: DATVF.LAXDAL, FBXD.CNAW

JP Hampstead here, filling in for Zach Strickland, who is making his annual pilgrimage to Wrigley Field. Godspeed, Sultan.

Data about the health of the United States goods economy is decidedly mixed. On the one hand, manufacturing PMI numbers and business investment are weak. On the other hand, consumer confidence has maintained some strength as personal incomes rise and retail spending has held up.

The Trump administration’s newly announced tariffs on Chinese imports, effective September 1, have thrown a monkey wrench into the plans of shippers and their logistics partners, who have to decide whether pulling freight forward is feasible and whether they think there’s a risk of an increase in the 10% tariff, perhaps to 25%.

It’s unclear what effect the new tariffs will have on spot rates. A short-term rush of freight that tightens capacity and spikes rates could materialize, but so could a hit to consumption and volumes.

Trucking carriers and freight brokerages with exposure to outbound Los Angeles spot freight are effectively making a bet on the United States’ peak holiday retail season. Enormous volumes of retail freight — apparel, electronics, home goods, and toys — are imported from Asia every year through the ports of Los Angeles, Long Beach, New York and Jersey, and Savannah. 

Retail shippers are the biggest importers of containerized freight: Walmart, Target, Home Depot, and Lowe’s top the list, with Dole Foods a close fifth. When that freight hits American shores, intermodal and trucking spot rates peak, even though carriers anticipate the seasonal surges and position their assets ahead of time. 

In both 2017 and 2018, trucking spot rates hit close to $2.25/mile from Los Angeles to Dallas by December, when demand for transportation was most urgent. At the moment, they’re significantly lower, at $1.50/mile. Meanwhile, on the ocean, steamship lines’ General Rate Increases have not held up, with prices deteriorating back to prior levels relatively quickly after the hikes. Box rates have only slowly gained momentum as alliances took capacity off the Transpacific services in anticipation of peak season. If a significant pull-forward occurs, expect one of the first signals on spot rates for Transpacific containers.

This year has been different: weak freight demand combined with overcapacity — especially of dry van equipment — to plunge rates far below 2018 levels. It stands to reason that carriers hauling outbound freight from the Los Angeles and Ontario markets may still enjoy some seasonal rate inflation, but the magnitude is unclear.

Rates will go up, but how high?

An observer of the goods economy could do worse than by dividing it into two large buckets: industrial and retail. Data from the industrial side has looked weaker and weaker. The Purchasing Manager’s Index, a monthly survey of manufacturers where a number above 50 indicates expansion and a number below 50 indicates contraction, slowed to 51.2, its lowest level in three years. It was the fourth consecutive month of PMI declines. 

On the other hand, the retail side of the goods economy has a pretty good set up. Consumer confidence is healthy and personal income growth is accelerating. Personal income growth is essentially wage growth plus investment growth: the blended number is growing above 4 percent year-over-year.

The decoupling of manufacturing activity from retail — and remember that consumer spending is responsible for approximately 70% of U.S. gross domestic product — means that the fourth quarter could be retail’s time to shine, despite freight demand that lagged 2018 for most of the year.

Another development last week will play into demand for transportation services this peak season and especially rates out of Los Angeles. President Trump announced new tariffs of 10% on $300 billion worth of Chinese imports beginning September 1. Most of the goods affected are consumer goods.

A significant pull-forward effect may materialize where shippers try to beat the 10% tariffs by rushing freight onto steamships. Shippers may also anticipate those tariffs rising to 25%, as happened with previous rounds of tariffs on Chinese goods. 

If that happens, the demand for transportation services out of major West Coast ports will increase dramatically: although warehousing markets have recovered a little from last year, there isn’t much slack. Los Angeles vacancy rates are around 2 percent, for example, well below the national average of 4.5 percent, which itself is still tighter than the long-term average of 5.8 percent.

Whoever went long on the Los Angeles to Dallas November futures contracts last week may be feeling a lot better about their aggressive bet right about now. Time will tell how the freight markets play out.

About the Chart of the Week

The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real-time. Each week a Market Expert will post a chart, along with commentary live on the front-page. After that, the Chart of the Week will be archived on for future reference.

SONAR aggregates data from hundreds of sources, presenting the data in charts and maps and providing commentary on what freight market experts want to know about the industry in real time.

The FreightWaves data science and product teams are releasing new data sets each week and enhancing the client experience.

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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.