Noël Perry | Transport Futures
In the fall of 2017 we looked at 2018 as a time when upside exposure dominated. The economy seemed to be strengthening, along with freight growth. Would that continue in the coming year? The spot market was sending very strong indicators for capacity tightening and rising prices. Would the electronic logging device (ELD) mandate accelerate the increase in tightening? Would contract rates respond as spot rates already had? Or would they gently glide forward as they had during the 2014 capacity event?
Well, 2018 turned out to be a year when the answers all turned out to be on the upside.
After a modest first quarter, GDP jumped more than four percent in the second quarter, raising hopes that the full year will top 3three percent, something not seen since 2014. Freight growth responded as it usually does, also topping four percent. The ELD questions were answered almost at once, as both capacity indicators and spot rate measures shot up to record levels immediately after the ELD mandate.
The result has been a year when capacity utilization has hovered around the critical 100 percent mark, and spot and contract rates both zoomed upward. Spot rates did so first, peaking at more than 30 percent increases, while contract rates followed, now up in the mid-teens. Spot rates are now about even on a year-over-year (YOY) basis, largely due to the presence of strong, late 2017 comparisons rather than some fundamental weakening of conditions. 2018 will go down as the strongest year in the mature truckload market history.
It follows, with convincing logic, that in the fall of 2018 we are looking at 2019 as a time when downside exposures dominate. The case for that direction is both theoretically solid and factually supported. The theory is simple. The truckload market and its driving economy are cyclical events, always moving up and down. With 2018 clearly established as a peak upside event, a move downward is highly likely.
Markets rise – then fall – like waves in the sea. The factual case comes from the spot market data provided by Truckstop.com.
The capacity data peaked at the beginning of the year and has fallen steadily since, now reaching two-thirds of the way back to normal. The pricing data has been falling since early July and is currently one-third of the way back to normal. The lag between the capacity and price data is normal.
2018 will go down as the strongest year in the mature truckload market history.
We also know that spot market results are reliable leading indicators for the contract market. If spot rates are falling now, contract rates should begin falling soon. One concludes, as the bias for forecasting 2018 was upward, the bias for forecasting 2019 is downward.
That conclusion leaves us with the same issue we faced a year ago. We are pretty sure of the direction, but we don’t know the amount of the change. The question applies to both economic and industry dynamics.
On the economic side, we have a very strong economy by recent standards. While few, beyond the President’s staunchest supporters, are forecasting a continuation of the four percent growth we got in 2018, most see a relatively strong 2.6-2.9 percent range for the year. Others, including myself, are concerned about both the age of this recovery and the frightening collection of macro-economic threats. We see a 2.3 percent year, the average for this recovery, as a favorable outlook with lower numbers likely late in the year. Either outcome implies downward change for trucking markets. How much depends on the curious dynamics of our markets following very strong years like 2018.
We know that regulatory drag, a substantial contributor to 2018’s strength will not be an issue in 2019. Yes, ELDs will still be with us, but operators will have adjusted to them. Those adjustments will likely be enhanced by the friendly policy of the Trump Administration. So, we know, as with the economy, that the direction will be downward regarding capacity tightness and rates. The amount of downward pressure will probably have more to do with the puzzling lags between the capacity pressures and rates.
My best guess is that the delays in adjustment of rates will persist through most of 2019 making it a year halfway between the records of 2018 and normalcy. Importantly, even such an optimistic view will create YOY growth rates way below 2018 levels. I have no growth for spot rates and only three percent for contract rates. Note, however, that both of those numbers assume the maintenance of much of the price gains from 2018.
Here’s the Big 2019 Takeaway
Industry conditions will remain quite favorable to carriers at least through the first half of 2019. Profits will remain high and equipment sales robust. However, as the year progresses it will feel much worse than it is because of the inevitable comparisons to 2018. Just as our perceptions of 2018 were influenced upward by comparisons of weak numbers in 2017, our perceptions of 2019 will be influenced downward by comparisons to strong numbers in 2018. The industry’s ability to process such confusing signals will be strongly biased by our most recent memories – that of a spectacular year.
In late 2017 many shippers were still in denial about the growing capacity shortage. In late 2018 many carriers will be in strong denial of the receding capacity shortage. Perhaps the shock effect of the change in YOY numbers will be a good thing because the outlook I have made here is the optimistic case.
A year ago, I was sandbagging my price forecasts due to strong market resistance to the upside predictions I wanted to make. It turned out I got the direction right, but missed the magnitude on the small size. Could be that I have made the same cautious mistake this year, albeit in the opposite direction. Industry participants should keep that uncertainty well in mind. Flexibility among the market participants remains an attractive virtue in an inherently volatile market.
Noël Perry is Principal with Transport Futures, based in Cornwall, PA. He may be reached at 717-270-5329.