Where is the Freight Transportation Industry Headed in 2020?

2019 in Review

After the hot freight market and record profits of 2018, many trucking companies added trucks and drivers to keep up with the expected shippers’ capacity demands in 2019. An index published by the Institute for Supply Management dropped to 47.2 in December, the lowest reading since June 2009 and the fifth straight month of contraction. A reading below 50 indicates the manufacturing sector is contracting. In 2019, excess truck capacity was met with a “manufacturing recession.”

One key trade flow indicator that maritime experts and world economists examine, is the volume of the eastbound trans-Pacific trade lane — the regional trade lane for ocean containers that originate in East Asia and end in the United States. This trade lane accounts for 40% of the world’s gross domestic product (GDP).

The flow of containers in this trade lane has marked a plunge in weakening relations. U.S. exports out of the Port of Los Angeles (the end of the lane) is down 12 consecutive months. China imports have dropped significantly. The ripple effect of this change not only hit the maritime system but the trucking and rail systems as well since there was less freight to move.

Excess truck capacity, coupled with soaring insurance and equipment costs, and a manufacturing recession, were among the main reasons some fleets did not survive 2019. A sharp and quick tightening of U.S. truck capacity that pushed rates up in 2018 (in all modes), was followed by a dramatic drop in spot truckload rates in 2019.

Hundreds of motor carriers, both large and small, fell victim to last year’s freight recession. Those carriers that relied on the spot market for freight, which tanked in 2019, caused some owner-operators to shutter operations and go to work as company drivers until economic conditions improved. The trucking industry lost some major players in 2019 such as Celadon and New England Motor freight.

What’s Ahead for 2020?

The New Year is beginning with a military dispute with Iran, Impeachment hearings and the expected ratification of trade treaties between the U.S. and China, and between Canada, the United States and Mexico. A recent Stifel report stated that “the signs are mixed for trucking. Expectations for an environment marked by weaker freight demand, pressure on profitability, higher-priced diesel and falling truck and trailer production mix with lingering talk in some circles of a possible recession.” An uncertain US political environment could also chill business outlooks.

U.S. manufacturers expect to reduce capital spending in 2020, a trend that could limit a rebound in the sector even as companies see profits improving. A plurality of companies, about 38%, cited domestic economic conditions as the main reason for adjusting capital-spending plans. Factory executives forecast capital expenditures will decrease 2.1% in 2020, which if realized would be the first annual decline in 11 years, according to a semiannual survey from the Institute for Supply Management released Dec. 9. That compares with a reported increase of 6.4% in 2019. Managers at nonmanufacturing firms expect a 1.3% rise next year, slower than 2019’s increase of 2%.

While the group’s monthly data show the manufacturing sector is contracting, the report indicates a turnaround may begin in the first half of 2020 and pick up later in the year. Factories remain in a fragile position after tumbling into recession early in 2019, though concerns have abated that the weakness will spread into the broader economy amid strong job gains.

Even so, companies across the economy held off on long-term investments amid uncertain trade policies, escalating tariffs and a moderating growth outlook. The pullback weighed on economic growth in 2019.

The US – China phase 1 agreement will provide some relief to manufacturers and other businesses rocked by trade uncertainty, but it leaves most of President Trump’s tariffs on Chinese goods in place. As a result, American manufacturers and other businesses that import parts and components from China will continue to pay higher costs to procure them. While China may buy more US agricultural products after the signing of the agreement, they have been actively looking for other sources of supply.

“The premise that the manufacturing slump is over because of the phase-one deal is misguided,” Gregory Daco, the chief United States economist at Oxford Economics, wrote in emailed remarks. “Trade uncertainty remains elevated with tariffs on two-thirds of our imports from China, global activity remains soft, and the dollar remains strong.” Mr. Daco added that “these headwinds will continue to restrain manufacturing output in 2020.”

There were more than 12 million truck crossings along the Canadian and Mexican borders in 2018 alone, hauling more than $772 billion worth of goods. The signing of the USMCA trade agreement will stabilize trade flows and be a positive development for the transportation industry in all three countries.

Nevertheless, there is a 30% chance of a recession in 2020. The first half of 2020 is expected to be stable; there are some economists who are forecasting a recession in the second half of the year while others expect an improvement.

Transportation Sector Outlooks

LTL Sector

The year 2019 was a mixed bag for the LTL sector. The industry’s top LTL carrier, Old Dominion, faced declines in daily revenue and tonnage, but produced an excellent operating ratio. YRC’s results are a concern. Some other LTL carriers, NEMF, LME, did not make it through the year. After a year where industry volumes fell and pricing held in, pricing discipline will be tested if volumes contract. There are rumblings of further consolidation in this sector. On a positive note, Ecommerce activity will continue to grow, a big plus for the small parcel and LTL sectors.

Truckload Sector

“The truckload sector, while faced with excess capacity, weak pricing, and generally soft volumes, should start to see a fundamental inflection as we move deeper into 2020,” according to Goldman Sachs analyst Jordan Alliger who pointed to a “bottoming of the industrial weakness” as the Institute for Supply Management’s (ISM) Purchasing Managers Index (PMI), a survey of manufacturing supply executives, has hit a low for the past decade. More likely, rates will rise slowly, beginning in 2Q20, as capacity is rationalized, and demand stays soft.

Further, Alliger believes that truck capacity could be normalizing as new truck builds are forecast to decline “sharply” in 2020. “Much of the surplus should burn off as we exit 2020,” Alliger said. More specifically, he believes a reversal in the excess capacity dynamic is likely in the third quarter. At the same time, DAT Solutions, which operates a load board, forecast truck availability to be more constrained in 2020 compared with 2019, and anticipates a rebound in spot market rates — with van rates up 4% to 6% in the second half of 2020. Contract rates should climb about 2%.

Intermodal sector

With the railroads finished with their cuts to intermodal lane capacity, and the actions taken on service improvements, coupled with a trade deal with China, to be signed in the middle of January, there is an opportunity for intermodal to grow faster than the market. Of course, this will be tied to how quickly the excess truck capacity exits the market.

As a final reminder, this is an election year in the United States. Mr. Trump has made reviving United States manufacturing his central economic mission, and the president embarked on a global trade war to help rewrite deals that he says put American workers at a disadvantage. Over the past two years, Mr. Trump has imposed tariffs on $360 billion worth of Chinese goods and placed levies on foreign steel and aluminum, washing machines, and solar panels.

But American manufacturing has stalled, damaged by the trade war, global economic weakness and a strong dollar, which makes American goods more expensive to purchase overseas. President Trump will likely take action to bolster his election odds, if the US economy falters in any way. Happy New Year!

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