Tariffs not enough to derail trucking economy

First in a series of FreightWaves’ Market Update webinars highlights economic outlook, impact of ELD mandate, and areas of freight strength

While there is a lot of noise surrounding tariffs and potential trade wars, FreightWaves’ Chief Economist Ibrahiim Bayaan isn’t as concerned as some that the noise will result in action that could derail the economy.

“The size of these tariffs and the goods they are being placed on are really not big enough to derail the [overall economy]; they really impact specific industries but [won’t significantly hurt] the broader macro economy,” Bayaan said during the inaugural FreightWaves’ Market Update webinar on Thursday. “What you do worry about is how these tariffs spill over into the rest of the economy. Just thinking about how the growth of the economy is, much of it is driven by how consumers feel about the economy, how businesses feel about the economy.”

Consumer confidence remains strong, but Bayaan, who was joined on the webinar by FreightWaves CEO Craig Fuller, noted that if talk continues, business may start adjusting their plans, particularly as they relate to inventories.

“What you will find is that businesses will start to hedge their bets,” he said. “As long as the tariffs stay where they are now and don’t escalate, I think the overall macroeconomic impact will be small.”

If businesses get concerned, especially about tariffs on goods imported from China, they may adjust tactics. “Companies may start to build up their inventories just in case,” Bayaan said. “If you assume these products you import from China are going to have a 25% tariff on them, you might build up inventory so you have time to figure out where you are going to source them from [in the future].”

The webinar is part of a new monthly series from FreightWaves that will highlight market impacts. This month’s presentation, titled “Market Update: Is this the end of just the beginning? What the data is telling us about the freight market,” focused on data points and what that data is suggesting for the freight markets for the remainder of 2018. The answer: A lot of good for carriers, and not so much for shippers who will continue to be faced with higher prices.

All of the data used was pulled from FreightWaves’ own SONAR platform, which aggregates hundreds of data points into a single intuitive dashboard to help brokers, fleets and shippers better prepare for and navigate the freight markets.

Tariffs were a big topic, but not the only one. Bayaan highlighted many of the positive economic data points that suggest strong second quarter GDP when announced later this month.

“Right now, the economy is kind of firing on all cylinders heading into the third quarter,” he said.
“The second quarter is likely to be the strongest quarter of the year. The third quarter will still be strong, not as strong as the 4.2% GDP [growth] we expect in the second quarter, but still good.”

That strength, pending something unexpected, should continue. The outlook for 2019, though, will be start to “return to normal,” Bayaan noted, pointing out that 2018 has been helped by a number of tailwinds.

“Right now, the economy has a number of things helping it,” he said. “We are still kind of benefiting from the tax cuts and there were a couple of one-off [events] that helped trade [during the second quarter].”

Off of trade, another key topic was capacity. It should remain tight, Fuller added, following up on Bayaan’s answer to a question on whether more drivers were being added to the workforce.

“More drivers are being hired but not enough to ease the capacity crunch,” Bayaan said. “I suspect for the rest of this year we are going to be in this very tight capacity environment.”

That environment has continued to push rates up, with long-distance rates up 9% year-over-year, and forcing shippers to look at possible alternatives to moving freight.

“If you are noting high rates of price inflation in trucking, shippers are beginning to investigate whether they can move freight via other modes of transportation,” Bayaan said. “What this does is it starts to increase the demand for intermodal services and that is having a spillover effect on pricing.”

Intermodal pricing is up over 15% year-over-year, he noted.

The capacity crunch is being driven in part by the lack of drivers. Bayaan pointed out that the industry is now adding jobs at a higher rate than the overall economy, but it just isn’t enough. Finding drivers is also being impacted by the overall low unemployment rate, with many industries, including construction, manufacturing, and warehousing, having trouble finding workers.

Fuller said that warehousing employment “is on fire right now” with employment in that sector up 52% since the end of the Great Recession, according to SONAR data. By comparison, trucking employment is up 10% and retail 7% during that timeframe.

He attributes that warehouse growth to e-commerce as Amazon and other companies selling online have adjusted strategies to move facilities closer to end users and shorten delivery times.

“One of the questions we get often is whether the growth of Amazon is actually increasing or decreasing the amount of freight in the market,” Fuller said. “It actually increases the amount of freight in the system, not detract from it.”

Bayaan agreed, saying that e-commerce freight is adding “an additional leg of transportation because they have to move the goods” closer to the end consumer, and then to the final destination.

The strong labor market is one of the continued reasons for the overall economy growth, Bayaan said. With hiring still happening fast and unemployment, while up in June, remaining at 4%, it continues to provide financial might to consumer pocketbooks. Retail sales were up 6% year-over-year in May after taking an early dip in January/February. They have risen each month since February, and even February was up 4% year-over-year.

Even with all the economic growth, inventories have steadily risen, which is generally a negative for freight outlooks. But, in this case, Bayaan said that inventories have not risen out of line with sales. The inventory-to-sales ratio has been trending down and remains below what would be expected in a high-demand environment, at 1.35.

“The relationship between the two has actually been falling so what this is telling you is that the companies have very lean inventories and when you have lean inventories, that means they are turning over faster and faster and this puts [added] pressure on freight,” Bayaan noted. Strong demand across the board “creates a high demand environment for shipping in the U.S. market.”

Industrial production has recovered nicely from its dip in 2015-2016, Bayaan pointed out, due in part to a “resurgence in oil prices which has helped with drilling,” rising 3% year-over-year.

Fuller noted that each new oil rig added brings online about 1.1 million truck miles.  “As oil goes up, to a point … it actually increases demand for trucking services,” he said.

Larger carriers are less affected by this as they pass “along fuel surcharges, so [it’s] the shippers that are picking up the bills.”

The oil and agricultural markets are driving strong freight market demand in the Missouri Valley and Southeast, right now, Fuller said.

While those markets are strong right now, the West Coast has cooled. That should change, according to SONAR data, which tracks container shipments out of China. Fuller explained that container volumes out of China typically are reflected in pricing and volumes on the West Coast about four to six weeks later.

“This week we saw a very violent move up which suggests shippers just don’t care [about higher container prices], they are going to move goods,” he said. “We expect in four to six weeks we will see high demand for trucking services heading into peak season.”

Container prices have spiked to $1,661 on the Freightos Baltic Index.

A few other data points the pair touched on included overall trade, which is up between 8% and 9% year over year, continued improvement in housing numbers, and firming in used truck pricing. With the backlog of new truck orders at eight to ten months right now, Fuller said his team is looking to the used market to see if there is spillover there.

“We’re starting to see a little bit of firming in used truck prices,” Fuller pointed out, noting that a 3-year-old used Class 8 tractor is now going for an average of $62,654. “That’s still below the 2015 numbers and we’re not seeing a large mass of independents adding trucks yet. They are adding trucks, but not at levels that [affect the overall capacity].”

Fuller also noted the impact the hard ELD enforcement date of April 1 has had on capacity. The result is that he doesn’t think it removed the capacity that people expected. What he said SONAR data is indicating is a new reality for carriers and shippers in the types of freight they choose and the rates at which they are willing to haul it which is leading to more drive time for drivers.

“The capacity constraint is less about how many miles the load is going and now how much time it will take,” he said, noting that data shows that beginning in March, the number of hours the average driver is driving starting going up. Prior to March, the average daily driving hours was 6.45 hours per day, according to SONAR data with top-performing drivers averaging 6.8 hours. Starting in March, that daily driving number started creeping up and is now at 7 hours of daily drive time.

By itself, the data may not indicate more effective use of driver time, but Fuller said that correlating the HOS data with FreightWaves’ Tender Reject data (the number of electronically transmitted loads not being accepted by a carrier) shows that carriers are being more selective about what freight they haul, particularly freight in the “tweener” lanes.

The Tweener Tender Reject Index (loads traveling 451 to 800 miles) shows rejections ranging from 27% to as high as 34%. That means that 34% of all loads in this range distance are not being accepted by carriers. What carriers are accepting are more local loads, with the Local Tender Reject Index (1-99 miles) sitting at just 8.5%.

“Now that ELDs [are in effect], it means drivers are much more sensitive to the types of loads they take,” Fuller said. “There is very little pricing pressure in the local, short-haul market and more pressure in [the tweener market]. Where you see high tender rejections, you will see that reflected in the pricing data.”

The impact of more selective freight choices is better driver utilization, as noted in the higher average drive times.

“As we moved into the April 1 hard mandate, we can see that drivers were starting to maximize their hours,” Fuller explained. “What that meant was drivers were being more selective about what freight they were picking.”

Concluding the inaugural webinar, neither man sees any near-time risks, short of an all-out trade war, upsetting the current market. Fuller further suggested that spot rates should remain stable for a bit short of some sort of shock to the system, such as the hurricanes from last year that jolted rates.

“If there is any kind of shock to the system, like we had with the hurricanes last year, that could send spots rates through the roof,” he said, while predicting continued capacity tightness, strong rates and continued economic growth.