The Cass Freight Shipments Index declined 5.9% in October, the 11th straight month of year-over-year declines.
The Cass Freight Index report, authored by Donald Broughton, founder and managing partner of Broughton Capital, provided an ominous outlook for freight demand, stating that the rate of decline is increasing and that “two years of growth [has been] erased.” The year-over-year decline in October was the highest since July and nearly twice the rate of decline seen in the previous two months, pushing Broughton to reiterate his belief that the data is “signaling an economic contraction.”
Stating that freight flows are a leading indicator of the direction of the economy, he added, “We see a growing risk that GDP will go negative by year’s end.” He called out weakness in transportation spot markets, lower demand in airfreight and rail carloads as well as declines in commodity prices and interest rates as the catalysts for negative GDP.
The data used in the Cass indexes is derived from freight bills paid by Cass Information Systems, a provider of payment management solutions, which processes more than $28 billion in freight payables on behalf of its clients annually.
Carriers provide constructive dialogue around peak season
The near-term outlook from management teams of truckload (TL) carriers at a pair of transportation industry investor conferences, while subdued, was less dire.
Derek Leathers, president and CEO of Werner Enterprises Inc. (NASDAQ: WERN) reiterated the company’s expectations for a decent peak season at the 2019 Stephens Investment Conference in Nashville. He said the company experienced sequential improvement in demand throughout the third quarter of 2019 and that trend has continued into the fourth quarter. Further, the company’s prior conversations around peak season capacity needs with their customers have materialized into contracts and shipments as expected and even “a little better” than expected in some instances. Werner is expecting a peak season more like that of 2016 or 2017, not nearly as robust as last year’s.
Schneider National (NYSE: SNDR) president and CEO Mark Rourke said, “Peak season has arrived.” He added that while they aren’t seeing as many premium, special project requests as they would typically see this time of year, they are seeing some elements of seasonality.
Eric Fuller, president and CEO of U.S. Xpress Enterprises Inc. (NYSE: USX), said the company expects a “muted peak season.” Asked his opinion of current freight demand and the likelihood of a traditional holiday-related shipping surge, Fuller said there will be a peak shipping season but that “this time of year, we should be fielding a lot more demand.” He went on to say that current conversations with the company’s customers are slightly more cautious when looking toward 2020 and noted that tariffs and the upcoming presidential election are the primary concerns.
Cass’ pricing expectations
Declining freight volumes and increased capacity are weighing on transportation prices, both spot and contractual. Further, lower fuel prices have resulted in lower fuel surcharge revenue. As such, the Cass Freight Expenditures Index has started to contract. May marked the first month that the index went negative year-over-year for this cycle. Those declines have accelerated over the past two months, with both September and October more than 4% lower.
In addition, the Cass Truckload Linehaul Index, which excludes fuel, went negative on a year-over-year basis in August (-2.6%). The index remained lower in September (-2%) and saw the declines continue in October (-2.5%). Broughton expects these declines to continue “in coming months.”
TL carriers see rates firming in mid-2020
The pricing conversation from the TL carriers at these conferences appears to be a little more in-line with Broughton’s freight rate expectations, as most management teams are expecting a tough contractual bid season in the beginning of 2020.
Leathers said the only real divergence in this peak season and prior peak seasons is that rates are under pressure for this year’s peak loads. He believes the 2020 bid season will be difficult in the first half of the year until the excess capacity leaves the industry. He expects this to happen rather quickly, citing several headwinds facing the industry: 700-plus carriers have already failed in 2019; many will struggle with license and tag renewals at the beginning of the year; new tractor orders below historical replacement levels; rising insurance premiums; the Drug & Alcohol Clearinghouse; and the potential for hair follicle testing.
He expects that these obstacles will be too large for most fleets to overcome and that more will fail or decide to run fewer tractors. Leathers believes the capacity correction will take shape by the second half of 2020, leading to better pricing. He said that while these headwinds will not arrive in time to cut capacity before bid season begins, they will be visible during contractual rate negotiations.
“I’m not saying we’re going to be positioned great as bid season kicks off, but you’ll be able to see the changes that are taking place one way or the other by the time that bid season really gets under way, and if we see capacity continuing to leave, that story is there,” Leathers said.
Fuller said some of U.S. Xpress’ customers are pulling forward the date of their bid season in attempts to take advantage of the current weakness in the market. However, he said some shippers are doing this as they believe that the capacity dynamic will change sooner rather than later, swinging back in favor of the carrier.
Schneider National is gearing up for a “highly competitive” bid season.
Intermodal outlook
The Cass Intermodal Price Index, which includes fuel surcharges, has continued on its positive streak for more than three years now. However, recent increases have basically flatlined year-over-year as September (+0.1%) and October (+0.4%) are well off the mid single-digit increases recorded in the spring. Again, the year-over-year comparisons are more difficult after three years of consistent increases, but intermodal rates are designed to capture purchased transportation rate increases from the railroads, which have moved higher over the same period.
Broughton expects intermodal pricing to decline in the near term. “Similar to our warnings about the Truckload Index earlier in the year, we began predicting the Intermodal Pricing Index will also go negative in coming months and remain negative through the first half of the 2020,” he concluded.
Rourke noted that excess truck capacity is weighing on spot TL rates and driving intermodal volumes lower. He expects to see “some pressure” on intermodal pricing, but believes that rail costs will moderate moving forward.
John Roberts, president and CEO of J.B. Hunt Transport Services Inc. (NASDAQ: JBHT), said the company has seen some stability in intermodal volumes recently. In the third quarter of 2019, J.B. Hunt saw intermodal loads decline only 0.5% year-over-year, much better than the rest of the domestic intermodal industry, which reported mid- to high-single-digit volume declines. The company’s head of Intermodal Services, Darren Field, noted “significant demand” on the West Coast.
The company has enjoyed relative strength in intermodal volumes in 2019 compared to its peers, as it has been able to recapture market share lost in 2018 as it increased intermodal rates. With regard to peak season, their outlook remains unchanged as their customers that normally show up inquiring about incremental seasonal capacity to accommodate the season’s higher shipping demand have done so.
Going into 2020, they said they expect no real change in the market. Asked whether the freight market accelerates, decelerates or remains stable in 2020, Roberts said, “We don’t see any catalyst for change. Going into 2020, we are going to assume some status quo metrics around demand changes.”
