FreightWaves Chief Economist Ibrahiim Bayaan and FreightWaves Chief Analytics Officer Dean Croke explained what the data is saying about the freight market in this week’s monthly market update. The update, sponsored by Convoy, tackled topics like hurricane updates, the holiday season outlook and trends in capacity and rates.
Weather update
While this hurricane season was originally predicted to be relatively quiet in the Atlantic, it turned out to be the most active hurricane season on record for the Atlantic and Pacific combined. The Pacific saw record-setting accumulated cyclone energy with Lane, Rosa, Sergio and Willa, and the Atlantic was surprised by the appearance of both Florence and Michael. FMCSA emergency declarations are still active for some affected locations through Nov. 9.
Moody’s estimates Florence ended up costing $38 to $50 billion, but impacts on the freight markets were minimal and localized. Many shippers moved their inventory in advance, and trucks not involved in relief efforts moved to other markets.
“Hurricane Florence, notwithstanding the excessive cost and the loss of life, the effect on freight markets was minimal and localized from a carrier, shipper and broker perspective,” Croke said.
Moody’s estimated damage costs for Hurricane Michael came in lower at $15 to $21 billion in property damage and lost economic output. Recovery is still underway from Michael, with about 27,000 people still without power and large amounts of debris left to be cleared.
Trucks involved in relief efforts are still experiencing issues with some local roads, like downed trees and power lines.
“The damage to the trucking industry was significant for those carriers that couldn’t get their trucks out of the way,” Croke said.
Freight market update
“We kind of think this might be the calm before the storm,” Croke said. “We’ve got some mixed signals here. What we wanted to talk about was possibly a strong case for both bearish and bullish outlooks on the Q4 market.”
FreightWaves SONAR data points to the freight market slowing down as capacity increases and freight volumes decline. Volume was down about five percent year-over-year, while new truck orders surged and used truck prices remained strong. Tender rejections are falling faster than volumes, suggesting increased capacity.
One could also make a case for a more bullish outlook, pointing to record levels of west coast port volumes and container pricing increases.
“This could be normal seasonality, but there are a few factors we need to pay attention to, such as building inventory ahead of the Jan. 1 tariff deadline, and how this might play out as the 2019 peak season begins and pulling forward of the Chinese New Year order cycle that generally happens in early new year may well be happening now” Croke said.
The third quarter is expected to be another strong quarter for consumer spending, big contributions from inventories and solid quarters or government spending. The third quarter, however, will likely also see trade weigh down growth, no gains in housing activity and potential hurricane impacts, according to the presentation.
Industrial production topped five percent growth year-over-year , with the impact of Hurricane Michael estimated to be low at -0.1 percent. At the same time, manufacturing growth is at 3.5 percent, a multi-year high/
Oil prices have stabilized recently after surging earlier this year. Geopolitical issues in Venezuela and Iran have restricted supply. Meanwhile, pipeline capacity issues have affected U.S. supply.
Housing struggled again in September, with hurricane conditions likely to blame in parts of the South region.
“Housing is one of the areas in the economy that you actually do see some hurricane impacts,” Bayaan said. “When you look at how Hurricane Florence and Hurricane Michael affect the overall economy, I think the impact will be minimal, but housing is particularly sensitive to weather conditions.”
There is likely some pent up activity building going forward, but it is difficult to predict when it will be released, with much of that depending on weather conditions throughout the rest of the fall. However, Bayaan noted housing was struggling before the hurricanes came along thanks to longer-term shortages of developed lots to build on and difficulty finding workers. These impacts will continue to be felt in the housing market even as hurricane factors let up.
Perhaps not surprisingly, as housing struggled in September, flatbed capacity increased dramatically.
“This could be the early signs of a slowing economy because flatbed is so much tied to housing and construction,” Croke said.
Capacity increased for all lengths of haul and equipment types, with the exception of refrigerated, Tender rejections in the refrigerated market have been inverse to the increase in flatbed capacity.
Retail growth remained positive for the eighth straight month, with little evidence of impact from the hurricanes.
The trade deficit has continued to widen as exports fall and imports grow, due in part to tariff-related fluctuations.
“You’re starting to see U.S. business that are typically importing things from China beginning to import more than they normally would right now and just storing it in their inventory,” Bayaan said. “What this means is that, as you get to the other side of some of these tariffs being implemented, here is probably going to be a drop-off in import volumes are well.”
Global growth conditions have become an issue for the U.S. going forward, and negotiations with China have deteriorated.
In terms of container prices, China to North American west coast prices have climbed considerably since April and prices from China to North American east coast were increasing until late September but now appear to be softening. Container volumes are high.
Despite national freight tender volumes softening, the LAX market appears more bullish, which could be the result of normal seasonality or could be impacted by the pre-ordering of inventory as a result of Jan. 1 tariffs.
Trucking hires continued at a solid pace in September, despite slowing job growth in the wider economy due to hurricanes. Year-over-year growth is trucking is now 2.2 percent higher than at this point last year, and the lack of drivers continues to be an issue in the industry.
Used truck prices have increased for three-year-old to five-year-old trucks, an indicator of overall market health. As new truck deliveries increase, trade-in volumes are expected to rise, which could have a negative impact on used truck pricing.
Freight rates continued to moderate in September, due in part to tougher comparisons. Gradually easing demand and increased supply is expected to relieve some pressure from rates in the coming quarter.
Holiday season
Bayaan is predicting 4.9 percent year-over-year growth in holiday retail sales because consumer confidence remains high, with job growth and income gains supporting holiday spending.
“I think consumers are just generally in a pretty good space heading into the holiday season,” Bayaan said. “The job growth has been solid all year. They got a bit of a disposable income boost because they got a tax cut at the start of the year that has been carrying over and confidence is very, very high as you head into the end of the year, so all this points to a consumer who is ready to spend and has the means to spend.”
Holiday sales are defined as non-seasonally-adjusted retail sales from November and December, excluding auto, restaurants and gasoline.
E-commerce is expected to continue being a standout among holiday sales, with growth over the past two years exceeding 15 percent since the second quarter of 2017. It is expected to near 16 percent in the fourth quarter of 2018, making up over 10 percent of all retail sales.
The biggest uncertainty surrounding holiday sales performance is the recent decline in the stock market, which could have families rethinking their holiday spending habits if it continues, according to Bayaan.
