Data across all modes of traffic is signaling a dramatic slowdown in the freight market, but U.S. gross domestic product (GDP) continues to come in strong. FreightWaves Chief Economist Ibrahiim Bayaan and FreightWaves CEO Craig Fuller teamed up to explain this apparent disconnect.
Bayaan and Fuller regularly host a webinar, “Monthly Market Update: What the Data Is Telling Us About the Freight Market,” in which they take a look at the current state of overall economic activity and the freight market.
First quarter 2019 GDP was recently revised up, coming in at 3.1 percent growth. Most freight executives would not consider the first quarter strong from their points of view, though. During the early part of the year, freight volumes held strong, but rates were being pushed down because of excess capacity.
Signs of a freight market decline have continued to accelerate since the first quarter, according to Fuller. National volumes are down, spot market rates have flattened and tender rejections have reached historic lows.
“The whole team has been having conversations with executives of participants across the market–factoring companies, insurance companies, truckstops, participants in freight of all modes–and I think everyone is seeing much of the same thing,” Fuller said. “We had a 4PL [fourth party logistics] tell us that shippers are pushing freight into the spot market. A year ago, they didn’t want to be in the spot market. This year, they want to be in the spot market to take advantage of those lower rates.”
Bayaan agreed that shippers have regained the upper hand, noting that while plenty of shippers reported misses during the last earnings season, there were not many outright declines reported.
“A lot of people missed their earnings targets or their volume targets, but Walmart reported growth,” Bayaan said. “Target reported growth. You don’t see this same idea that volumes are just down.”
Fuller suggested that some of this could be because big e-commerce players are building out their own proprietary networks, taking some for-hire freight off the road.
“That is partially what happens when you get burned by transportation costs. In 2018, a lot of these shippers got hit very hard by higher rates,” Bayaan said. “When that happens, it basically makes them reevaluate everything. Things like expanding their own private fleets become something that is now on the table.”
Regardless of why the freight market is slowing, it certainly seems to be in opposition with the latest GDP numbers. Bayaan explained the reasoning behind this during the webinar.
“From a GDP standpoint, things actually look very good,” Bayaan said. “It’s important to remember that GDP covers everything that goes on in the economy. It is the broadest measure of economic activity that we have.”
The reason GDP does not necessarily match-up with freight activity is threefold.
The U.S. economy is service-based
Over half the U.S. economy is made-up of service-based offerings, including financial products, healthcare, leisure and education. That number climbs to about two-thirds of the economy when looking at only the private sector, according to Bayaan.
It is important to take this into account because services can typically be rendered without much freight movement.
“When you’re looking at the GDP number, keep in mind that two-thirds of it is service activity, and it may not have anything to do with how freight is actually behaving,” Bayaan said. “That was the case during the first quarter of 2019. Most of the areas that were growing were service areas.”
Imports are taken out of the GDP
The keyword in GDP is “domestic.” The reported GDP only accounts for products produced within U.S. borders. From a freight market perspective, where something is produced matters much less than how it moves through the country.
“Something that gets imported from China, then moves through the U.S. to the consumer, drives freight activity, but it is taken out of the GDP,” Bayaan said. “If you have a decline in imports, that actually helps support GDP growth, but it is not good for freight activity.”
Inventory growth is a positive for the GDP
When GDP is calculated, inventory growth is considered inherently positive because that means production took place. Whether or not those goods make it into the hands of consumers is not considered in GDP, but that is an important consideration for the freight market.
“From a freight perspective, adding to inventories may be a good thing or it may be a bad thing,” Bayaan said. “What you really want is goods flowing through the economy. You want inventory turnover. You don’t necessarily want things that just sit in inventory and don’t move.”
Freight movements and the overall economy are entwined in several ways, but GDP should not be used as a pure indicator of the state of the freight market.