Knowing the difference between a strong market and a weak one is usually just a matter of time and data. With the passage of time and the context it brings, anyone can point to the moment before markets plunged and say, “see, the signs were there, how did we not see it?”
But what about the present time? What about right now?
Our daily analysis of the freight market is broad, and we don’t rely on singular datasets. In fact, we aggregate data from hundreds of independent data sources to get a perspective on the conditions of the overall market. We combine near-time data, most within the last 24 hours, leveraging our team of 25 journalists and a dozen market analysts to monitor, analyze and interpret signals in the market.
Sector-specific labor and market conditions are far more valuable than taking GDP data, which lags, as a full explanation of the freight market. The common objection we hear from bulls in the market is how strong GDP and employment are. This is true. GDP is expanding.
But employment may be weaker than it looks on the surface.
ADP released its May jobs report showing the slowest creation of new jobs in nine years. In fairness, we are at full employment, so it is becoming exponentially harder to create new jobs.
LinkedIn’s Chief Economist, Guy Berger, said in a post that “the LinkedIn Hiring Rate (LHR), which measures job starts, was down 0.2% [month over month] in May and, on a [year-over-year] basis, was down 0.9%.”
Berger continued:
“The overall trend: gross hiring is basically flat. It’s telling an “economic growth is moderating” story, not a “recession” story.”
“But look at the industry level, and you see a lot of unevenness. On the positive side, hiring in software & IT services continues to grow; the LHR for that industry is up 0.9% [month-over-month], and 6.7% [year-over-year]. Corporate services hiring was up 3.2% [month-over-month] and 7.6% [year-over-year].”
“And then there are the export-oriented goods-producing industries like agriculture and manufacturing. These industries had a powerful upward arc during 2017 and early 2018; hiring growth meaningfully outpaced that in the overall economy. That has not been the case recently. Gross hiring in both industries is declining pretty rapidly. Hiring in manufacturing is down 5.6% [year-over-year]; in agriculture it’s down 6.7% [year-over-year].”
What shouldn’t be missed for freight folks is related to the sectors where jobs declined: manufacturing, construction, and mining. These are the very sectors that drive a large part of the freight market.
So even with a seemingly strong GDP, our Chief Economist Ibrahiim Bayaan will point out (prior to joining FreightWaves he was the senior economist at UPS, NYSE:UPS) that GDP does not tell the full story of the freight economy.
More than 2/3 of the GDP numbers are related to services: finance, education, healthcare, tourism, media and software. Unfortunately, for our purposes, service-based businesses are not typically freight related, so expansion in these markets is not going to drive freight volume. Plus imports are netted out of these numbers, so GDP is not as tight of an indicator as freight demand.
To get a feel for demand, you must break it down by commodity and weight them accordingly. In fairness, a large portion of bulk commodities go by rail, pipeline, and barge and don’t see the truck market. They do, however, impact one another. As rail and barge demand surges, more freight ends up on trucks. When conditions in these modes drop, it takes some demand away from trucks.
Energy remains the largest single component of freight demand. Over 60% of this is coal related, but also includes liquids like nat-gas and oil. But in recent months, fewer wells are being drilled, creating a drag on freight demand. Sand is also transported less frequently as drillers and explorers find sources of sand closer to the well site. There is a glut of rail cars that were added for sand transport, as demand for frac sand transport failed to live up to expectations of rail car leasers.
After energy, agriculture freight ranks number two for ton-miles. Trucking plays an outsized role in the ag markets, particularly around produce transport. With weather playing havoc on agriculture production this year and export demand dropping, it’s hard to believe that we will see improving conditions around ag freight volumes.
Materials used in manufacturing, like metals and wood products are also significant drivers of freight demand. Recent manufacturing surveys are showing a bearish view on domestic production. This will cause transportation of those materials to also drop.
Construction has been struggling for the past year as interest rates climbed up, there is less land to build on, and available labor for new homes becomes harder to come by and more expensive. Often times, the laborers that are involved in construction pull from the same workforce as warehousing and trucking and as those sectors have pulled employment, construction labor costs have followed.
Peak auto is behind us and auto production are expected to decline each year for the next decade, with double digit declines (down 22% from current levels in 2030 according to PWC). Consumers simply aren’t buying cars and trucks like they used to. Alternatives, including ride-sharing services (NYSE:UBER) and (NASDAQ: LYFT) are sufficient replacements. Also rental car services have historically been huge buyers of new cars, representing nearly 25% of new North American auto purchases. But rental car services are not just doing as well as they used to for much the same reason.
Retail will also be interesting to watch, especially as brick and mortar retail outlets shift their staffing efforts towards e-commerce and warehouse fulfillment. The retail sector, largely driven by consumer spending has held up relatively well, but this could change if the broader employment picture changes.
As Berger reminded his followers, “The key question for the US economy in the coming year is whether how much the weakness in these relatively small goods-producing industries “leaks” into the much larger services sector.”