Moving Words – Economics
Timothy Brady
“Economy has frequently nothing whatever to do with the amount of money being spent, but with the wisdom used in spending it.”- Henry Ford
With the lower rate pressures being placed on most segments of the trucking industry, what does this bode for the moving industry? Let’s look at what the logistics prognosticators are saying regarding the near-term future. Trucking is the bellwether measurement for our economy, what’s occurring in the trucking industry in terms of hauling rate levels and freight volumes is the ‘canary in the mine’ for the entire U.S. economy. As we all know as movers, where the economy is going determines where we need to focus our planning and forecasting where our future shipments will be generated. In a booming economy, it’s the corporate moves: as individuals are hired and/or promoted, they are a major source of our business. In a slowing or recessive economy, as businesses downsize or close and people are laid off, they’re looking for new employment opportunities and the individual is paying for the move, increasing the COD sector of the moving business. With this ebb and flow between corporate moves and COD moves, it’is imperative we, as movers, are prepared for what the economy brings.
According to “FreightWaves Freight Intel Group Report,” trucking company failures are expected to increase through the remaining part of 2019. The authors of the report found that … “trucking company failures are usually the result of unexpected large spikes in diesel prices that then cannot be adequately passed on via fuel surcharges by small to midsize carriers.”
Also in the Report, the authors outline three statistical factors that may portend an increase in trucking company failures in the near future:
One: Spot rates are down significantly; 20% year-over-year, and 30% off their peak.
Two: Contract Rates are also moving lower and are at risk of continuing this downward spiral.
Three: Trucking company costs are higher, due to increased pressure to raise wages matched with the overcapacity that accumulated from carriers adding more trucks during 2018 when rates and freight volume were considerably higher. Add to this, there’s the potential for higher diesel prices from the implementation of IMO 2020.
(What is IMO 2020? The International Maritime Organisation (IMO) has ruled that from January 1 2020, marine sector emissions in international waters be slashed. The marine sector will have to reduce sulphur emissions by over 80% in switching to lower sulphur fuels.)
The leading causes for trucking company failures cited by companies who are closing include the following. (Many of these are codependent on each other, as seldom is there a single cause that brings about the failure of a trucking business.)
- Falling contract and spot prices
- Rising diesel prices
- Expensive, rising and unaffordable insurance costs
- High labor and maintenance costs
- Unionized labor forces
- Onerous contracts with large shippers (e.g., Amazon)
However, the greatest single contributor to a carrier’s failure is the cluster effect as freight volume and freight rates deteriorate quarter after quarter, as we have experienced in the first two quarters and into the third of 2019.
The final straw according to FreightWaves Report, is evidenced by the record levels of Class 8 new truck orders in 2018 with delivery dates well into this summer. A large number of trucks will be hitting the market just as demand begins softening, and overlapping hard comparisons from the prior year, thus creating the excess capacity that’s making a soft market even worse.
FreightWaves Report mirrors similar results from the May, 2019 Cass Freight Index Report titled ‘Economic Outlook from Freight’s Perspective.’
(https://www.cassinfo.com/hubfs/Freight%20Payment%20/Transportation%20Indexes/Cass%20Freight%20Index/Cass%20Freight%20Index%20Report%20-%20May%202019.pdf )
In December, 2018, CASS Shipments Index was negative for the first time in 24 months, followed by January and February 2019. CASS Report issued this statement: “While we are still not ready to turn completely negative in our outlook, we do think it is prudent to become more alert to each additional incoming data point on freight flow volume.” March and April 2019 continued the downward movement with decreases respectively of 1.0% and -3.2%.
Then in May, 2019, it slid markedly downward with -6.0% indicating a defined economic contraction.
In May, CASS acknowledged “All these negative percentages are against extremely tough comparisons; the two-year stacked increase was 5.1% for May; and the Cass Shipments Index has gone negative before without being followed by a negative GDP.”
The statement continued, “The Q1 ’19 GDP of 3.1% suggests the economy is growing faster than is reflected in the Cass Shipments Index. Our devolvement of GDP explains why the apparent disconnect is not as significant as it first appears. May’s drop is significant enough to raise the question, “Will the Q2 ’19 GDP be negative?”
Finally, CASS verified FreightWaves Report with the following statement: “The weakness in spot market pricing for many transportation services, especially trucking, is consistent with the negative Cass Shipments Index and, along with airfreight and railroad volume data, strengthens our concerns about the economy and the risk of ongoing trade policy disputes. Weakness in commodity prices and the decline in interest rates have joined the chorus of signals calling for an economic contraction.”
While neither CASS or FreightWaves is issuing any Economic Storm Warnings, we can be assured they are issuing an Economic Storm Watch. Keep your eyes and ears on the eastern horizon for that ‘Red Sky in the Morning’ telling us to take warning of an impending economic storm.
“Economics is extremely useful as a form of employment for economists.” – John Kenneth Galbraith
