May be the Freight Slowdown Signaling Recession?

Fewer goods being shipped could indicate a recession coming.

In the last year, several analysts and experts in economic trends have flashed indicators about the U.S. economy. Not waving a red flag of concern will be a challenge in today’s somewhat chaotic environment, with discussions of trade wars, tariffs and an impending downturn in economic activity over the board. Though it is impossible to predict when another recession may strike, freight — among the broadest indicators of economic movement — has been sending mixed signals throughout the majority of 2019.

Many think that after the latest data published on industry trends, the downturn in freight during the last half a year shows a clear sign of a recession coming.

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The signals of a freight recession.

Several driving forces indicate a recession in freight, impacting almost all parties mixed up in process. From freight brokers to truckers, shippers and carriers, a slowdown in the freight industry has far-reaching implications for most. However, not absolutely all signals of a downturn warrant fear. Two main areas of the freight environment foreshadow a recession in freight: a reduction in rates and growth in stockpiles.

A reduction in freight rates

When compared to impressive numbers in the summertime of 2018, this season shows a clear decline in freight rates. According to recent data, spot load posts, van load-to-truck and flatbed load-to-truck rates are down in comparison to August 2018. A decrease in freight rates is a reply to provide and demand. As capacity grows tighter, meaning you will find a small gap between carriers and shippers, freight rates have a tendency to tick up. When the contrary occurs, rates drop, often significantly. The year-over-year decline in freight rates could be a signal of a longer-term economic slowdown.

A rise in stockpiles

Furthermore to declining freight rates, a rise in stockpiles across manufacturers and retailers is an indicator of a recession in the market. From almost all sources, including DAT, ACT research and the Cass Freight Index, volumes of loads in freight have observed decreasing numbers for a substantial part of 2019. Businesses, particularly those in industrial categories, definitely not consumer-focused merchants, rushed to get inventory stockpiled prior to the implementation of tariffs threatened this past year. Now, those stockpiles aren’t moving nearly as fast as some might hope, therefore there is less of a dependence on freight services. These indicators signal a downturn in the freight industry as much or even more than falling freight rates.

Turmoil in trucking, rail and air freight industries.

The entire freight industry, including trucking, rail, and airfreight companies large and small comprise a lot more than $800 billion in economic contribution. Although 2018 was an easy and furious year for some freight companies, alongside successful freight brokers and independent carriers, 2019 is a different story altogether. As freight rates dropped with loosened capacity, freight businesses felt the pinch and responded accordingly.

Big players cut growth outlooks.

Major contributors to the freight industry have recently reduced their projections for growth given the decline in freight trends. For example, J.B. Hunt, Knight-Swift and Schneider — all large companies in the freight industry — slashed earnings outlooks for the rest of 2019. Part of the declines can be linked to the fact a decline in spot market loads fell 37 percent from July 2018 to July 2019, highlighting a decrease in the necessity for moving goods among manufacturers and retailers. As significant players cut growth outlooks, they could also be inclined to cut jobs, leaving truckers and other operational staff searching for new opportunities.

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Small players forced to go bankrupt.

While larger companies in the freight business have observed adverse outcomes because of recession signals firing within the last couple of months, small freight businesses have felt the pressure to a larger extent. Small companies in freight, including owner-operator truckers, are more susceptible to focus on an as-needed basis through one-off contractors. Through the height of the freight boom in 2018, tight capacity meant everybody had been called to the table for work. Now, as freight needs decline, smaller companies are hurt more, with some filing bankruptcy or closing up shop altogether. Larger freight operations may have significantly more usage of capital to keep carefully the doors open throughout a recession; small and independent businesses might not have the same luxury.

U.S.-China trade war intensifies the problem.

Experts claim that the upsurge in freight volume that spread throughout 2018 was the consequence of fear for future years economic state. Talk of trade wars was ever-present, however the implementation of tariffs on both Mexico and China had yet to come quickly to fruition. To get prior to the potential downturn a newly imposed tariff would cause, freight companies rushed to meet up the demands of business all over the world. Stockpiling inventory, from consumer goods to industrial and recycleables, was the norm this past year.

Now, however, the freight world has experienced a substantial changing of the tides. Trade war talks have grown to be possible, with new tariffs imposed as recent as the start of September. With an elevated cost to do business because of tariffs, manufacturers and retailers are forced to decelerate procuring inventory to then ship to businesses and consumers, or they need to increase prices to make sure financial stability in to the future. These changes have a drastic effect on shipping by truck, rail and air. There is less of a dependence on freight services as trade war tactics continue, creating more of a decelerate in the market overall.

The Cass Freight Index and what this means for the economy.

The Cass Freight Index has received a substantial amount of attention during the period of 2019, and it will, given its purpose. The Index, published by Cass Information Systems, is a measurement of monthly aggregate deliveries of freight within america. Every month, data is published on a lot more than 1,200 divisions of unique companies and manufacturers, providing an image of freight volumes and historical trends in the market.

In December 2018, the Cass Shipments Index was negative for the very first time in 2 yrs, but this is quickly brushed off as a one-time decline. However, after that, the Index shows steady decreases every month, when compared to previous year’s data. When these figures are trending downward for many months, analysts share an economic contraction could be along the way. When goods aren’t being shipped normally or with as much volume as the Index suggests, the freight industry is going for a turn. In most cases, the economy follows suit, albeit not necessarily immediately or even to the same extent.

When freight is in a recession, does the economy follow?

Heading back to the newest recession, data implies that freight slow down is definitely an early indicator of a broader decline in economic activity. Freight experienced a downturn in 2006, nearly 2 yrs prior to the Great Recession began in January 2008. However, the freight industry falls into recessionary levels twice more frequently as the economy most importantly, and declines in freight volume and rates usually do not always signal a recession for the masses.

The Shipment Index vs. GDP

A crucial facet of a recession that’s necessary to note may be the reality that the signals showing a decline in freight movement usually do not indicate a recession is looming. For the first quarter of 2019, GDP, a respected indicator of economic activity, was up a lot more than three percent. In the next quarter, positive growth continued, but at a slower rate of just one 1.8 percent. Trends in GDP, unlike the shipping index, include several areas of the economy, such as for example wages, employment and consumer spending. Each has continued to create relatively strong gains during the last several quarters, but analysts suggest, based partially on the slump in freight trends, that growth may soon come to a finish.

Should these forces behind economic health insurance and stability continue steadily to shrink in the coming months, a recession will probably follow closely. Other broad indicators have also appeared lately, including an inverted yield curve that is a telling sign of recessionary trends. Furthermore, economic growth and contraction are cyclical, historically relocating eight to ten year periods. As an economy, america is overdue for a downturn by multiple year.

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Fewer goods are being shipped. What does it mean?

Overall, a recession in freight because of lower shipping volumes and decreased rates will not mean indefinitely an economic slowdown is occurring. However, fewer goods being shipped could be a clear indicator a recessionary environment is on the cusp. From an industrial standpoint, declining shipments could be linked to lower housing starts, increased costs to do business because of tariffs, and lower business investments in economic forces like increased infrastructure. On the buyer side of the line, fewer goods being shipped boils right down to decreases in consumer spending — just one more telling sign of an economic depression. In general, the signals from the freight sector highlight what’s coming for the broad economy sooner or later soon.

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