There is a rumbling of a possible recession in the logistics industry lately. The red-hot freight market is slowing and that has some economists concerned. The freight industry is an accurate measurement of national manufacturing strength. Generally speaking, if something is manufactured it needs to be shipped somewhere. A slowdown in freight transportation may suggest a reduction in manufacturing which is a key component of GNP. Truck, rail and air freight volumes fell 5.3% in June from the same period a year ago, the seventh straight annual decline, according to the closely watched Cass Freight Index. That followed a 6% drop in May.
“There is growing evidence from freight flows that the economy is beginning to contract,” Donald Broughton, managing partner of Broughton Capital and author of the Cass report, wrote in the latest edition last week.
Some analysts are dismissing the apparent slow down attributing it to seasonal demand. The summer months are typically the slowest of the year. Other industry watchers blame the drop on the global economic slowdown and U.S. trade war with China, which have dampened U.S. imports and exports and led to fewer deliveries of chemicals, consumer products and other goods to seaports and airports. The trade fight also has crimped business confidence and investment, spurring fewer orders for computers, factory equipment and other long-lasting products.
Earlier this year, economists forecast a potential slowdown in the trucking industry in 2019. Part of the problem stemmed from shippers rushing inventory into the U.S. to avoid tariffs, which pushed freight rates upward as trucking capacity strained to keep up.
Whether the apparent slow down is related to the economy or other economic or seasonal factors remains to be determined. Data published by a leading load posting service clearly demonstrates a significant decrease in demand for equipment. The chart below provides numeric detail on demand and rate requests.
These figures can be considered reasonably accurate and certainly telling. Every category for demand is down considerably while the supply category suggests a strong surplus. Industry analysts will be looking closely at these figures as we enter the robust fall months and holiday seasons, easily the strongest months in the shipping industry.
Other Modes Are Down Too
In terms of freight traffic by rail, the Association of American Railroads (AAR) reported that in June overall, volume fell 6.3% from a year ago. The volume of intermodal freight – containers hauled by truck and then transferred to rail, or semi-truck trailers that piggyback on special rail cars – dropped 7.2% in June. For the first half, overall freight volume by rail was down 3.2%, with all segments in the red, except Petroleum and Petroleum Products, which was up 23%! Intermodal was down 3.3%.
June marked the fifth straight monthly decline for total U.S. rail carloads and for U.S. intermodal traffic,” said AAR Senior Vice President John T. Gray. Manufacturing is responsible for much of the rail traffic base, but U.S. manufacturing output has been falling for several months. Housing too is in the doldrums, and trade is suffering because of tensions with trading partners overseas. Taken together, demand for rail service just isn’t as strong as it was six months or a year ago. Obviously, railroads hope things turn around, both for their own sake and for the sake of the broader economy.
DHL Global Forwarding saw its airfreight volumes decline in the second quarter of the year, but its air gross profit was on the rise. The world’s largest airfreight forwarder reported a 2.4% year-on-year decline in second-quarter airfreight revenues to €1.2bn, while volumes dropped by 5.8% on last year to 502,000 tones and gross profit was up 4.8% to €238m.
The volume decline reflects weaker market conditions as tariffs and increasing uncertainty left their mark on overall trade volumes. The entire airfreight market is estimated to have declined by around 5% in the second quarter.
Ocean carriers are experiencing similar declines so far this year. Declining demand and compliance deadlines for new fuel emissions could make the future very challenging for the ocean freight market.
We will continue to monitor this topic closely. Look for follow up articles throughout 2019.