I was forewarned. On April 25, Julian the trucker posted this comment on WOLF STREET:
Have been trapped on the West Coast for the last week. Freight has slowed to a crawl, with way too much time on the loads, and the truck stops are filling up too early in the day. I had to pay for a parking place in Castaic, CA, night before last because the Pilot was full at 4:30 in the afternoon. Finally got a load to Little Rock. But it doesn’t load till late tonight and has more time on it than usual. We usually experience slowdowns before the rest of the country becomes aware of them.
On May 2, he wrote:
I have lost 5 days either waiting for a load or waiting to load or deliver, since leaving on the 12th of April. I have seen this pattern before in my 34 years of trucking – we always get hit first in any downturn, just as we always feel the upturn first. As you regulars know, my company has done several strategic things since the crash in 08 and work has been steady since then. My warning is anecdotal but you all are well of the inventory overshoot in Q1.
And on May 4, he wrote:
Freight is still slow. I barely have 7,000 miles on the clock since the 12th of April. A normal month is 10,000 + miles.
As Julian said, it’s anecdotal. Maybe he was just unlucky. Maybe he got tangled up in some kind of snafu somewhere. A sample size of n =1 doesn’t represent the vast US trucking industry. But rumblings have been coming from other ends of the industry, triggering some, let’s say, intriguing explanations.
Rates for intermodal containers by rail, as reported by the Cass Intermodal Price Index, dropped on a year over year basis in January, February, and March. April hasn’t been released yet. When the surprising March decline came out, Cass tried to make some sense of it:
With diesel prices continuing to fall, loads are shifting (to the extent capacity is available) from domestic intermodal back to over-the-road truck, which is challenging demand and pricing power for intermodal.
So railroads were facing weaker demand and losing pricing power as shippers were shifting loads to trucks because diesel has gotten cheaper? That’s the theory.
In reality, as Julian experienced, and as it turns out other truckers experienced, shipping volumes by truck fell in March from prior year. It seemed like a fluke, something that would bounce back in April, but in April, according to the just released Cass Freight Index, shipping volumes by truck fell again.
These two months in a row of year-over-year declines came as a particular surprise because 2014 had been a banner year, according to the American Trucking Association. On Monday, it reported that revenues by trucking companies jumped to an all-time record of $700.4 billion, finally beating the prior record set before the Financial Crisis. You could practically hear the exuberance in the report:
Increases in freight, combined with continued tight capacity helped drive revenues and coupled with lower fuel prices, we saw motor carriers go on a buying spree for new trucks as they replaced older equipment.
This vast $700-billion machinery with its 3.4 million drivers that hauled nearly 10 billion tons last year – 69% of the nation’s freight – is an excellent early warning system for the overall economy.
So when the spot rates for tractor-trailers started dropping in April, it triggered all kinds of explanations at the time, for example, in the Journal of Commerce:
Rather than a sign of underlying economic weakness, the softening spot market may indicate shippers are finding the trucking capacity they need, for now, with contractual partners. Shippers, carriers, and logistics operations at a recent transportation industry event said the US trucking market shifted back toward a rough equilibrium in capacity in the first quarter.
Given the exuberance of 2014, carriers have added lots of new trucks to replace older equipment and to add capacity, but by mid-April, the phrase “excess capacity” started cropping up. And the idea that the spot market was suffering as shippers were relying more on their contractual partners made sense.
But turns out, overall shipping volumes and money spent on shipments have been dropping for two months. The Cass Freight Index, which tracks them, usually rises in the early part of the year from the lows in January. This seasonal pattern is also playing out this year, with a difference:
The index for shipping volume in March dropped 5% from a year ago. But maybe it was a fluke and April would make up for it. But no. Now the index for April dropped 2.5% from a year ago! The index for shipping expenditures fell 3.5% in March and fell again 4.7% in April!
The first quarter was crummy. We already know that. The estimate for Q1 GDP growth will likely sink into the negative over the next two revisions. But April is in the second quarter! This weakness is now infecting it as well. That’s what the trucking industry is saying. And the trucking industry, as Julian pointed out, experiences the “slowdowns before the rest of the country becomes aware of them.”
There are numerous reasons why this might be happening, including the $110-billion inventory buildup during the first quarter. Businesses will eventually bring inventories back in line, either by selling more or by ordering less.
The first option – selling more – obviously isn’t happening: the just released retail sales for April, for example, were flat on a monthly basis and up only 0.9% year over year. That’s less than the rate of inflation; so in terms of shipping volume, that would be a down month!
And the second option – ordering less – may be one of the scenarios beginning to play out. It would be bad news. The trucking business is an early thermometer of the real economy. And things might turn around on a dime. There might be a sudden surge of sales that will propel the economy to “escape velocity.” But we doubt it, and we’ll keep listening to the truckers for more clues going forward.