The industry that was supposedly making too much money not that long ago is now a leading indicator of a possible downturn.
The industry that was supposedly making too much money not that long ago is now a leading indicator of a possible downturn.
D uring the pandemic, record profits in the transportation sector were the subject of concern among some politicians and commentators who sought to vilify transportation companies as profiteers. Now, adding to the signs that the economy is starting to buckle, transportation has seen a slew of bad news in recent days.
The stock-market decline that has been grabbing headlines was felt especially hard by transportation stocks. “Shares of transportation companies are falling twice as fast as the hard-hit U.S. stock market, reflecting investors’ expectations that a recession is likely ahead,” reported the Wall Street Journal on Sunday.
It’s conventional wisdom among investors that the transportation sector can be a leading indicator of a recession. The idea is that if companies slow ordering and reduce output, the companies that run the trucks, boats, and trains that are supposed to carry those goods will notice first.
The Dow Jones Transportation Average, which includes 20 major transportation companies, is “on pace for the largest monthly percentage decline since March 2020,” the Journal reported. If a severe downturn materializes in the overall economy, expect a lot more “since March 2020” facts to appear in the financial news.
It’s not just the stock market, though. Transportation companies are feeling the effects of reduced demand, and it’s having a direct impact on traffic.
Market analyst Zach Strickland looked at trucking demand data for FreightWaves. The Federal Reserve intends to slow purchasing through its monetary policy of higher interest rates. That would reduce demand for trucking, and it’s exactly what the data have shown, according to Strickland.
The problem is that trucking demand was already starting to fall before the Fed started raising interest rates in March. That decline was leading to concerns of a freight recession earlier this year. Now, on top of that, there are significant interest-rate increases for the first time in years.
Monetary policy, as Milton Friedman wrote, operates with long and variable lags. This means that trucking hasn’t even felt the full effects of the interest-rate increases that have already occurred, let alone the future increases that the Fed has promised.
The decline in trucking demand has already been swift, and it is likely to continue. Strickland wrote:
There was a 19% drop in truckload demand over the course of five weeks starting in March, before the Fed started raising interest rates. This drop has pushed truckload spot rates excluding fuel from a point where they were 63% higher than pre-COVID levels to a current value of 17% over September 2019. Truckload contract rates take longer to move and have just started to drop over the past few months. The historic relationship between spot and contract rates suggests they will fall at least another 14% — if demand remains stable.
Looking to the ocean, we see more of the same. Carriers are canceling sailings during what is supposed to be peak shipping season in the months leading up to the holidays. The bottom is falling out of container rates: Prices are half of what they were just three months ago on some key routes.
Market analysis from Drewry shows that container rates fell by 10 percent just last week, and the steep declines are expected to continue. Maersk warned of softening demand as well and said it would be using “structural blankings” (canceled sailings) to adjust its schedule. The negative outlook is driving a selloff of ocean-carrier stocks that’s contributing to the transportation sector’s market woes.
This collapse in container rates will likely return ocean carriers to their normal state: razor-thin profit margins, if they make profits at all. Don’t expect any of the politicians who portrayed these carriers as robber barons over the past year when they made once-in-a-lifetime massive profits to say anything as they return to normal.
It’s important to remember that the steep declines are in spot prices, and most ocean shipping is done on longer-term contracts. Shippers signed those contracts with carriers in the past when rates were high, and they’ll still pay those higher rates until contracts are renegotiated, so it will take a few months for the effects to filter through to consumers.
The good news is that part of the reason for a lackluster peak shipping season now is that companies were already stocking up for the holidays earlier this year. That means shortages aren’t likely, and the nonstop peak season that supply chains have been enduring for about the past two years is coming to a merciful end.
That ending could well be a hard landing, though. It’s certainly looking like one for FedEx, which revised its earnings expectations downward for the first quarter of next year. Analysts were expecting earnings per share of $5.14; now FedEx is projecting only $3.44. The company said it would be canceling some of its projects that were supposed to increase capacity, and it will freeze hiring.
Transportation was making money hand-over-fist just five minutes ago, and now it looks like a leading indicator of a larger economic downturn. Never assume an ongoing trend will be permanent, and never underestimate the churn of the market.