The truckload market cycle
The market historically sees periods of undersupplied capacity, a transition to oversupplied capacity, and a transition back to undersupplied capacity (see Figure 1). The duration and magnitude of these cycles varies based on freight demand and supply injection or contraction (from both the for-hire and private capacity pools).
In 2019, the market saw strong freight volume in North America. According to the ATA, the committed for-hire market is estimated to finish 1.5% higher in volume Y/Y. But due to spot market weakness, the combined market could be down 3-5% Y/Y.1 While this sounds alarming, 2019 has been a very good freight year when compared to the years prior to the exceptional 2018.
Cyclical supply response lags the market tension. Below summarizes the recent years and where we may end up in 2020:
2016: Cited as flat freight or recession year following 2015 capacity expansion. As a result, oversupplied.
2017: A growth year for volume. A lagging response to 2016 of continued supply contraction, initiated a tight market in Q3.
2018: Exceptional year for freight volume paired with continued supply contraction into Q1. H2-2018 supply growth began to balance the market.
2019: Continued Q4 2018 softening of Y/Y volume growth. Supply continued to expand as new truck orders were delivered leaving the market oversupplied.
‘The market is the market’ as they say. No participant has enough scale to shape the market as even the largest shippers and carriers are single digit participants. Forecasting the phases of the cycle requires discerning what level of tension or slack will exist in the market and how long each phase of the cycle will last. Neither of which are usually successfully anticipated.
Investment and divestment of trucks often lags the market experience. Market analysts such as ACT Research offers analysis that helps market participants understand new orders and purchases and their timing. Typically this fragmented market adds capacity after tension is felt and removes capacity well after slack is present. With so many independent participants in both the for-hire and private fleet markets, we tend to see over corrections on each end of the cycle.
Truck and trailer sales: To date, new truck and trailer sales are slowing as the back orders of 2018 were delivered well into 2019. A leading indicator of 2020 is the order pattern of 2019. Orders have been at or below the volume estimated to replace permanently retired tractors. October was a strong order month followed by a lower November. Analysts are watching these orders in an effort to get a better sense of how the investment of new tractors will increase or decrease the fleet.
Used truck exports: A key relief valve to oversupply is the exporting of used trucks. ACT Research forecasts about 14,000 tractors will be exported in 2019. This is slightly below the 10-year average and well below correction years like 2017 when around 23,000 trucks were exported. The upcoming 2020 market will possibly have two key economic headwinds to large export levels: a strong U.S. dollar and a slowing global economy.
While for-hire capacity grew in 2018 and 2019, ACT Research and the National Private Truck Council estimate private fleets grew 10-12% in this time. Private fleets are no less than 50% of the capacity, which is a material contribution to the supply side of today’s market.2
Key industry segments: Manufacturing, housing, and retail.3
The Purchasing Managers Index (PMI) experienced growth through July. However, it has been below 50 for several months now.4 The PMI is considered highly correlated to less than truckload (LTL); and when it is declining, LTL tonnage tends to recede.
Housing has been up and down in 2019. It struggled going into Q3, but has improved in October. Both van and flatbed truckload services serve this sector.
Ecommerce continues to experience meaningful growth, helping the LTL industry. Large-format ecommerce freight continues to use LTL service, contributing to demand and LTL price stability.
Consumer sentiment continues to be resilient by most analyst reports. With strong employment data, economists regularly cite the consumer as the brightest spot of the economy and forecast.
Trade: Most analysts cite that completing the trade negotiations with China and ratifying USMCA could have a positive effect on the economy of North America and increase freight flow.
Inventory levels: The inventory to sales ratios published by the U.S. Census Bureau continue to show levels that are higher than optimal. When levels are lower, there tends to be more movement of freight in supply chains.
Forecasts for 2020’s surface transportation market range from ‘similar to 2019’ to ‘progressing toward supply-demand parity in H2 of 2020.’
Watch the injection or contraction of new trucks along with freight volume patterns. The analyst community seems to agree we can expect flat to slightly down capacity and flat to slightly up demand.
Steve Raetz, Dir. Research and Market Intelligence, joined C.H. Robinson in 1989 and currently focuses on areas contributing to the evolution of C.H. Robinson’s supply chain value proposition to its clients, supporting client sales and relationship strategies through transportation market insights and academic research. Previously he led CHR’s consulting team, was General Manager of Minneapolis National Accounts and served as the Southeast Regional Transportation Manager for the Quaker Oats Co. Steve also is a member of MIT’s Center for Transportation and Logistics advisory board(MIT-CTL), American Transportation Research Institute’s Research Advisory Committee (ATRI-RAC) and Vice Chair for CSCMP’s annual Edge conference. C.H. Robinson is a global Fortune 500 provider of multimodal transportation services and third-party logistics (3PL).
1. Bob Costello, Chief Economist of the American Trucking Assoc. Blended 2019 forecast assumes spot market is ~15% of the total freight market.
2. ACT Research October Freight Flows report
3. Bob Costello, Chief Economist of the American Trucking Assoc.
4. Institute of Supply Management, Purchasing Managers Index. A value of 50 is the threshold of growth or contraction for manufacturing