Most major freight indexes continued to advance last month, but the economy may not be as healthy as we would hope.
Railroad carloads (excluding coal and grain) were up 4.3% for the four weeks ending Oct. 24, turning positive for the first time since December 2018 – largely on the basis of a 9.2% increase in intermodal loads. Driving this intermodal surge is port import loadings of containers, which in August jumped almost 10% from July and are 8% higher than last year. The 2.1 million 20-foot-equivalent units (TEUs) set an all-time volume record. In my opinion, this is largely being driven by inventory restocking, as retail inventory levels were declining at a 10% rate in July and August, per our data.
Will this continue? Possibly so. We believe retail inventories remain lower than desired. In addition, as can be seen in the accompanying graph, the Institute for Supply Management’s ISM index came in at readings of 56.0 and 55.4, respectively, for August and September. This data implies an optimistic manufacturing sector, and historically, these levels of data foretell higher levels of truck tonnage.
Not all truckers are seeing these improved volumes. Those with consumer or essential goods customers are likely seeing the lion’s share, while those with mall-based retail or industrial/construction-related clients are not seeing as much of a recovery.
Capacity appears to be tight in truck markets. Truckstop.com’s market demand index, which measures the ratio of spot loads offered versus trucks available to haul them, set an all-time record the week of Oct. 2 at 117.72. For the week ending Oct. 9, rates were at October record levels – approximately $2.44 per mile. Although the market softened somewhat later in the month, for the week ending Oct. 16, the average broker-posted rate per mile excluding fuel surcharges was still about 29% above the same week last year and about 23% above the five-year average.
In other words, despite modest economic growth, truck capacity remains tight, and rates are reflecting this. There have been many reasons cited for this tightness, including some drivers choosing not to risk their health driving during the COVID-19 pandemic, the new federal Drug and Alcohol Clearinghouse reducing the pool of eligible drivers, and driver training schools processing fewer candidates because of the pandemic.
Whatever the reason, the markets imply a tight pricing marketplace, and it would appear there will be upward pressure on contract rates that will carry into 2021.
This has led to increased confidence among trucking companies and a surge in truck and trailer equipment orders and an upturn in used equipment pricing. Equipment purchases that were delayed in the spring are coming back onto the books.
This is not to say we are off to the races. There is still significant cost inflation on the insurance side, and there is about to be driver wage inflation as fleets compete for available talent. Some fleets will continue to struggle. However, truck markets seem to be an oasis.
Now the bad news: The new jobs created by the “convenience economy” aren’t soaking up the jobs lost. Early on, we saw largely blue-collar layoffs and white-collar wage cuts. Based on recent announcements, executive-focused layoffs are now happening at a faster pace. Initial jobless claims have been settling around 850,000 per week. While down from our peak, this is still worse than any previous recession in our data going back to the 1960s. We need a figure in the 250,000 range to support economic growth without stimulus. With politicians fighting over a stimulus package we are not likely to see until after the election, it is possible that may work its way into the data.
In the July issue, I predicted that the economic recovery would be more complex than a simple V-shaped bounce-back, likening it more to the bounce of a tennis ball. So far, it has looked a lot like a V, but with softening consumer demand and the potential for new restrictions as COVID-19 cases rise, the second half of that V may just be the top of a bounce.