Often in the English language, we use key words to indicate meaning beyond the actual definition of the term. For instance, when I speak with analysts or economists and they tell me they are “adjusting” or “tweaking” their forecast, it almost always means “lowering.” Nobody ever says the word lowering, yet that’s almost always what they mean. When economists raise their outlooks, they actually use the word “raise.”
Similarly, when I speak with freight companies about activity over the past two months, I am often told that overall, things are feeling “better.” Retail data has improved, spot rates have arrested their rates of decline, bankruptcies are slowing the increase in industry capacity, and truckers are hopeful that third-quarter results will mark the bottom in terms of incremental weakness.
However, it is important to note that “better” and “less bad” are two different things, and I believe that when speaking about what is going on the current environment, “less bad” is more accurate.
To me, “better” implies improved. For example, if we made $100 last week, and made $102 this week, I made more money, so my situation is improving, or better. “Less bad” is something different entirely – it implies that the environment is still getting worse, but at a less aggressive rate.
Look at the spot rates chart. The difference between last year’s high spot rates and this year’s average spot rates has declined from a negative spread of 54 cents to about 35 cents since June. But that’s because spot rates a year ago fell from a seasonal peak of $2.77 to about $2.47, or about 30 cents. In comparison, this year’s spot rate seasonal decline fell from a peak of about $2.23 to $2.12, or about 11 cents. In other words, if not for the optics of the prior year, we would say that spot rates are 11 cents worse than in June. To say that the market is “better” is misleading.
So over the past two months, carriers and shippers are telling me that the environment is “better.” Yet both spot and contract freight rates are lower than they were at the end of June. Freight tonnage is not better, and in some cases, a little worse. Fuel costs and driver costs are higher on a year-over-year basis, as are insurance costs, so profits are continuing to decline. Inventories showed some signs of moderating last month, declining for a growth rate of 5.2% to 4.9% (but I highlight, still growing at 4.9% in a 2%-ish real GDP environment and a negative freight environment). In other words, I would call all of the above data “less bad,” not necessarily better.
Last month’s report on second-quarter financial results for publicly traded motor carriers showed them to be generally worse than trend, with many managements tempering expectations for 2019 and even for 2020. Where we saw the greatest incremental deterioration was in over-the-road truckload realized pricing, as some shippers have been under-shipping contractual freight so they can use currently cheaper spot truck markets. It would appear that third quarter results might not be better than second quarter – although to fleets it may seem “better” compared to their prior expectations, it’s really “less bad,” implying continued deterioration.
We believe the inventory overhang on truckers will remain until winter, with capital expenditure plans likely to continue to moderate through year-end as margins continue to deteriorate. It is indeed getting, “less bad,” but make no mistake – it is not yet getting “better.”