Weekly Market Update: The sky may have fallen

Like the “snap” in the Avengers movie, where the big bad villain, Thanos, eliminated half the life in the universe, something similar occurred to the freight market after the trade war escalated between China and the U.S earlier this month. It is hard to imagine the freight market being so fragile that one action — tariff increases — could drop national freight volumes 4% to 5% overnight. While it is difficult to say that is exactly what happened, the timing makes it hard to ignore the correlation.

On May 5^th President Trump announced his plan to implement an increase on previously implemented tariffs from 10% to 25%. This increase was implemented less than a week later. By May 13^th freight volumes began their descent, with national volumes plummeting 5% over four days, according to the Outbound Tender Volume Index (OTVI).

Volumes have started to recover from the uncharacteristic mid-month dip, but the damage may have already been done. A dip in volume in mid-May is more damaging to carrier revenues than a drop in January, as there is more to lose. Combine the lost volume with increased capacity, and the impact is more than doubled due to increased expenses with lower utilization.

Over the last few days, volumes have picked back up, with the OTVI climbing 4% in the past six days. A lot of this volume, however, is shippers trying to get in front of the holiday by increasing lead times on next week’s shipments, essentially a mini pull-forward to make up for losing a day next week. The Tender Lead Time Index that measures the average time between order submission and requested pickup date increased 3% over the last week to 2.66 days.

The Los Angeles and Ontario markets in southern California were the two most heavily impacted markets in the U.S. by the sudden drop.  The L.A. market, which had been averaging over 60% higher outbound volumes in 2019 versus 1Q volumes in 2018, dropped 22% in three days last week, but has recovered over half of that in the past seven days.

The nation’s largest outbound market, Atlanta, was not as impacted by the “snap” as many of the coastal markets where volumes are heavily influenced by international shipping –volumes only declined 4.3% — recovered slightly over the past few days to pre-drop levels.

There is little indication that volumes will recover enough in the next few weeks to make up for all the lost freight potential. Since May 10^th, national volumes are averaging roughly 5% off 2018. Volumes were relatively flat from a YoY perspective through the first nine days of the month, which made many carriers, brokers, and at least one analyst relatively optimistic about the coming months entering peak season.

Trucking is not the only area this drop will be felt; intermodal volumes are down 5% versus this past week in 2018. Spot rates for container shipping continue to slide amidst weakening demand, with the Freightos Baltic Exchange rates losing 16% in the last 10 days from China to North America’s West Coast, the lane most impacted by the trade war with China. A lot of the capacity that was added last year is also at risk. It turns out freight economist, Noel Perry, may have been correct when he predicted a freight recession last summer. Ten months later, it looks like we are on the verge of one.