Manufacturing slowdown, interest rates continue to squeeze freight market

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Current and lingering economic turmoil has translated to near-term uncertainty for motor carriers. While we've seen some signs of easing inflation (good news for consumers), it's unlikely to halt to the Fed's ongoing interest rate hikes, and that's not good news for freight demand. 

Joining Randall Reilly Content Director Jeff Crissey this week for the first installment of CCJ's newest video series, CCJ MarketPulse, is Jason Miller, supply chain professor at the Eli Broad College of Business at Michigan State and veteran transportation economist, and he shares his take on the current state of freight: are we at or near the bottom?

Contents of this video

00:00 MarketPulse introduction

00:41 Inflation, Consumer Price Index

02:33 Manufacturing slowdown

05:37 Housing market

07:08 Interest rates

08:29 Freight market

10:38 Trucking employment

12:36 Class 8 truck manufacturing

13:34 Used trucks, spot rates and future freight demand


Jeff Crissey (00:03):
Hello and welcome into CCJ MarketPulse, your monthly look at trends and indicators in the broader economy and their impact on freight markets. Joining us every month is our regular guest, Jason Miller, supply chain professor at the Eli Broad College of Business at Michigan State and veteran transportation economist.

But before we begin, please like and subscribe this channel to stay up to date on new episodes of market polls as well as the weekly 10-44 trucking series that brings you the latest trucking news and updates, but you don't have to wait monthly to get Jason's insight and analysis on transportation markets. Be sure to follow his data reporting on his LinkedIn page.

So let's start off with a look at inflation. So the CPI numbers we're easing a little bit to start the year in 2023. Is that trend here to stay or are the numbers suggesting otherwise to you?

Jason Miller (00:53):
Well, so right now on the consumer inflation side, and we're focusing on this because this is what's going to trigger how the Federal Reserve Board is going to be behaving through the rest of '23. So that's why we're so interested in this right now from a transportation standpoint. It really depends how you want to look at the data.

For example, if you focus on the consumer price index for all items excluding shelter, and we often will exclude that because we know shelter lags. We're actually looking very good while inflation right now, year over years at 3.4% as of March for that index, there's very good reason to suspect we'll actually be below the 2% target that the Fed Reserve board has for overall inflation by May. So from that standpoint, it's a very good sign. However, and this is the however piece, a different look at the data where we take a look at what we call core consumer prices.

So that is consumer prices excluding movements of food and energy. There we have a much higher degree of persistently high inflation, about 5.6% year over year. Right now the fed's long-term target is 2%. We're already seeing discussions of one more interest rate hike of about 25 basis points at the early May meeting, and then the Fed likely to hold steady but not reducing rates anytime soon until we start seeing that core inflation get under control. And that matters so much for us in the transportation space because those interest rates affect housing. They affect capital investment decisions that generate so much freight demand.

Jeff Crissey (02:33):
Okay, great. Now moving on to the manufacturing segment for a minute. You've got a slide coming up here, but there's been such buzz around the potential for manufacturing reshoring and that's ability to obviously add to truckload volumes here domestically. As manufacturers continue to explore bringing that production state side or at least back to North America, what are your thoughts on the manufacturing sector right now?

Jason Miller (02:58):
Right now, my general sense is manufacturing activity is substantially weakened. Over the last year we've seen that show up in the purchasing manager index from Institute of Supply Management. Five of the different Federal Reserve board banks have their own PMIs that have been effectively negative for the last six to nine months. And the main data I look at is the Federal Reserve Board's industrial production for manufacturing, excluding pharmaceuticals and high-tech products. Those really don't generate that much freight activity, but they have an undue influence in shaping aggregate manufacturing as we think about it.

And unfortunately there we see that activities down about 1.5% from where it was last year, and we have not been able to reach our essentially post global financial crisis highs that we reached in 2018, even in 2022 and 2021, we didn't jump back to that. And so connecting it to the reshoring discussion, while I think there's some encouraging activity, we're seeing more factory building right now than we've seen in many years in the U.S. I don't see that heaviness, tremendous surge of volumes because many of the industries we did lose overseas take mass production of furniture in the United States.

We're not going to go back to have plants in the High Point region in North Carolina, each with 1,000 individuals turning out furniture. Those days are gone. It's going to be more, I'd say niche sectors, more products where it's high value, high innovation, very lead time sensitive. So while I do see some positives coming from this, I don't want to get everybody too excited for a reality that we're not going to go back and see manufacturing activity for example, like we likely saw in the late 1990s.

Jeff Crissey (04:56):
But certainly you see the potential for a return to the manufacturing level activity that we saw in 2018.

Jason Miller (05:02):
No, I do think by end of '24, middle of '25, assuming we don't have some type of actual recession, I think we've got a chance to take out those 2018 highs. But if we take a look in the nineties manufacturing activity was about 8% more than it was today. If we go back to 2006, 2007, it was about 9% more than it was today. I don't see reshoring bringing back a 9% increase in manufacturing and activity. That just doesn't seem to be a realistic number at the present time.

Jeff Crissey (05:37):
So turning our attention to the housing market for a moment, even when the economy rebounds, higher interest rates mean fewer borrowers, fewer home purchases and fewer goods being transported. So we just got an update on the housing market this week. What's your take on that?

Jason Miller (05:51):
So housing activity as seems to have bottomed out and it's bottomed out almost exactly where it was in two in 2017 through 2019. If we sort of look at the average number of new starts during that period, that's right where we are now. So that's sort of the good news is we seem that we've reached a bottom. The bad news is that bottom is about 30% below where we were this time last year and where we were in 2021.

And so when we think about what that means for loads of carpets, for loads of bricks, loads of shingles, loads of lumber, number of appliances, it's not a good sign. And so my general sense right now is housing is likely to hold effectively around this level. We're starting to see home builder sentiment get a little bit better. So hopefully we can hold at this level. And then my guess is once we do start to see some interest rate cuts likely in 2024, we should see a rebound on that side, albeit it'll take a few months. So fingers crossed, home building period in 2024 looks better than what it does now. But for perspective, we're kind of right now back to where we were in 2017 through 2019.

Jeff Crissey (07:08):
I really guess it's all dependent on what the Fed does with interest rates, but if they do as you suggest, kind of go one more small hike and then start holding it that the borrower's appetite for buying homes would sort of trend along with that kind of freeze in interest rates.

Jason Miller (07:25):
That's my general sense right now. And I think one of the biggest challenges we're having with predicting where the freight market is moving is we've not had this dynamic of an interest rate hike cooling economic activity really since maybe 2019. But we also had the trade war going on at that point in time, which really caused a loss of durable goods manufacturing. And so we almost are having to go back to the 1980s for a reference period because in the '90s when we were having interest rate hikes before bubble, we then had the offshoring boom and the movement of manufacturing to China in the early 2000’s, which caused a three-year decline of trucking employment because we lost so much manufacturing activity. So in a lot of ways we're in uncharted territory right now of four and a half, 5% interest rates. We haven't seen that since the '90s and it doesn't look like we also have a global financial crisis type of event brewing like we did in 2007.

Jeff Crissey (08:29):
At TCA's annual convention, the consensus from a panel of fleet executives was that we are already at the bottom of this freight cycle that started in mid 2022. Do you agree with that? Do you think the numbers that you see lead you to believe that we're closer to the beginning or the end of this soft freight environment?

Jason Miller (08:51):
My general sense right now based on a trucking ton mile index that I co-author with my dear friend and colleague Gabo Mo at the University of Tennessee is we are likely near bottom very likely. We actually were at bottom December of 2022, which was a horrible month for the trucking sector. Our index, just as you described, Jeff, we had the freight recession began officially in Q3 of 2022. It is still ongoing. We've seen about a 2% decrease in overall activity and demand for trucking. That's a little steeper than the decline we saw in 2019 from 2018. We have very good sense that this index is picking up the dynamics because it benchmarks very well with census bureau data on trucking revenue when we transform ton mileage into a revenue metric. So we've got a good sense that I think we're to kind of getting very close to bottom.

We did just get a data point from the New York Feds Empire State Manufacturing Survey the first time in almost nine months they had a positive reading for new orders. And so hopefully we're starting to see the manufacturing activity, which drives 60% of trucking demand. Hopefully we're starting to see maybe a little bit of a pickup and/or at least we've hit bottom because once we get to bottom, then we'll at least have a better sense. So it feels to me right now that we're probably kind of akin to where we were in almost Q4 of 2019 when we were sort of reaching the bottom of that recessionary cycle. We were expecting an uptick in 2020, but then the pandemic hit and well, the rest is history right there.

Jeff Crissey (10:38):
Now the trucking employment numbers don't necessarily line up with this soft freight environment. We haven't seen that dip in employment numbers. Talk a little bit about that.

Jason Miller (10:50):
So the biggest sort of monthly release of employment data we have from bureau labor statistics where we can get a sense of trucking employment, the number of people on payrolls, just as you mentioned, we actually haven't started to turn substantially negative yet. We appear to be at the peak of the cycle. Now typically that peak shows up about nine to 12 months after we enter the start of a freight recession. So employment didn't peak in pre-COVID until about July of 2019. We'd been in a freight recession for at least six months at that point, if not a little while longer. So right now, the key thing I keep wondering is are we going to start to see payroll start to decline? We saw that in 2019. We saw that in 2016 when we were in the industrial recession caused by the fracking boom.

But the one encouraging thing is if we look historically, there's no reason to expect the 80,000 payroll decline that we witnessed between 2000 and 2003 and then the 200,000 payroll decline that we saw in the global financial crisis. And that was a scary three year period where we started to see a decrease in trucking employment. My guess is right now, if the freight market has indeed bottomed is maybe we'll see 15, 20,000 payroll shed at most before things would level off. But that really just depends. How quickly do we hit bottom? Do we start to see rates increase and just how much capital and cash do a lot of small and e not even so much small, how many young carriers have to get them through this last year?

Jeff Crissey (12:35):
So you're sort of predicting then a shallower correction, if you will, in capacity there long term through the rest of the cycle.

Jason Miller (12:45):
Yeah, I think we'll have a shallower correction if for no other reason than the lack of class 8 deliveries over the last two years likely kept the industry from adding even more capacity than it would have. And so in some ways, the semiconductor shortage and other component shortages that hampered the class eight manufacturers getting trucks delivered, probably kept the trucking industry from adding even more capacity, which would cause a much sharper correction. And that is the one sort of difference right now between 2019 was we were able to effectively on a percentage basis, add more capacity quickly back then because we had the Class eight deliveries at a much higher pace than late 2018, early 2019.

Jeff Crissey (13:34):
Yeah. So that the truck purchasing environment could be a real blessing in disguise this time around.

Jason Miller (13:40):
It could help on not adding too much capacity. The caveat though is how many used trucks were bought in 2021 at incredibly inflated prices, which is giving some of these young carriers, which are more vulnerable anyway, a unsustainable cost structure now that spot rates have come down as much as they have, and so it's kind of difficult to see, but we'll just have to see how the data plays out. The real question right now is we think future freight demand is when does manufacturing bottom out? We talk so much in the trucking space about imports and retail, but at the end of the day, that is not the big engine that's driving trucking activity in the United States. And one of the big reasons alone is that a lot of those long haul movements of those imports are being done by the class one railroads in the first place.

Jeff Crissey (14:34):
All right. Thank you again, Jason for your time today. That's it for CCJ Market Pulse this month. You can read more at While you're there, sign up for our newsletter and stay up to date on the latest trucking industry news trends and analysis. Please use the comment section below if you have any questions or comments on this month's episode. And don't forget to subscribe and hit that bell for notification so that you can catch us next time. See you guys in May.