'Soft' trucking conditions likely for at least another year

Jeff Crissey
Hello and welcome in to CCJ MarketPulse, your monthly look at the statistics and trends in the broader economy and how they're impacting freight markets. Joining us today as always is Jason Miller, Supply Chain Professor at the Eli Broad College of Business at Michigan State.

But before we dive into this month's conversation, please like and subscribe to this channel to say up-to-date on new episodes of MarketPulse, as well as the weekly 10-44 trucking series that brings you the latest trucking news and trends. And for more [00:00:30] frequent economic updates, click the link in the description below and head on over to LinkedIn to follow Jason's insights and analysis on trucking indicators.

Hey, Jason. Welcome back in.

Jason Miller:                
Hey, thanks so much for having me.

Jeff Crissey:                 
Okay, so trucking conditions continue to remain stagnant at best and the tonnage index just released by ATA shows more slowing of the freight market at least through July. And we have high interest rates are stymying home sales, so consumers are spending less on appliances and household items. What [00:01:00] are you seeing right now in the US manufacturing sector?

Jason Miller:                
So right now in US manufacturing things remain soft, and the key thing to remember is that manufacturing shipments tend to move very long distances, so 500, 600 miles. In comparison for shipments, let's say from wholesalers to other businesses, which tend to move only 100, 200 miles or so.

So when we look at manufacturing, the best index that really captures the feel for freight volumes from manufacturing plants is [00:01:30] data from the Federal Reserve Board, excluding pharmaceuticals as well as high-tech products. Those products don't really account for that much freight, but they have a major effect on shifting how the Federal Reserve measures manufacturing output.

And what I've drawn on this diagram is time periods where we've seen substantial decreases in manufacturing output. And those decreases, Q1 2001, broad-based slowdown because of offshoring that takes place. [00:02:00] Textile products, electronics, appliances, a lot of non-metallic mineral products, like things made out of clay and whatnot, a lot of plastic products that move overseas. So it was a very broad-based slowdown. It took three years really for us to come out of that. The second one is the global financial crisis. This was about a 25% drop in manufacturing. This is every sector, automotive really leading the way. It loses 50% of volumes. Then we [00:02:30] had a downturn in 2015, heavy industry downturn because fracking activity slows down. So less machinery, less demand for steel, fabricated metals. We had a sharp decline in 2019. This was due to tariff effects. This was very much again, machinery, steel, again this heavy industrial piece. And then the latest really sharp downturn was the fourth quarter of 2022. This was a little different. This was paper, [00:03:00] this was chemicals, this was furniture. So this is other sort of sectors being affected a little differently. Plastic products really turned down.

The point I want to highlight, each of these downturns, even though they're being driven by different sectors, each one of these is corresponded to what we'd say is either the start or the worsening of a freight recession. What I want to emphasize is if you look at this chart, it takes typically about two to even three years for manufacturing [00:03:30] recessions to end. That means that we're looking into the middle of 2024 really is a best case scenario for a substantial increase in manufacturing volumes. And so that's going to help keep the market for trucking transportation soft as we move through these next months. So I wish I had better news from this, but looking historically, it's going to take several more months for us to get out of this current manufacturing recession.

Jeff Crissey:                 
That sure is sobering data. Now we [00:04:00] do see strong manufacturing coming from Mexico. So it was interesting to see in the news earlier this month that Mexico has actually now eclipsed China as the US' largest trading partner now. So talk a little bit about the importance of Mexican freight.

Jason Miller:                
So right now we are seeing record levels of cross border freight, especially moving northbound from Mexico to the US, and this is reflected in the trade data. So what I've done here is taken our imports from Mexico and I've adjusted them for the price of those imports to really get us as close [00:04:30] as we can to physical goods that are moving. What we can see is for the first half of 2023, we've had record imports from Mexico. They're up about 20% from the first half of 2019. And what I want to emphasize is we've returned now to the trend line that really existed from the end of the global financial crisis up until 2019. We had had a down period when the auto sector was struggling with the chip shortage and that was reducing motor vehicle and part shipments. [00:05:00] But we're effectively now back to that pre-COVID trend line. I think there is an open question, as we start to see production leaving Asia and coming to Mexico, whether we may even tick up even more. But for now, if you are involved in those cross-border movements, it seems like we're looking at a sort of linear trend line upward as you're trying to forecast into the next part of 2023, but more importantly 2024 and beyond.

Jeff Crissey:                 
So I mentioned at the top about [00:05:30] the interest rates right now and their impact on the housing market, but to what extent does that impact freight movement?

Jason Miller:                
So we've seen a really odd dynamic in housing in that so few people are looking at selling their existing homes that even with interest rates high, we've actually seen now a year-over-year increase in single family housing starts by about 10% from where we were in July last year, which was really the start of a recession [00:06:00] in the single family home building cycle. So it actually seems that we're very likely out of that single family home building recession, but it doesn't seem like we're feeling that from a freight standpoint.

So that begs the question why, because we're always talking about the role of single family housing and driving freight. And I do think there's one partial answer to this, and that can be found in looking at the inventories that exist at construction wholesalers as well as building material retailers. [00:06:30] Those are going to be the two industries that are going to be supplying those construction sites. And what we see is that, even adjusted for inflation, we still have incredibly high levels of inventories in those sectors, and importantly they're being drawn down. And so when you think about what happened in 2021, we not only had very strong single family starts, so we had very high demand, but we also had inventories being built up. So what you can [00:07:00] think is that means the number of trucks that were bringing product from the ports and/or from domestic manufacturing plants to these wholesalers, to these retailer's distribution centers, that number of trucks was higher than the amount that were flowing out to job sites. Now we're in the reverse scenario. Even with single family housing recovering, we're seeing inventories getting drawn down, which means that the number of trucks going from manufacturers or from the ports to these entities [00:07:30] is actually less than the amount of freight that's flowing out, and often flowing out through private fleets.

And so what I want to emphasize is we are going through right now the largest inventory drawdown in different sectors of retailing and wholesaling that we have experienced in effectively a non-recessionary time. And so this is one thing that's keeping freight volumes further muted. Yes, there's been tremendous progress made by Target, by Walmart, by T.J.Maxx [00:08:00] to right size their inventories. But what I want everybody watching this to understand is we still have a long way to go in a lot of other sectors, and again, I think it's going to take us till that second quarter at least of next year until we get these inventories right sized.

Jeff Crissey:                 
So this right sizing of inventory levels is just compounding the issues for an already soft freight market?

Jason Miller:                
They are. Because we always have to think we track sales so much, but really from a trucking standpoint, we really want to be tracking the arrival of [00:08:30] orders. And so we have to be looking at how sales are evolving, as well as how inventories are evolving, to get a sense of where that demand is at.

Jeff Crissey
All right. Well Jason, hey, I appreciate you joining us again this month.

Jason Miller
Thanks so much again for having me.

Jeff Crissey
All right. That's it for CCJ MarketPulse. You can read more ccjdigital.com. And while you're there, sign up for our newsletter and stay up to date on the latest in 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 [00:09:00] and hit the bell for notifications so you can catch us next time. See you next month.