Even though the weather
seems to be taking a positive turn, it is fair to say that the current outlook
for the freight economy is not nearly as rosy at the moment.
There are many reasons
for that, with the majority of them based on more general, or macroeconomic,
headwinds hovering about at the moment.
Which headwinds? At this
point, you can basically take your pick as there are many to be sure,
including: second quarter GDP growth at 0.5, its lowest tally in two years;
sluggish retail sales and commensurate consumer confidence levels; declining
industrial production numbers; fluctuating manufacturing output; the ongoing
decline in energy production; still way-too-high inventory levels; fuel prices
slowly heading back up; the Chinese economy struggling to stay afloat by its
own lofty standards, the impact of the strong U.S. dollar on exports, and U.S.
housing starts slowing down.
It is entirely possible
I missed some things with this list, but a lot of the key themes are certainly
there.
And as expected these
things are having a decidedly negative impact on the freight economy,
especially in terms of load counts and volumes. How could it not? The not so
steady nature of the economy as it relates to freight has been front and center
for a while now, with some industry stakeholders positing positive change is
right around the corner while others are clear in saying, more or less, that it
remains hard to see the forest through the trees or something to that effect.
On top of that there are
concerns that the current economic landscape, related to freight in this case,
be on the verge of the “R” word, as in another freight recession, something
which has not truly happened in earnest going back to the dark days of 2009.
A research note from
Stifel analyst David Ross highlighted that the current economic environment at
the moment feels similar, but not the same to the last freight recession.
Ross explained that was
evident in a mostly sour first quarter earnings season for transport companies
his firm covers, calling earnings season unequivocally disappointing, as
freight volumes continue to be hampered by elevated inventory levels.
Depending on where
things go from here, Ross outlined bull and bear scenarios for the freight
economy with former calling for the U.S. continuing a long, below-trend,
uninspiring economic recovery with eventual supply shortages in trucking
driving rates and margins higher. As for the latter, he said the U.S. could
enter into a recession, pushing freight volumes even lower and supply shortages
fail to materialize.
“After a freight
recession (we went into one last year and hope to emerge soon), the next
recession should not be limited to just the transports but will almost
certainly be much broader,” Ross wrote. We just believe these stocks have
another run up in them before likely going lower again in 2017-2018, even if we
view that run as limited (don’t expect a return to 2014 levels for most) and it
becomes closer to picking up pennies in front of a steam roller with the Fed
trying to kick the eventual rate hikes as far down the road as they can, while
the S&P 500 still flirts with record highs. In our opinion, future
outperformance is contingent on further economic growth this year and an end to
the inventory de-stock underway sooner rather than later.”
Underscoring Ross’s
sentiment were some tidbits Mike Regan, chief relationship officer at TranzAct
Technologies, recently shared with me.
Never one to mince
words, Regan said the current state of the economy could well be viewed as the
calm before the storm, explaining that the actual economy is much worse than
what is being portrayed by mainstream media.
“I just think that
demand is not there,” he said. “It is easy to see carriers don’t know which way
things are going, given the teeter-totter nature of the economy. Freight
markets and the economy are weaker than we all believe, and that is playing out
with the low GDP output, too.”
Again, while it is
warming up outside, the economic headwinds are pretty chilly and could get
cooler in the coming months. Now might be a good time to grab a sweatshirt to
try and stay warm amid the changing and challenging economic conditions. So if
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