Economic headwinds continue to raise concerns for freight sectors

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.