Armada’s Prather examines the disconnect between the freight economy and the macro economy at SMC3 JumpStart 2024

To be sure, there are many ways to approach and analyze the current state of the macroeconomy and the freight economy these days, especially coming out of the pandemic. There have been more than a few twists and turns along the way, when it comes to gauging and assessing things, considering the good (lower inflation, strong jobs growth, an improving inventory outlook, and solid GDP, and other factors) and the bad (low demand resulting in lower tonnage and volumes and geopolitical tension).

So, how does one get a true sense of what is really happening on the economic front, specifically as it relates to freight transportation and logistics? Keith Prather, Managing Director, Armada Corporate Intelligence, did a thorough job of providing some insight into that at last week’s SMC3 JumpStart 2024 conference in Atlanta.

When posed the question of “if there is really strong product consumption, coupled with consumers spending, why is that not being felt in the freight market?” Prather explained that based on looking at data going back multiple decades, at times, freight transportation and the general economy get disconnected from one another.

“We just went through one of those periods and had the same thing in 2014,” he said. “The U.S. dollar surged, everything around the world was on sale. We bulked up on inventories, and the inventories-to-sales ratio surged. The next thing you know we go into a freight transportation recession for 14-to-18 months, and everything kind of rebalances.”

In looking at these cycles, Prather explained that it is almost like clockwork, in that it typically takes 14-to-18 months for the global supply chain to work itself out and get back into a regular cycle.

Citing Federal Reserve data, Prather took a look at freight transportation volumes compared to GDP going back to 2008, which is when he said a disconnect saw its beginnings, and their paths diverted, followed by a what he called a “boom cycle” over the following 14-to-18 months.

“It got to the point where purchasing managers simultaneously went too lean, with a little bit of growth coming and then panic and overorder and freight transportation surges,” he said. “This happened in 2014 and again in 2018, which many in the freight transportation say was the best freight market they have ever seen, which was topped coming out of the pandemic but you can still see the same scenario.”

In viewing the disconnect between solid economic readings and low volumes, Prather cited a client conversation in 2022, in which it was discussed how while consumers were spending and corporations were investing, the freight market was not taking off.

And he said the only thing he could find that could justify the fact that demand was so strong despite low freight volumes was inventory-to-sales ratios. When looking at the 19 different sectors that make up that data, Prather noted that what is found is an economy moving at different speeds.

“Some people will say they are having a booming, great year, and others will tell you they are really struggling,” he said. “How can you explain that? We compared inventory-to-sales ratios back to the decade before the pandemic. Supply chains were basically in cycle, it was pretty easy for us to predict demand and kind of deal with the market environment. We can manage our inventories relative to sales and we didn't have a lot of surprises. The global supply chain was rolling and we didn't have a lot of disruptions…and we could plan better.”

What’s more, on a historical basis, Prather said that when companies are sitting 3% lower [for inventories] than they were a decade prior to the pandemic, they are sitting way too light, with their supply chains constantly trying to catch up.

“They're scrambling to try and get enough on the shelf to be able to meet order demand,” he said. “The gray area is sort of that balance matter where you are coming in and fulfilling them pretty quickly. And there is just this continuous replenishment cycle. The bottom line is the reason why they're in the red is because those are industries that right now today are overstocked and sitting more than 3% heavier than they were prior to the pandemic.”

That leads to a stall, of sorts, with new sales coming in and companies pulling inventory off the shelf to fulfill that order. Which does not generate supply chain activity downstream or upstream, he observed, as orders for things like new materials, energy, and labor from the supply chain is choked off.

“If you ask me what is really the challenge right now as to the reason why the freight market and the macro economy is disconnected is because of this: I think we are finally back in a cycle worldwide,” he said. “I'm calling it a global supply chain reset. If you go look around the world, and you look at what's happening in manufacturing sectors, there is a lot of stall out and not a lot of movement. What I'm hearing from a lot of purchasing manager indexes and surveys conducted, the manufacturers around the world and wholesalers around the world have gone through the destocking process and at least anecdotally, when we look at the survey data, they're telling us that they're back in cycle.”

That sets things up for the transportation economy to come back and rejoin the macro economy, according to Prather, with things coming back together. And as new volumes pop up with a little bit of growth on the macro side—like manufacturing starting to tick up a little bit or construction sector improvement or wholesale trade gains—those things all generate orders throughout the supply chain. And he noted that will result in the form of increased volumes throughout the supply chain.

“This is the big reset we have been waiting on, for 14-to-18 months, and I think we have the reset now,” said Prather. “We may be growing this year, somewhere between a little bit less than 2%. It's kind of a normal GDP growth rate that we were used to in the decade prior to pandemic but instead of like in 2023, when that felt good from a macroeconomic perspective, but it didn't feel good from a freight perspective, this year, we get to reset, things feel different. We get 2% growth on top of a $23 trillion economy…we're going to see freight move. And that's different from where we've been over the last year and late 2022. “Things are different moving forward.”

Prather’s overview provides some optimism for a sector that, for more than a while, has been facing an uphill battle, in the form of a freight recession, impacted by low demand, inventory issues, and inflation, among other factors while providing some hope for a nice rebound coming at some point, hopefully sooner than later.