Macroeconomics are Supporting The Tight Freight Market (Macroeconomic Monday)

I wanted to write a quick note about the tight freight market.  We all know it is tight and certainly there are no lack of free webinars telling us how to be a "shipper of choice" and make our freight easier to handle.  With this note, I wanted to outline a few key statistics which will help you quantify the issue. 

Macroeconomics:

PPI

There are three items I want to show.  First, the PPI for General Freight, Trucking, Long Distance Truckload.  This important statistic produced and updated by the government tells us what is going on at the wholesale level (which virtually all freight is).  As you can see, we are now much higher than we were at when we were "pre-recession.  While the last month appears to have stabilized I cannot believe this curve is going anywhere but in the upward bound direction.  Fiscal stimulus is very strong in our economy and unless there is an existential threat (War, trade war etc.) I think we have at least two years to run on this cycle.  Learn to work in an inflationary cycle.  

Second, the infamous Inventory to Sales Ratio.  This tells us how much "slack" is in the economy and the story supports the inflationary pressures cited above. 

Inventory v. sales

In this graph we see that in about 2017, the "worm turned" and inventories started being depleted.

This has two implications.  First, it means that at some point, if sales stay strong companies will feel a need to restock inventory.  When that occurs we will see even more pressure on the transportation infrastructure of the United States.  This is not just a rate issue but rather has to do with the overall infrastructure of the country.  Pressure on bridges, roads, capacity and congestion all will continue to drive a very inefficient transportation network (including rail). 

Finally, we see the end results in the CASS Freight Index and it is not pretty. 

We continue seeing costs increasing in this very important index and they are at the highest levels we have seen in a long time.

These three pieces of data make it very clear we are in an inflationary environment for freight and it is not just an isolated lane or area of the country.  It is a broad based inflation due to fiscal stimulus driving an incredible amount of business.

Like the "spiral downward" we experienced in 2007-2009, we are not seeing a "spiral upward" with the market driving a "wealth effect" and the wealth effect drives consumer spending which ultimately drives everything we are seeing in freight.

Having said all this, there are pressures on the macroeconomic horizon.  Specifically, there are 4 things I worry about:

1. Fuel Prices:  When fuel prices increase (both at the retail level which we buy at and the wholesale level the carriers buy at) it is just an implicit tax levied on people and businesses.  People have to drive for their work and their lives so it is really not a discretionary spend.  More money spent on fuel is less money spent on other things.
   
2. Interest Rates Rise Too Fast:  We did get some good news last week with the Fed saying they may let inflation run above 2% but if the interest rate hawks take over, this could brake the economy hard.
   
3. Student Loans:  There is an implicit brake on the economy with the large overhang of student loan debt.  If you think this is small, think again.  Here is some information from the website StudentLoanHero.com:
   
• Total student loan debt:  $1.48 Trillion 
• 44.2M Americans have some student debt
• Delinquency rate is 11.2% (people who are more than 90 days behind)
• Average Monthly Loan Payment: $351 
• Median Monthly loan payment:  $203
  
4. Existential Threat:  It seems we are just one "Tweet" away from global war or at least a trade war. 

Those 4 are the key ones which could put a stop to the party.  However, as a planner who manages probability, I would plan on the "party" continuing for the foreseeable future (But have your contingency plan B ready).  

Will Disruption in The Inefficient Transportation Market Come From Within

Many of you who have read my blog over the last many years know I am a bit critical of our industry.  Innovation has been very slow in coming (Thus resulting in a somewhat man made crisis), executives at major trucking companies treat their service as a commodity (Talk about pricing relative to supply and demand not relative to value) and when measured by performance, our industry has not performed well.

I have advocated for outsiders to come in and disrupt the industry which led to my excitement when Elon Musk put his crosshairs squarely on the industry.  Unfortunately, the "outsiders" have almost the reverse problem of the insiders - the outsiders just don't understand the industry.  They think a driver is going to be on his iPhone all day.  So, if the insiders are stodgy and not innovative and the outsiders are not knowledgeable enough to matter, where will the industry get the innovation it needs to defeat the current crisis and truly add value to consumer's lives?

Well, it appears the disruption is coming from within which is probably the best we could hope for.  Two companies, Lanehub and the BiTA alliance are really driving significant innovation and both are led by long term industry experts.  Even the major carriers are providing some innovative solutions such as JB Hunt's 360 solution for both carriers and shippers. 

Our industry is on the verge of a major crisis and while clearly there have been some externalities which have exacerbated the problem, most of the issue is within the industry.  A lack of looking forward, a lack of innovation in productivity and finally, even leaders of the industry, treating it like a commodity, have all contributed to this crisis.  Look to the innovators, some of whom I have mentioned above, for leadership. 

Why Are People Using The Driver "Crunch" as An Excuse for Poor Service?

Ok, no more webinars or explanations of how to be a "shipper of choice... please.  I think we all get it that there is a driver problem and there is a capacity problem.  However, as I think about this there are two real issues I just cannot reconcile with the problem.  The two are 1) Lack of delivering on commitments and 2) Lack of investment.

First, lets deal with commitments.  This word really lacks meaning in this industry but I will try to define it. The definition is simply "Do what you say you are going to do" and regardless of tight capacity or not, this is something everyone should be able to do.  Why is freight being left on docks after companies have made commitments (through tender acceptances) to pick up the freight?  If there are no drivers to pick up the freight be up front and honest with the shipper.  Tell them that.  I fear too many companies are just "sweeping up" tenders then, over time, figuring out what they will do and what they won't do (sometimes by just not delivering at all).  I cannot figure out if this is purposeful or if it is just horrible execution. 

This also brings me to the idea that we are blaming ELDs for this crisis which seems ridiculous to me.  Essentially, when someone says that, they are saying they used to operate illegally but now that there is an electronic device they can no longer be illegal. Oops.. that type of argument gets you in trouble.

So, this brings me to my second and final point:  Don't listen to what the sales people tell you, listen to what the CEO's of the companies tell the investors.  The key question you should be asking carriers when they say they need higher rates to offset the capacity crunch is what are they going to do with that money?  If they are plowing back into driver investments then I am all in.  If they are increasing dividends and or buying back stock then you have to wonder who is kidding who. 

My fear is this issue is going to be a circular problem that will never be solved.  Let's follow this logic:

1) How is leadership compensated?  Increasing stock price.

2) How do you increase stock price in a tight market with raising rates?  Buy back stock and raise dividends. 

3) Will the stock price go up as much if you invest the money in driver pay versus doing #2 above?  No. 

This says we likely will not see driver investment or productivity investment.  Rather, we likely will see shareholder investment which will make the problem much worse.

Please prove me wrong by doing the right thing. 

When Does a Comment to Investors Become an Illegal "Signal" to Competitors?

On July 18, 2015 I wrote a blog post entitled:  DOJ Investigates Airlines - Are the Trucking Companies Next?  At that time I had just read an article about the DOJ investigating the airlines concerning collusion on capacity and ticket pricing (The original article was on Bloomberg News and titled: What Does it Take to Prove Airline Collusion).  What I found interesting is they were investigating statements made during earnings calls and "investor" conferences where one airline executive might say they are going to practice things such as "disciplined capacity control" or have "expected price increases through disciplined revenue management".

The question raised by the investigation was essentially whether these were statements to investors so they could make a good investment decision or where they "signals" to the competitors?  For example, does the statement "disciplined capacity control" state a good business practice to the investors or does it state to the competition "If you don't add capacity I won't add capacity".

As part of the post, I posited this exact question could be applied to the trucking and freight transportation industry.  Every conference I have been to and every investor deck I have seen usually has the freight transportation executive using these exact words. 

The example used in the lawsuit is, according to the article:

"...airline officials repeatedly assured one another on earnings calls and at conferences that exercising "capacity discipline was good for the industry"

Sound familiar?

It is a fascinating question and it really puts the companies in a pickle.  If they do not disclose "material" items to the investors they can get sued for not disclosing but if they disclose too much they can (and are) get sued for collusion. 

Well, there is an update to the story and I think it is a big deal.  In today's NY Times it is reported: Southwest Airlines Settles Suit but Denies Colluding to Keep Ticket Prices High.  Southwest has agreed to pay $15M in cash and "provide extensive cooperation" with the on-going investigation against American Airlines, Delta Airlines and United Airlines. "Extensive Cooperation is defined as:

 "a full account of facts relevant to the plaintiff's case as well as a series of informational meetings and interviews with industry experts and Southwest employees facilitated by the company."

How could this effect trucking:

1. We all have been to the many conferences where this type of language has been used by top executives.  Could the airline case be used as a precedent for a case against transportation?
   
2.  Does SWA have something and essentially became the first one to talk - get a lighter penalty for turning?  $15M is a lot more than just "nuisance" money.  Something is going on here.
   
3. Will trucking companies start being a lot more careful at conferences and public statements as a result of this settlement?

As I said in 2015, this is definitely a case to keep an eye on and it could have broad and deep implications for the transportation industry as a whole.