The word “recession” has been thrown around a lot during the second half of 2022. Some say it’s nothing to worry about, and they even welcome some sort of economic downturn to cool things down. Others, like “Dr. Doom,” who predicted the 2008 economic crash, believe a 2023 recession will be “long and ugly.”
Jason Miller, associate professor of supply chain management at Michigan State University's Eli Broad College of Business, is taking a more neutral stance—similar to other industry analysts’ forecasts.
See also: ‘Who cares’ if this is a recession? CV demand could prop up market
Miller, who joined a conference call with Stifel Investment Services on Oct. 5, explained that when we think of trucking recessions, it’s really a story of declining industrial activity pulling down freight volumes. Potential recession red flags are sharp rises in consumer credit card debt, which would lead to substantial pullbacks in spending, and a drastic drop in single-family housing starts—likely below 2018 levels.
Inflationary pressures are, indeed, causing increases in credit card debt; however, Miller pointed out that households are experiencing less debt today than they were before the pandemic hit.
“How are we having a 40-year high inflation, but on the credit standpoint we’re not seeing these red flags? The answer keeps going back to how much money consumers were able to save up because of stimulus efforts and a reallocation of spending,” Miller explained. “We never saw stimuluses like we saw in 2020 and 2021. We are still trying to understand the long-term ramifications for them.”
Wages and salaries also have grown substantially above the pre-COVID trendline. That said, there has been a pullback since May in single-family housing since the pandemic-related surge of new housing construction starts in 2020 and 2021.
“If the year-over-year change in single-family houses goes negative, that is one of the top indicators of a recession,” Miller said, adding that in 2020 and 2021 the housing market saw 16% growth in two years. “That is very unusual.”
“There has been a transition in building away from single-family houses, which have become effectively unaffordable,” he added. “From a freight market standpoint, cooling of this isn’t a bad thing because we actually do need prices to normalize for a bit to bring the demand back. 2022 does not appear to be 2007 [when housing starts and permits fell to their lowest level in more than a decade]; there’s just not data points indicating that.”
Still, trucking economists are keeping an eye out, as flatbed demand relies on the housing market for the transportation of construction materials. In a recent blog post, DAT Freight & Analytics pointed out that although the recent interest rate hikes have slowed down the housing market in recent months, in August, there was an uptick in new housing starts.
In August, single-family housing starts, which account for the largest share of homebuilding, increased 3.4% month over month to 935,000 units, after a steady decline since March, according to DAT data. Year over year, however, single-family housing starts are down 14.6%, DAT reported.
“A brief decline in mortgage rates helped to boost new home sales in August, but sales are expected to move lower in the months ahead as rates have since moved higher and builder sentiment continues to fall due to declining housing affordability and ongoing supply chain bottlenecks,” said Robert Dietz, chief economist at the National Association of Home Builders.
Retail trade and e-commerce
Last month, FedEx’s CEO Raj Subramaniam warned about an impending global recession due to weakening global shipment volumes. In its first quarter financial results report, FedEx, which ranks No. 1 on the FleetOwner 500: Top For-Hire Fleets of 2022 list, said its Q1 results were adversely impacted by global volume softness that accelerated in the final weeks of the quarter.
FedEx Express results were particularly impacted by macroeconomic weakness in Asia and service challenges in Europe, leading to a revenue shortfall in this segment of about $500 million relative to company forecasts. FedEx Ground revenue was around $300 million below company forecasts.
See also: FedEx to cut costs, increase freight rates
At the time of the announcement, analysts were unconvinced of this global softening, pushing FedEx executives on why their peers haven’t issued similar warnings about demand. During the recent Stifel call, Miller also noted than when looking at inflation and seasonally adjusted revenue for courier messengers like FedEx, activity is down just a couple percentage points from where it was last year at this time.
“It’s down, but it’s not like we are going to have parcel inventory dry up,” Miller noted.
He did, however, point out that brick-and-mortar inventories at retailers such as Target, Walmart, and Costco remain bloated.
“Normally, inventories are going to peak in September and October,” Miller said. “Don’t be surprised if we see some data in a month or two acting really weird and seeing seasonally adjusted inventories to sales dropping because the inventory is already here.”
In terms of port import volumes, TEUs coming into the U.S. through July were up 22.6% from July of 2019 in terms of freight, Miller noted.
One area of concern in the truckload segment is that spot prices continued their months-long slide in August, despite stronger load volumes, according to DAT. The national average rate to move dry and refrigerated freight on the spot market fell for the seventh consecutive month in August.
The spot van rate fell 11 cents to $2.52 per mile in the month, while the reefer rate was down 10 cents to $2.89 per mile, DAT reported. The average spot rate for flatbed freight also tumbled—24 cents to $3.05 per mile in August—and was 40 cents below the all-time high set in March.
See also: Spot rates continue slide in August despite stronger volume
“The sharp pullback in spot prices is what has worried folks so much, and if you look at the implied linehaul rates, the decline is even more pronounced because this all-in rate is being supported by higher fuel prices,” Miller explained. “That has certainly unnerved folks. We are seeing the same dynamics in ocean right now, where on a percentage basis, we are seeing even sharper plunges in spot prices. It’s really because markets have been so overheated that the moment the fundamentals didn’t support that overheating, we were going to have very sharp pullbacks. I think this is what is expected when markets normalize, they’ve just normalized much quicker than we expected them to.”
For Miller, the neutral argument right now is that the Russia-Ukraine war is going to spur more energy production in the U.S.—with the U.S. energy sector projected to benefit long-term from Europe moving away from Russian oil production.
“The biggest concern I have is if we see more pullback in spending, if retailers can’t get those inventories under control—most of that will be imports for a lot of the product categories we are talking about, so it will be much more of a negative effect on the ocean side than the trucking side because imports are still going to be a very small percentage of the truckload freight market,” Miller said.
