You can listen to this conversation using the player below, or by going to www.ftrintel.com/podcast, or read below for the transcribed audio. As you read or listen, you will hear from Eric Starks, Chairman and CEO for FTR, Avery Vise, Vice President of Trucking, and Todd Tranausky, Vice President of Rail and Intermodal, with each providing their perspective on the situation from both a shippers and carriers perspective with modal perspective insights for trucking, rail, and intermodal.
[Audio has been transcribed automatically from the State of Freight Podcast. We apologize for any grammatical errors or wrongly transcribed vocabulary.]
Eric Starks: I’ve been getting a bunch of questions from customers and they keep asking about what’s happening within the economy in the transportation market and they keep going, ‘you know what, I’m hearing all these conflicting messages throughout,’ so I figured let’s get our experts together let’s get Todd Tranausky and Avery Vise together and let’s just hash this out a little bit. Let’s see what’s what’s going on. And each week it’s great week we all sit down we talk through all of these different issues and we try to make sense of what’s happening and that’s kind of what we’re going to do here today. So when I look at the economy and I look what’s happening out there I really am seeing a lot of mixed signals. However we could kind of segment some of this stuff and we’re seeing different things in each of the different modes. So let me let me bring in Todd first and Todd let me let me lob something over at you. We are seeing the economy came at two point one percent in the second quarter but when we look at the real data we’re seeing something that says it’s not growing. So what what are some of those things that you’re really looking at there.
Todd Tranasuky: Thank you Eric. This is Todd. The thing with the real data is it is basically following seasonal patterns. It has for the last month or so essentially followed what we would consider normal seasonality in terms of the way a lot of the carload sectors have moved on an overall basis and then down below that if you look into the segments, there are some exceptions, there’s coal and some things there that are not performing against the seasonal trend, but for the most part it’s just moving with a seasonal pattern looking for a catalyst. It’s sort of bouncing around the bottom. There are a lot of non-economic reasons for that. The railroads have done an awful lot with precision scheduled railroading over the last couple of years. They’ve done a lot of focusing on efficiency within their network that has caused them to shift away from certain lanes of business, certain types of business, and that has affects as you flow through the data as you sort of create a headwind to growth that isn’t there in the broader economy. If we look at intermodal for a quick second it’s also following its seasonal patterns lately but it has underperformed the growth expectations relative to what folks had including those of us here at FTR to start the year. It has certainly not performed to the level that folks would have expected. And there are a lot of reasons for that. You had trade as an underlying factor with that, with people pulling volumes into the fourth quarter of last year that got pulled out of the first quarter of this year. You had an awful lot of weather issues that made it hard for the railroads to be able to deliver the service that intermodal shippers require. You’ve had some network changes, some inefficiencies put into the intermodal network with crosstown drays and you’ve also had a lot weaker truck market than you had last year.
Todd Tranasuky: And as I’ve said in a lot of different venues, people’s experience in 2018 shape how they view 2019 and even though if you look at the trucks statistics which I’m sure Avery will get into. You know it’s historically tight still this year in trucking it feels and it is a little bit looser than it was last year and folks have burned into their brain how tight last year was and so even though it’s still historically tight in 2019, it feels a lot easier to get a truck and to move that volume on a more reliable truck than to trust it to rail intermodal.
Eric Starks: Well okay. So if we are if we see that loosening that you’re talking about in trucking and you’re seeing that seasonal behavior for rail, this doesn’t match up with the economic growth that we’re seeing out there. Well how do we make sense of that.
Todd Tranasuky: I think shippers are in a lot of cases making a choice in some sectors to move away from rail and to move into truck, to move into other other modes, to try and find other ways that are more efficient maybe more cost effective overall and that just hasn’t proven in 2019 to be a rail solution.
Eric Starks: OK so Avery let’s let’s bring you in. So, you’ve got what’s happening on the rail side. We’ve got things that are just kind of holding steady. Either they’re down a little bit or they are just right off their seasonal average. What’s going on with a trucking because of the stuff Todd was talking about. Shouldn’t we be seeing a different dynamic there?
Avery Vise: Well, what’s happened in trucking is that trucking is able to adjust to capacity so much faster than rail can. For for a lot of obvious reasons. And it really comes down to driver supply and trucking company frankly can add active capacity a lot faster than railroad can because of among other things the training and onboarding time relative to the two industries. So what we saw is pretty significant pressures on the driver supply or the availability of drivers and carriers starting really around the time of the 2017 hurricanes really started to gear up on that and have succeeded to the point where have gotten at least into balance. And at this point you know we are about to announce actually we did announce to our customers a some revisions to our Freight•cast™ model. And you know it does show that you know we are not quite as tight as is we we thought we were. It’s certainly not necessarily a loose environment but it is sort of a much looser than it was a year ago and a lot of this as Todd was saying is sort of the what happened last year set the tone for this year. So you do have a lot of that comparison year over year taking taking place but some interesting things that we’re we’re seeing is that load availability in spot market for example is sort of holding up. It’s it’s it’s staying up with a five year average. It’s certainly not a boom like it was last year but it’s it’s certainly not bad. What has happened is that truck availability is is still very tight and probably because relatively speaking the route guide or contract environment has been has been more favorable. So a lot of people look at the spot market numbers because they’re precise and they’re immediate but that’s not the entire market. And you know we’re looking at of you know a very slow growth environment overall. Some sectors may see some year over year decline in 19. But you know overall it’s it’s somewhat above flat. So you know it’s the kind of market you would sort of expect after what we saw in 17 and 18.
Eric Starks: So but does this make you nervous when you see data that’s coming out like this.
Avery Vise: No not really. It’s it’s sort of what we expect. I mean you know one of the things that a lot of people have talked about is you know a lot of carrier failures, a lot of companies going out of business. We’ve certainly seen a few high profile ones. But you know looking at the data. Yeah. It looks like we are seeing a lot of small carriers come out. But we also saw a lot of small carriers come in during 2018. A lot more than usual. So it pretty much follows the kind of pattern we normally see. We it’s it’s nothing I guess I’m not seeing anything that is sort of out of the ordinary that would give me pause as long as the overall economy continues where it where it’s going and we’re seeing we’re seeing things not certainly get any worse. In fact in manufacturing we just got some good news last week on core capital goods which you know were were pretty strong. And so I don’t see anything that particularly concerns me. It’s most of the pain that we’ll feel in 2019 is really behind us in terms of you know any kind of acceleration. A lot of the rest of the year looks to be sort of status quo which is somewhat negative levels in our Trucking Conditions Index below zero, but not tremendously below zero and at this point it doesn’t look like it’s going to get worse. It’s going to trend you know fairly close to neutral conditions.
Eric Starks: But that’s also, we have the expectation that you’re going to have a slightly growing freight market in trucking, correct?
Avery Vise: Yes yes yes. I mean I mean overall it’s we’re not expecting too much freight growth but we are expecting some. So it’s certainly not any any kind of catastrophe.
Eric Starks: Yes. So I mean part of the issues that I’m running into as I start looking at a lot of this information coming out is we had this tale of two markets. You had trucking that was so hot last year that shippers really just could not find enough capacity. Period. And we knew that it had to come back down. And then you had the railroads and you had the rail system that really didn’t add a whole lot of freight in the system. It had a little bit but it was mixed and they didn’t convert from truck which we would have thought and move it into intermodal. They were they were having problems with that and then as we moved into the end of the year trade became a bigger issue. So a lot of the easing that we’re seeing right now is that economic conditions or is that trade? Todd let me let me throw that at you. I’ll throw you that bomb. Go!
Todd Tranasuky: Thanks Eric.
Eric Starks: Anytime man, I’m here for you.
Todd Tranasuky: I mean from my perspective I think it was trade early there. I think a case could be made that the intermodal numbers in the first quarter were really the result of trade.
Eric Starks: But you’re talking this year. 2019? Not last year?
Todd Tranasuky: Yes. As you look at the second quarter and the start of the third quarter now. It gets harder and harder to make that case. As you get further away from the tariff implementation and further away from the weather issues that really handicapped the railroads for the better part of four or five months, it’s just harder to make that case. And it’s either that volume is choosing not to move by rail you know it’s either moving by truck or you’re seeing a shift in the economy that’s causing less freight to be moved and I think that a lot of that freight is moving by truck because the railroads have made it significantly more difficult to do business with their intermodal franchises from cutting lanes to the reintroduction of crosstown drays in Chicago. All of those moves add inefficiency, they add cost, they add time for shippers, and if you can go get a truck and have it be significantly more reliable and significantly more efficient and not have to deal with things like cross towns in Chicago in this freight environment why wouldn’t you take it?
Eric Starks: Yeah no I get it. So one of the things that really always kind of bugs me when I think about this market is transportation is so cyclical and it’s you have a little hiccup in the economy and transportation gets a fever. So it’s hard to always assess where we are in the cycle because you’re trying to predict well is the is the transportation marketplace saying well the economy is doing X or is it the other way around. And we know that typically transportation leads what’s happening within the economy but it doesn’t tell us for example, are we going into recession. Sometimes we just have a little bit of a hiccup. Right now it’s feeling more like a 2015-2016 timeframe where we had a mid market cycle slowdown and coming off of 2018 when things were so hot it now tells us that we’re normalizing. So let me let me ask to Avery are we are we back to normal whatever the heck normal is.
Avery Vise: Well you know I would argue that the one thing that is not normal is normal. And what I mean by that is that we seem to be in a very weird situation where the capacity in the truck market and the demand in the truck market are very close which is unusual. And so I guess that’s sort of the answer is No it’s not normal because it’s normal. And I use that you know I make that point based on what I see in the spot market for example. So we have spot rates that are still down relative to now we certainly compared to last year. They’re not even comparable. But even if you look at a five year average unit if you look at an average of just say four years from 14 to 17 they’re sort of close to that but you have capacity in the spot market that’s very tight and you have loads that are that are OK they’re not you know I haven’t seen a collapse in loads. And so when you think through those dynamics there’s only a couple of things that can be happening. One is that you know there could be a lot of failures. That’s depressing the spot market and you know I think there’s some of that but I think again as I said earlier debt is really just offsetting what we added to the market in the past couple of years. And so I don’t think it has depressed the capacity artificially in the spot market, it’s just sort of kept things where it was but what it does suggest is that there is enough rate in the route guide environment to keep truckers relatively busy because if not we should be seeing a surge. I mean really you know if we were seeing this wave of failures that a lot of people were talking about we really should have seen at some point a sort of a surge in spot capacity as trucks move into the spot market to to scramble to fill those excess trucks and we just have not seen that.
Avery Vise: So again is this normal? I would argue actually not. But it is functioning logically and I think that’s really where I’m coming from is that while we don’t normally see this dynamic it is more or less a reasonable dynamic and it will change. I mean what you know what we would anticipate is that capacity additions will well will cease. We may even see some continued attrition in capacity. We’ll see a firming of utilization that’s sort of what we’re anticipating and then we’ll get back to an environment that you know probably is more normal is what people would call normal which is that it’s just a tad bit tight all the time and you know rates are either you know okay or really good but not horrible. So yeah I might at least from the carrier perspective obviously.
Eric Starks: So let me let me clarify for for those listening. So one of the things we’re looking at here is the number of trucks in the spot market that are chasing freight and we’re just not seeing that number going up because typically you see that number going up and then the rates come come down. That’s just not happening this time of the cycle. That’s one of the things that kind of keeps a scratch on our head a little bit and that’s why Avery you’ve been doing a great job of looking at what’s happening with failures because if you get more trucking companies failing then you have less trucks chasing chasing that freight. So this is this is one of the things we’ve been we’ve been trying to understand. Todd let me let me bring a thing back to you though on inventories because inventories have a big issue when we talk about specifically intermodal and that relates then into the truck market. Inventories are less of an issue for rail because a lot of times they are they’re heavy bulky types of things you can have a decent amount of inventory because they tend to be low cost, talking about sand and things like that, but when we get into the retail market, we get to the wholesale market, that’s when we start looking more closely at intermodal. How are you feeling about the inventory cycle right now?
Todd Tranasuky: You know inventory is really built up at the start of the year and in the first quarter there were definitely very high inventory levels. But from everything I’ve heard those inventory levels, particularly at warehouses near Port complexes both on the west coast and only East Coast, t hat those inventory levels have started to drop down. You know they’re still probably above normal if you look historically but they’re not at the 100% of capacity that we saw earlier in the year. And so those have come down and those have come down as folks try to move product that they brought in ahead of time into their facilities. Now as we get into the second quarter third quarter they start to to need that product they don’t have it on their shelves or in their distribution centers. They’re starting to pull from those port warehouses.
Eric Starks: Yeah. No, I I’m totally with you and we’ve definitely been seeing that type of stuff happening. So Avery, is this change in the inventory cycle, do you see this as a good or a bad thing as we move to the end of the year?
Avery Vise: Well you know if we look at the total business inventory to sales you know it still isn’t budging and so it does raise a concern. However, I think we are still seeing some distortions as Todd was talking about. We may be finally working through a lot of what we saw with Chinese imports and so on. I think there’s still a little bit of noise there. And then of course the other issue on inventories is the you know the whole revolution in e-commerce and the expectations of quick deliveries and what that’s doing to the floor if you will on inventories. I’m not as concerned with those two factors in mind as I would be normally in looking at that inventories to sales ratio. Normally when 1 3 9 now and I would that’s not something that correlates to a lot of freight velocity. But if that does not start coming down, because there is a lag in that data, so if that doesn’t start coming down through the summer then I think you think it would be quite a bit of a concern as we head into the holiday peak.
Eric Starks: Do you, and Todd jump in on this one too, because I kind of throw my two cents in, but do you see a movement because of the inventory stuff that we’re seeing. Do we see the movement from a two day retail environment for online sales get delivered down to one day or even same day within this within this cycle over the next let’s call it six to nine months that has a material impact?
Todd Tranasuky: You know I think folks are trying to move that way, particularly as they follow the need to meet customer demand that shipping is fast and free, and that means you need more inventory but you don’t need inventory in the traditional places. It was a wave about a couple of decades ago to consolidate distribution centers and now to hit one day targets or two day targets you need a network of warehouses that are forward to the customer so you don’t necessarily need the big warehouses that you used to have you know consolidated near the port or near particular regions of the country. You need lots of smaller warehouses to serve metropolitan areas. That by nature creates a need for more inventory because you have it more spread out across different geographies and different regions to serve that demand. So I don’t think it is really need more inventory. You need inventory in different places than you might otherwise.
Eric Starks: That makes a lot of sense. OK. Well, let’s start to wrap this this thing up here. Let me get a couple final takeaways from from the group here. What what would you be telling someone in the C-suite right now, As as you look at this? Todd, go for it.
Todd Tranasuky: On the rail perspective, I would say that the sky is not falling. If you’re in a carload sector, save a couple of exceptions, coal being one, forest products being another, the sky is not falling. Things are slowing but moving according to the normal historical seasonal pattern. There’s really nothing to see here. We need to stay awake and stay watchful for whatever the next catalyst is. Right now, the markets are performing very rationally and very normally on a seasonal basis across most of the carload sectors. On the intermodal side of the house it is more concerning because everybody, FTR included, expected intermodal to be up mid-single digits this year. At this point, it’s pretty clear that isn’t going to happen and we’ll be lucky to post positive results of any sort. That raises the question, ‘where is that volume moving, how is it getting to market, and are the railroads seeding some of that volume back to truckload’ like they’ve talked about for the better part of decade; That would be partly through their own rationalizations and partly through a loser truck market and driving highway-to-rail conversions and volumes off the highway. At this point in 2019, it feels like that has gone backwards. It has gone the opposite direction if you’re a railroad.
Eric Starks: Avery, let’s move over to you. What a couple of quick takeaways for you for the c-suite when we talk about trucking?
Avery Vise: When you look at 2019 as a whole, it’s really a tale of two halves. For carriers, the pain portion of the year is coming to a close for the most part and for shippers the opportunity portion of the year is closing. As we look forward to the rest of the year, it’s not going to be great opportunity for carriers, certainly not relative to what they might have come to expect. Things are looking firmer from the carrier perspective and I don’t think from the shipper perspective the truck market is looking bad either. It’s looking acceptable for those business partners who are rational as Todd pointed out, who are looking at this as not something that is going to greatly swing one way or the other.
Eric Starks: Yeah, I appreciate that so thanks. I’ll give my quick two cents on how I’ve kind of seen seeing the world it’s generally a slow growth environment right now, especially when we look at the economy. Getting back to something in that 2 percent type of GDP market seems to feel correct but that means that we have a mid-cycle correction that we’re seeing right now for transportation. That’s because it was so stinking hot. If I’m in the C-Suite, I’m going to be looking at downside risks. You’ve got the inventory issues, you’ve got trade, you’ve got Mexico, you’ve got a lot of the geopolitical things. So a lot of those risks are on on the downside but that doesn’t mean that we won’t see growth within this market. It just means that you’re going to have to be vigilant and paying attention to what’s what’s going on. So with that let me thank Todd and Avery for for joining us. Really appreciate hanging out with you guys and let’s do this again.
You can find more publicly available State of Freight content by going to www.FTRintel.com/Podcast and take a look at the GDP figures yourself from FTR’s recent press release: Freight Environment is Weak but Still Growing Slightly.
FTR is the leader in freight transportation forecasting in North America, providing consistently reliable reports for trucking, rail, and intermodal transportation, as well as providing demand analysis for commercial vehicle and railcar. For more information about the work of FTR, visit www.FTRintel.com, or call us (888) 988-1699 to find out which publications will best support your business. For more information: Click here