Slow US economic growth has not dampened the forecasts for truckload pricing in the coming year. Both a leading third-party logistics provider (3PL) and a spot market load board operator have argued that the prices will experience a turnaround in 2020. This is contrary to the standard expectation that a fall in economic growth will dampen demand and prices. Several companies in the logistics industry have released 4th quarter forecasts with similar projections. They are of the view that after June 2020, the contract truckload rates are going to start rising again.
These projections come at a time when the industry experienced six consecutive quarters of deflation. The economic convention might dictate that an inflationary environment is not likely in the foreseeable future, but projections at the moment are indicating otherwise. The rationale for these bold predictions is that the spot rates have been trending towards an equilibrium where demand meets supply. After that, an inflationary environment might occur. This could come as early as the first quarter of 2020 and reach full swing after the halfway point of the year.
A Market Rebound Is Predicted
Despite the predictions of a market rebound, there are some words of caution for the market. First of all, the contract rates will remain negative for the rest of 2019. This trend will continue throughout the bid season and may only come to an end when the first quarter is complete. Nevertheless, the rates will rise for the rest of the year. For shippers, this signals that there will be a primary tender acceptance erosion by the second quarter of 2020. That prediction implies that there will be increased exposure to the spot market.
It is anticipated that spot rates will increase by about 5% when compared to the previous year. The increase in contract rates will be slightly lower at 2%. However, these relative changes are in line with the fact that spot rates are typically higher than contract rates. That is why many companies that wish to make savings over the years try to sign their contracts as soon as possible so that they do not have to deal with the vagaries of spot rates. Overall, any truckload shipment will cost more than the previous year. The consolation is that if these predictions are to hold, the prices will climb once more in 2020.
There may be some wiggle room for contract rates to be negotiated based on the current feel of the market. However, to leverage the market, it is critical to start the negotiations early. In any case, the 2% and 5% increases in contract and spot rates respectively are way lower than the double-digit gains that happened in 2018. The market has to adjust accordingly. The pricing surge of 2018 is not reflected in the 2019 figures. Some suggest that this is an indicator that the rates are going back to their normal levels since the economy recovered from the 2008 recession.
The effect of a recession
The projections are that the market swing could survive a recession, beating all earlier expectations. Experts argue that the swing is so significant that it can overcome the natural patterns of depressed demand and prices following a recession or during a recession. It is projected that economic growth in the USA will stagnate at about 2.1%, which is not quite a recession. Perhaps that is what explains the trends that are going contrary to conventional wisdom.
The forecasts by experts from IHS Markit producer price index or PPI are in line with other projections that have been quoted. Long-distance truckload pricing is expected to rise in the coming year. For example, the PPI is expected to rise by 3.2% by the second quarter of 2020. Although that does not indicate an identical increase in rates, it is on the upswing.
How shippers should prepare
The one variable that shipping companies and importers have in their hands is capacity. Shippers can increase and reduce capacity, depending on demand. For example, 2019 saw vast excesses of capacity as economic growth rates slowed. Ordering trucks during this year turned out to be a somewhat risky proposition, with many still languishing in motor carrier yards. This is a capacity that is under-utilized and therefore represents a cost to the industry. There are secondary markets that could be used to offset some of this excess capacity.
It is expected that the market will return to equilibrium due to the demand floor, which has been hit and is now rising. The experience over the years is that the market does not bounce along in an equilibrium state for an extended period. The two situations that are most likely are a supply surplus or a supply scarcity.
That is where the players in the industry can take advantage of opportunities in the market. When demand is very high or when they have precise projections of robust demand, then shippers can increase their capacity. When it is clear that demand is not going to rise, then perhaps it is a better idea to restrict capacity.
This article has shown that conventional economic wisdom does not always hold for the shipping industry. Although the USA sees a slowdown in its economic prospects, there is still justified hope that truckload rates are going to rise in 2020. This may be because the downturn in the US economy is not technically a recession and that the equilibrium point is going to be reached next year. Hence after June 2020, these rates will rise.