A Freight Recession: The Good and the Bad

Summary

• An industry analytics firm is forecasting a ‘freight recession’ – declining freight volumes for more than two quarters.
• The China Covid lockdowns is largely responsible.
• JBHT, a major player in freight transportation, reported stellar earnings, and suggested that the softer trucking market is more a sign of the economy returning to normal.

Market Implications

• The economy could be healing itself far ahead of the Fed.
• The risk is the Fed misreads the dynamics of China’s Covid lockdown and brings on something worse than a freight recession.

Freight Recession Threat Spooks Investors

On 31 March, FreightWaves, a data vendor and analytics firm that tracks the freight industry, published an article calling for freight recession in 2022. A freight recession is when freight volumes decline for more than two quarters in a row.

Freight-related equity indices fell 13% on the day. JB Hunt Transport Services (JBHT), a major player in freight, dropped 17% (Chart 1). To put that in perspective, that is about half of the selloff in late 4Q 2018 and 1Q 2020 – but those happened over a period of months and weeks, respectively, not one day.

FreightWaves based its forecast on declining tender rejection rates, or truckers not rejecting offers to ship loads. The implication is that trucking companies have gone from being able to cherry-pick the most attractive offers to becoming more likely to accept what shippers are willing to pay to keep their trucks on the road.

A big reason for this is slower imports from China, due to Covid lockdowns. One consequence is a decline in ships waiting to unload at Los Angeles/Long Beach, from over 100 late last year to about 45 now. A need to move less stuff, combined with more trucking capacity, has eased competition for trucking services.

JBHT Earnings Tell Another Story

But what may be negative for the freight industry may be positive for the broader economy.

JBHT reported robust 1Q results earlier this week ($2.29 EPS vs $1.94 expected) and offered some interesting comments that could have macro implications in coming months.

• Last year, demand for spot trucking services was very strong. With many retailers caught short inventory when the economy started reopening, shippers were willing to pay a premium to secure scarce trucks.

• Now, shippers are turning back to intermodal transport services, where goods are shipped via a combination of rail and truck. This takes more time but is also cheaper. Retailers seem to be better stocked so time is less of the essence.

JBHT specializes in the intermodal market, so this development is a big plus for the company.

Is the Economy Already Slowing Down?

Granted, freight equities are little changed since the big selloff. Despite stellar earnings, JBHT is up less than 1%. Clearly investors are taking warnings of a freight recession and associated economic slowdown seriously.

We must be careful about reading too much into one company’s earnings and views. But, putting these various strands together, a slowdown in imports and related freight activity could be just what the doctor ordered to help ease inflation and supply-chain pressures and allow the economy labour to gradually return to normal.

For example, the Baltic Dry Index is down 18% over the past month, suggesting ocean shipping demand and transport costs are easing. And to the extent that labour market shortages seem to be easing, wage inflation may also ease.

The broader point is that the economy may already be making adjustments to cool down and reduce inflation, far ahead of the Fed.

The Fed Risks an Overshoot

We would like to say a moderate slowdown should be constructive for equities. But there are several risks to consider.

• This easing is largely due to China’s Covid lockdown. If China reopens all at once, the transport/freight sector could soon be overwhelmed again.
• If the reopening is more gradual, it could be a nice soft landing for the US economy.
• If China’s lockdown continues indefinitely, the costs and inconveniences of shortages will stoke more inflation.

And then there is the Fed. If in its fervour to attack inflation it misreads the dynamic and shifting impacts of the China Covid lockdowns, it could bring on something more than a mere freight recession.

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.