The Next Freight Recession And What You Can Do About It

Last year was one of the strongest years for transportation and logistics companies. E-commerce continued to gain market share and increase demand for parcel shippers; tariff uncertainty and freight pull-forward put a premium on warehousing space and services; steamship lines achieved something resembling pricing discipline on the Transpacific lanes; the capacity-constrained truckload sector enjoyed historic rate inflation.

Yet there are reasons to be wary—we know transportation is highly cyclical, and there are signs that all may not be well in the broader economy. In December, part of the U.S. Treasury bond yield curve inverted for the first time in more than a decade when the spread between 3- and 5-year yields fell into the negatives, signaling Wall Street's concern that rising Fed rates coupled with slowing growth could hurt the economy. In November, air cargo volumes from China to the United States were down about 5% year-over-year, and global air cargo volumes fell 2% from October to November, a peak season period when volumes normally grow.

Annual automobile sales in China fell in 2018 for the first time in more than twenty years after four straight months of double-digit contraction; meanwhile November U.S. home sales sputtered, posting their steepest decline since 2011. And, of course, we would be remiss not to mention the 19.8% crash in the S&P 500 from September through the end of 2018 that nearly pulled equities into a bear market.

There are numerous reasons to be worried about the health of global trade and the goods economy, even though, in our view, a full-on macro-economic recession in the United States is still unlikely. Instead, we think a sectoral recession involving, for example, the American energy industry, housing, and industrial production is far more likely. That kind of slowdown, as should be obvious, will have an outsized effect on the freight economy.

"As we kick off 2019, there are a number of headwinds that are emerging for the key drivers of freight demand," said Ibrahiim Bayaan, chief economist at FreightWaves. "Manufacturing, energy, and international trade are all showing signs of slowing down, and could potentially turn negative during the year. While this likely won't be enough to push the overall economy into a recession, there is a higher probability that freight volumes could contract as the year goes on."

 The chart below, from Stifel Financial, shows the high beta—the higher volatility—of transportation stocks relative to the whole market. The up cycles in the economy are amazing for transports, but the down cycles are really bad.

Whether you're a publicly traded transportation and logistics company or not, the chart is clear: supply chain participants are very exposed to the broader economy and are often more sensitive than a typical company, earning more in the good times but also losing more in the bad times. That's why it's smart for transportation and logistics companies to take the next freight recession seriously.

But what does a freight recession really mean? Whether you're a 3PL, steamship line, freight forwarder, parcel or truckload carrier, it comes down to the simple fact that there will not be enough freight to go around. Asset-based carriers (whether we're talking planes, trains, or automobiles) slowly build up their fleets over time—capacity is usually not very volatile, even though trucking added a significant amount of capacity during 2018. The big swings in transportation companies' earnings come from the volatility in demand: it can take decades to invest in the assets required to move the goods generated in a growing economy, but a downturn can convert those assets into under-utilized liabilities in a matter of months.

If there isn't enough freight to go around, who wins, or least survives? During the last bull cycle even a traditional freight brokerage with nothing special to offer could double its revenue every year for several years in a row. Some of these startups called themselves ‘tech-powered' when all they've really managed to do is customize someone else's TMS and find a posse of aggressive young salespeople. A rising tide lifts all boats. A downturn, though, separates the strong from the weak and the savvy from the complacent.

In our view, the next freight recession will intensify the competition between shippers, 3PLs, and transportation providers on both a cost and service basis. After getting wrecked by runaway costs in 2018, shippers' supply chain managers will live under a mandate to reduce their transportation budgets, optimize their networks, save money, while still outperforming their competitors on service, whether that means freight covered, visibility provided, or on-time rates.

Third-party logistics providers must find a way to compete with worried asset-based carriers on price at the same time that they offer better communicate. We've already spoken to a number of 3PLs, brokerages, and freight forwarders in the new year who indicated they're making aggressive plays for contract freight, anticipating a slowdown in spot markets.

A renewed focus on technology investment and digitization is really the only way to outperform peers on cost and service going forward. Automation that generates more through-put with a smaller headcount, allowing logistics companies to lower their prices while maintaining profitability. In the past few months, private equity firms told us that even in a climate of restricted credit that sees lower multiples for acquisition targets, tech-differentiated companies maintain high valuations.

"The market puts a premium on companies that differentiate themselves with technology, and tech leaders hold their value in recessions much better than tech laggards, who find themselves exposed in down cycles," said Chris Kirchner, Slync CEO.

Technology that enables seamless collaboration between supply chain partners and speeds time-to-decision will be especially valuable in a freight recession, the lean years when customer relationships and efficiency allow the best companies to grow against the wider industry.

Slync's platform brings siloed data to the surface so that it can be accessed in realtime by shippers, intermediaries, and consignees without relying upon manual communications processes. This simple advance—everyone sees the data relevant to them without having to send an email—is so valuable that it's hard to give up once you've experienced it.

We think that using ‘sticky' multi-party platforms your partners and customers don't want to leave can be one of the keys to differentiation in the next freight recession. When a software platform allows your partners to see more, know more, and can react faster to changing conditions, they're likely to want to keep using it and you. And the more money the platform saves them—whether in automated exception management, intelligent transit time prediction, or sheer visibility allowing decisions to be made in advance—the more eager transportation managers will be to work with your company.

"Our platform helps you become indispensable to your customers, so that you can build truly collaborative partnerships that survive and thrive regardless of fluctuations in the business cycle," Kirchner said.

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