With so much focus on Washington in the first days of the Trump administration, the January State of Freight webinar with FreightWaves and SONAR CEO Craig Fuller could have focused solely on politics and its impact on freight markets.
But in the monthly discussion between Fuller and SONAR’s director of market intelligence, Zach Strickland, they found a few other key topics to discuss as well as the machinations in Washington and what they will mean for logistics. Here are five takeaways.
After Strickland displayed a chart showing that rail volume in the past year has risen while the Outbound Tender Volume Index (OTVI) has fallen during that time, he noted that so much of the discussion in markets focuses only on trucks as a source of capacity. “They’re talking about how many trucks are there, and where are the trucks going?” he said. “How many trucks are leaving?” But meanwhile, he said, “they grew capacity in the intermodal market by 5% to10%.”
Fuller said there is a concept of “dispatchable capacity,” which puts intermodal and trucks together as a total. And railroads are in a position to take a bigger share of that, he added.
“The railroads have their act together and they didn’t necessarily have that a few years ago,” Fuller said. With labor peace in place that Fuller said “actually favors labor quite a bit more than it did in the past,” it means that “crews are largely supportive of where the railroads want to be. The railroads are taking advantage of these opportunities and inflection points,” he added.
Another force in the market pressuring over-the-road trucking companies is the rise in private fleets, Fuller said: “They’ve expanded exponentially over the last couple of years.”
Leaning into the chaos
Supply chains will be impacted by the volatility that comes with a Trump presidency. “Even when you think things are settled or not, he’s always negotiating in his mind,” Fuller said. The webinar took place two days before sweeping tariffs on Canada and Mexico are due to be put into place. Fuller cited the recent stand-down by Colombia over a dispute that would have involved steep U.S. tariffs on Colombian imports, “and I think what this means is that if you’re in the supply chain, you really are not going to catch your breath, because there’s always something.”
But the relatively quick end to the Colombian conflict reveals another part of the Trump playbook, Fuller said. “Oftentimes, he makes a huge threat and is happy to take some type of victory. Never underestimate Donald Trump’s willingness to accept victory at any moment in time.”
Why the continued bankruptcies if things are getting better?
With bankruptcies still piling up in the industry, Fuller said he was talking to somebody on Wall Street who wondered why, if the freight market is showing signs of improvement, there are still bankruptcies.
As Fuller put it: “The balance sheets have memory. You can have an improving situation in the market, and you still have all these operating deficits that you have to contend with. That is the reason the market can still be in decline.”
In an unusual twist, Fuller said sometimes improving markets can help trigger a bankruptcy that had been bubbling under the surface for a while. The reason: used truck values. “The equipment now is more valuable to banks because they feel like they can sell it and flip it so they will repossess it,” he said. “When the market is bad, they don’t want the equipment. So when you see a firming of residual values, they’re like, ‘Hey, we can actually liquidate this equipment.’ Getting half your money on a payment is better than nothing at all.”
Still bullish?
Fuller is still bullish even as Strickland noted that the OTVI in SONAR has started to slip. Through most of the freight recession, OTVI has held relatively firm. “I’ve been burned a number of times over the last couple of years by being really bullish in January when things do collapse,” he said. But there are other data points, like the rise in the Outbound Tender Rejection Index to a level near 7%, that still point to bullishness.
Fuller also said various statements on earnings calls this quarter suggested strength. “They’re seeing some of the shippers start to get ahead with higher rates earlier in the cycle than they have in the past,” he said. “And that suggests to me that everyone is sort of positioning themselves for a better year.” For shippers, the increasing risk is that “you could run out of trucks or have high spot rates.”
Fuller also said the narrowing gap between contract and spot rates suggests continued market tightening. A weak market has contract solidly above spot; a stronger market can see the reverse. Trends now point to spot rates catching up with contract rates.
What do deportations have to do with trucking capacity?
Fuller began his remarks on the subject of deportations and trucking capacity by saying he didn’t want the discussion to be political. He also noted that the highly publicized arrests of undocumented immigrants in the early days of the Trump administration obscure the fact that arrests and deportations were at higher rates in other administrations, including the eight years of Barack Obama.
But given their visibility, Fuller offered two scenarios. One is that a worker in a visible location like a meatpacking plant who is concerned that the site will be raided by U.S. Immigration and Customs Enforcement might think he’s safer in a truck if he has the capability to drive. But offsetting that in terms of capacity is the fact that a lot of the people who are being arrested might be found working in such occupations as construction. And there has always been a trade-off between workers going back and forth between construction and trucking.
“Those businesses are losing people, and when they lose people, those jobs become competitive,” Fuller said. “So we will pull some capacity out of the market, because drivers are ultimately the determinant of capacity.”
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