Warning: Weak economy ahead

Trucking and rail capacity and service shifted in 2019 compared with 2018. Instead of the high spot-market rates and capacity shortages that shippers faced during 2018, freight transportation markets mostly improved in 2019 with available supply overtaking weakening demand.

Trucking companies found themselves with excess capacity as the pace of shipping demand downshifted from 2018. As a result, shippers benefitted from lower trucking rates and adequate capacity. The pressures from limited truck driver availability, even with tight labor markets, were also less severe.

Article Figures

[Figure 1] Percent change in real U.S. business fixed investment Enlarge this image

[Figure 2] Change in U.S. industrial production and real GDP Enlarge this image

Railroads, for their part, saw a shrinking in unit volumes for intermodal services year-over-year as well as for almost all carload commodity categories. While further adoption of Precision Scheduled Railroading operating practices—such as more precise train car supply management and as a result more consistent transit times—had some impact on volumes, the underlying cause of the freight sector weakness was a slowing freight economy in 2019.

While U.S. household consumption was relatively strong, it was offset by weaknesses in manufacturing, agriculture, and trade-related shipping. Will this situation reverse itself again in 2020, or can shippers expect a continuation of the favorable freight market conditions they saw in 2019? Economic conditions will determine the answer.

2020 outlook

IHS Markit is forecasting that a weak economy will make 2020 another challenging year for carriers. Despite very low unemployment and resilient consumer spending, business investment and industrial production will continue to slow, contributing to a further weakening of freight demand in 2020. IHS Markit expects U.S. real gross domestic product (GDP) to grow only by 2.1%, which is 0.2% slower than the estimated 2019 economic growth of 2.3%. In contrast, the tight freight market conditions in 2018 happened while the economy was growing closer to its potential at 2.9%.

This outlook doesn't bode well for strengthening underlying freight demand, and it doesn't offer much hope to carriers looking for a year-over-year reversal for their markets. For supply chain managers, the macroeconomic forecast outlook implies restrained transportation cost increases, limited sales volume growth to manage, and continued tight labor markets.

We expect mostly downside risks to these baseline forecasts, meaning that growth could be lower as a result of an adverse shock. Factors that could potentially impact growth negatively include policy mistakes and/or drops in business and consumer confidence.

Business investment decreases

There is even more to the story that supports our baseline forecasts. In 2019 the pace of business fixed investment grew only by 2.2%, a drop of two-thirds from 2018's strong 6.4% rate of increase. IHS Markit forecasts business fixed investment growth to slow further to a rate of 1.7% in 2020.

The data on specific categories of business investment reveals more about the weakness in 2019 freight demand. (See Figure 1.) The pace of business investment in structures fell into negative territory in 2019, while investment in equipment slowed to nearly flat levels. Investments in intellectual property, which often enhances productivity, slowed the least in 2019. As indicators of freight demand, however, it is the structures and equipment investment categories that matter the most.

The IHS Markit forecasts for 2020 business investment don't offer much hope for carriers. We expect that we are near the bottom of this cycle for equipment and structures investment growth and do not anticipate seeing a recovery until 2021. The relative resilience in intellectual-product investments will help sustain aggregate business investment growth for 2020, however, this category of investment boosts freight demand the least.

Slow growth for manufacturing

The growing weakness in the manufacturing sector in 2019 is observed in the industrial production data, which shows that manufacturing has been hit harder than overall industry output. (See Figure 2.)

During 2018 the strength in U.S. industrial production contributed to strong freight demand. In 2019 this trend has strongly reversed with the consequences for carriers being the difficulty in finding shipments to haul. IHS Markit's forecast for 2020 is for industrial production to begin to recover, averaging a slow, but positive, 0.3% growth for the year. Manufacturing sector production will start to grow slightly faster than overall industrial production. Yet it will be well below the pace reached during 2018.

Freight market implications

With economic growth weakening, will carriers regain their pricing power through disciplined deployment of capacity in 2020? IHS Markit forecasts further slowing in heavy-vehicle sales in 2020, which indicates trucking companies are no longer expecting business growth to support capacity expansions like they made in response to the 2018 levels of demand.

To be sure, truck equipment replacement cycles will continue as an element in annual sales, and low interest rates will continue to make financing costs attractive to financially strong carriers. Yet truck manufacturers are trimming their sales expectations, which is consistent with the manufacturing weakness seen in other sectors as well. Meanwhile railroads are expected to continue to reduce staffing and locomotive power in 2020 in response to the 2019 declines in traffic and the further adoption of Precision Scheduled Railroading practices.

However, despite carriers scaling back capacity (and additional motor carrier bankruptcies), IHS Markit does not expect shippers will face a return to 2018 rate levels. The discipline of carriers in deploying capacity will mostly serve to limit further rate reductions and not create new freight transportation service availability problems for supply chain managers in 2020.