America's 'industrial recession' is so bad that truckers are warning there won't even be a 2019 peak season

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America's 'industrial recession' is so bad that truckers are warning there won't even be a 2019 peak season

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  • Following a round of mediocre third-quarter earnings, trucking giants are pointing to a recession in manufacturing and industrials. XPO Logistics CEO Brad Jacobs said there's been an "industrial recession" for about a year - thanks largely to President Donald Trump's trade war with China.
  • Industrial movements are so low that it might undo any 2019 peak season.
  • Transportation giants like UPS and FedEx aren't going to be as slammed by the drop in industrials, because the retail economy is still relatively healthy.
  • Click here for more BI Prime stories.

America's trucking sector has been in a recession since the first-half of 2019.

And, more than ever, the leaders of the $800 billion industry are blaming their woes on an industrial recession - one that's being kicked off by President Donald Trump's trade war.

"We have been in an industrial recession for the last year, and I say that just based on the objective fact that not only us but the entire LTL industry has seen negative tonnage growth in each of the last four quarters," XPO CEO Brad Jacobs said in a call to analysts on October 29.

When the rest of America is headed for a downturn, freight usually dips first, a report from Convoy's economic-research division said. The industry went into a recession in April 2006, more than a year before the rest of the economy was clobbered by the Great Recession, starting in January 2008.

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A tumble in trucking doesn't always foretell a recession for everyone else. The freight industry goes into recession twice as often as the rest of the economy, according to Convoy.

One key industrial number dipped to its lowest level since June 2009

Analysts, and an onslaught of blue-ribbon indicators, agree with XPO's Jacobs. The Institute of Supply Management said manufacturing has been contracting for three consecutive months, and in October, its trademark index slipped to its lowest level since June 2009. (The November ISM number reflected a slight uptick.)

New orders for American-made products and equipment investment saw an unexpected drop in September. Factory goods orders dipped 0.6% in September, the US Commerce Department reported on November 4. Meanwhile, economists polled by Reuters had predicted the measure would decrease by just 0.5%. Orders fell by 0.1% the month before.

Read more: One of America's largest trucking companies is quietly closing its operations of a Pennsylvania warehouse and will lay off dozens

"Any way you look at it, the industrial economy is slowing and has been slowing for the last year and a half," Amit Mehrotra, Deutsche Bank's transportation and shipping analyst, told Business Insider.

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Freight volumes have also dropped from record levels in 2018, in part because of trade tensions. The Cass Freight Index reported on October 14 that North American freight volumes have declined for 10 straight months.

In the first half of 2019, around 640 trucking companies went bankrupt, according to industry data from Broughton Capital LLC. That's more than triple the amount of bankruptcies from the same period last year: 175.

Read more: A major trucking company just slashed 10% of its workforce - and it shows the trucking 'bloodbath' isn't over

Manufacturers, sensing that they'll need fewer trucks, are buying fewer trucks as a result. ACT Research reported on October 28 that the heavy truck market is set to "continue to deteriorate" through 2020, given that trade uncertainty continues. The market then won't see growth again until 2021, according to ACT.

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Meanwhile, in rail, which has also been slammed by the industrial downturn, Moody's Investors Service wrote in an October 31 note that rail freight volumes are set to dip by as much as 3% in the next 12-18 months. The railroad analyst team had previously estimated a freight volume increase of 0.25% to 1%.

But it's important to separate that industrial downturn from an uptick in the consumer market

While industrials are suffering, the consumer economy is relatively strong, Moody's rail analysts wrote in the October 31 note to clients. "It's a tale of two cities," Kevin Sterling, managing director of Seaport Global Securities, told Business Insider.

The healthy consumer economy explains why UPS is calling for a "record" peak season for online holiday shopping, and hiring 100,000 temporary workers. FedEx will hire 55,000 temporary workers for the 2019 holiday season.

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There's a split between the industrial and consumer economies because trade tensions are dragging down industrials. The demand for US products have dipped, so factories are making less and trucks are moving fewer goods. Manufacturing comprises 11% of the US's gross domestic product.

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"The trade war and the uncertainty tax have caused a significant and large downward drag on overall domestic industrial activity," said Joe Brusuelas, the chief economist at RSM. "The risks around the direction of trade policy have caused large declines in fixed business investment and is one of the primary reasons why the Trump administration is quickly looking to strike a deal."

Read more: We just got the latest sign of a downturn in US manufacturing - the opposite of what Trump's trade wars were supposed to accomplish

Should trade tensions resolve, industry watchers say the industrial and trucking downturns should settle.

"There is this view out there that the downturn that we're currently in, at least with respect to the industrial economy, has the potential to be short and shallow as opposed to deep and long - if we get some resolutions on the trade policy side," Mehrotra said. "So, there is some sense that maybe this downturn that we're in has somewhat been manufactured because of some of the trade rhetoric that's driven people to defer spending and cap backs."

It's so bad that 2019 might not see a real peak season

The recession in industrials is so bad that some trucking giants are warning that the 2019 peak season - the time between Thanksgiving and Christmas when consumers buy more goods and services - will be muted.

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Even though consumers aren't buying less, the industrial recession is so massive that it's eating into retail. "What's happening this year is the industrial economy is so weak that it's actually gotten negative," Sterling said. "The truckers come look at overall freight flows and say, 'Wow, we're way down just because industrial is so negative.' If industrial was more flat, you'd hear more positive out of these guys."

And that caught industry insiders by surprise.

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The trucking mainstay Hub Group, which generated $3.7 billion of revenue in 2018, is another transport giant that reported volume declines this quarter. Hub CEO Dave Yeager told Business Insider in September that he expects a 2017-like peak season, but volume declines are so serious that that's not likely to happen.

Ultimately, peak season will look more like the slow-growth years of 2015 or 2016, industry insiders and watchers said.

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"Basically because we're not seeing a peak season like we did last year," Hub CFO Terri Pizzuto told analysts in an October 30 call. "And when we talked about our projections back in July, we thought we would see a peak season similar to 2017, and we really haven't seen that either, both on the Intermodal service line or in truck brokerage, for that matter."

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