Prepare yourself. There’s likely more coronavirus fallout to come in the freight markets.
That was the takeaway from Jason Miller, associate professor at the Michigan State University Eli Broad College of Business, who spoke with FreightWaves founder Craig Fuller during the FreightWaves 3PL Summit.
Fuller is very bullish. Miller, in contrast, sees a lot to be concerned about.
“From a carrier standpoint, it really comes down to what type of freight you’re hauling,” said Miller. “On the retail side I’m neutral to somewhat bullish in the near term — but that’s consumer retail. For industrial, I’m on the bearish side. If you’re a flatbed operator out in the Permian Basin, it’s not a good time right now. If you’re hauling for Home Depot or Kroger, it’s pretty smooth sailing at the moment.”
Retail freight risk
“I’m of the belief that we have a lot of artificial stimulus on the consumer side in the form of the $1,200 checks and the expanded unemployment benefits,” said Miller. “That’s going to be expiring soon.
“Come August, if we’re not starting to see a lot more folks back onto the payrolls, do we start to see that consumer engine die down?
“If we don’t start seeing unemployment numbers start to tick down very rapidly, I have a hard time seeing where the retail demand comes from.”
Industrial freight risk
On the industrial side, he warned, “We’re seeing a true global recession right now. I worry about what this is going to do to capital investment. For making companies want to hire back a large number of workers.
“There’s so much uncertainty. And what we know very well from economic research is that uncertainty spikes eventually turn into the same thing as demand shocks. Uncertainty goes up. Eventually that leads to falling demand. Less industrial production. Less employment.”
Rail freight risk
Weakness in the industrial economy has major implications for rail transport.
“I’m concerned with railroads from a secular-trend standpoint,” explained Miller. “The big one is declining coal volumes. We’ve seen that over the past several years as we’ve switched to more and more natural gas. Coal used to be the bread and butter — where the railroads made a lot of their profit.
“Also, on the industrial side, a lot of rail movements relate to oil and gas. That’s not helping [given weakness in oil and gas].
“There has also been a switch with fracking sand. A decade ago, most of the fracking sand came from Missouri and Wisconsin and was trained to the Bakken and Permian Basin. That was obviously very expensive. So, oil companies switched over to more locally sourced fracking sand and we’ve seen rail get [negatively] affected.”
What about intermodal, where rail competes with trucking? According to Miller, “We saw the CASS Intermodal Index price just plunge in May, down something like 17% year-over-year.
“I think railroads will need to substantially cut prices from where they were a year ago to get intermodal volumes. There seems to be a good amount of capacity in the truckload sector, we’ve seen contract rates in trucking drop, and we see trucking spot rates were where they reasonably should be.”
Trucking freight risk
Fuller asked Miller whether he thought shippers should lock in higher trucking contract rates given recent market strength as states reopen from COVID-19 lockdowns.
Miller replied, “Contract rates have fallen back to where they were around November 2017, prior to all the big increases we saw in 2018 due to the very hot spot market in the latter half of 2017 and early half of 2018.
“We’ve seen substantially all of the gains of the last shipping cycle erased. On the question of why shippers are being so aggressive in trying to lock in low rates, I think there’s a lot of pressure on many of them to claw back some of the money, given how brutal 2018 was [in terms of trucking costs].
“And right now, given that everybody’s budgets are not looking good with additional costs from COVID, I think any way to shave off some money is being supported.
“The risk they [shippers] run is if we do have a very robust recovery, we’ve seen about 6% of [trucking] capacity leave the market. If demand starts increasing much more rapidly than trucking supply can catch up, you’ll start seeing a lot of routing guide failure and that’s going to put pressure on those contract prices upward.”
Government stimulus risk
None of these freight outlooks — whether for trucking or rail, retail or industrial — can escape the role of government.
“We have never seen the Fed and Congress be this aggressive trying to stave off an economic downturn. But the concern I have is that long term, structurally, we’re taking on an incredible amount of additional national debt. At some point in time, we’re going to have to start paying the piper.
“Just as an example, how is the Federal Reserve going to back itself away from its extensive bond-buying program? When it started it was going to buy ETFs [exchange-traded funds]. Now it’s buying bonds. How do you back down from that? That’s not going to be easy.”
Fuller pointed out, “The Modern Monetary Theory [MMT] folks would argue that the government can effectively print as much money as it wants. As long as you’re not driving inflation, you don’t have to be held accountable and can keep printing dollars. I take it you’re not a believer in MMT?”
“No, I’m not,” answered Miller.
“I believe inflation is so restrained because we have different channels today through which we can restrain it. If prices get too expensive in the U.S., we can offshore production. That [option] wasn’t there in the 1950s, 1960s and 1970s. The other thing is that oil prices are under control. In the 1970s, inflation crises were due to oil shocks. We have a glut of oil supply. We don’t have to worry about that anymore.
“But I do not buy this argument that we can perpetually run deficits,” Miller maintained. “Maybe it’s because I was brought up in small-town Ohio — it’s just not the way I think of things.” Click for more FreightWaves/American Shipper articles by Greg Miller
MORE ON CORONAVIRUS AND THE TRANSPORT SECTOR: Q&A with Deutsche Bank transportation analyst Amit Mehrotra, who’s very bullish on 2021: see story here. Q&A with IHS Markit transportation consultant Paul Bingham on potential fallout ahead: see story here. How the loss of export markets is effecting U.S. energy volumes: see story here.