Falling freight rates, weak outlook again put shippers in driver's seat

The truckload contract-bidding season is likely to leave shippers with smiles on their faces.

Over the long term, the smiles may turn to frowns should the economy turn and the low rates vanish. The short term, however, is another matter. As a top executive of a large 3PL put it at the end of September at the Council of Supply Chain Management Professionals' (CSCMP's) annual meeting in Orlando, "There's never been a better time to source freight."

No matter where one looks, the picture is of user-friendly pricing. A monthly index of per-mile truckload line-haul rates declined in September by 3.5 percent year over year, making it seven consecutive months of declines, audit and payment firm Cass Information Systems Inc. and investment firm Avondale Partners LLC said earlier this week. Avondale, which analyzes data from freight bills audited and paid by Cass, forecast that rates will rise no more than 1 percent through mid-2017, and could fall by as much as 3 percent until then. The familiar culprit: Sluggish demand—save for e-commerce—combined with excess truck capacity.

A separate monthly index from Cass that measures shipments and expenditures—the amount that was spent on freight services—also showed sluggishness. Shipments fell sequentially by 0.4 percent, while dropping 3.1 percent year over year, the 19th consecutive month of year-over-year declines. Expenditures rose 5.2 percent sequentially, while dropping 3.8 percent year over year, Cass said.

The increase in sequential spending is due to higher diesel fuel prices, not improved pricing, Cass said. As evidence, Cass pointed to a monthly index of intermodal line-haul rates showing a 0.7-percent year-over-year decline in September. The index excludes the impact of diesel-fuel prices, and thus omits fuel surcharges from its measurements. Cass prepares that index along with Avondale as well.

Intermodal, for its part, isn't faring much better. Though the September drop was an improvement over the average monthly decline of 2.4 percent for the past 20 months, pricing might weaken anew should truckload contract rates continue to fall, as is expected, the firms said. Intermodal rates tend to move in concert with truckload rates.

Avondale said in its analysis that "contract rates for trucking have been losing strength (even going negative in many lanes), which would imply even more potential weakness for intermodal pricing."

If J.B. Hunt Transport Services, Inc.'s third-quarter results are any indication, big wholesale intermodal buyers are having trouble passing on higher rates to their customers. The Lowell, Ark.-based company, which generates roughly 60 percent of its revenue from intermodal, said a 2-percent year-over-year drop in rates, excluding fuel, was a key reason that operating income fell 7 percent year on year, even though volumes rose by 7 percent over the same period.

The pattern is unlikely to change in the immediate future, according to Avondale. Businesses are still working down inventory levels, which have been elevated for many months, while a strong dollar and subpar overseas demand is hurting export activity. E-commerce continues to grow, while volumes supporting auto and housing/construction have downshifted, mirroring the leveling off in both sectors.

The overarching issue is a persistent U.S. industrial recession, now approaching its 20th month, Avondale said. The ongoing weakness "continues to weigh on overall volumes," the firm said.