bongdaso ìnoNews #88 - Freight markets brace for impact of proposed tariffs

Domestic freight demand is not only strong, it is growing stronger.

Yet this statement, supported by data from SONAR, U.S. trade agencies and numerous industry observers, rings false to many carriers operating in bongdaso ìno market today.

It might even call to mind bongdaso ìno recent brow-beating and haranguing that sought to convince Americans — for whom, in bongdaso ìno two years since 2021, bongdaso ìno price of groceries had risen 20% — that their economic fears were unjustified, that they were simply trapped in a “vibecession” of their own making.

This article makes no such claims about bongdaso ìno state of bongdaso ìno trucking industry. Rather, it examines bongdaso ìno ways that freight markets might be shaped by bongdaso ìno controversial tariff proposals of President-elect Donald Trump, both in bongdaso ìno short term and over a longer period of time.

For months now, it has been clear that shippers have frontloaded record imports to bongdaso ìno country, largely to avoid expected tariffs. This has spurred bongdaso ìno U.S. trade deficit to its highest level since April 2022, flooding markets with a wave of unseasonal freight.

But — if there is so much freight reaching bongdaso ìno U.S. — why hasn’t carrier sentiment improved?

There are two sides to every market: supply and demand. While freight demand is outpacing many of bongdaso ìno bearish forecasts from bongdaso ìno past few years, its growth is yet unable to satisfy bongdaso ìno tremendous glut of capacity that has survived in bongdaso ìno market beyond all expectations. This imbalance has depressed carrier rates for more than two years; it is lower rates, not scarce demand, that have spread pessimism throughout bongdaso ìno industry.

In other words, there’s been a bountiful harvest, but there are still too many mouths to feed. There are good reasons to believe that this excess capacity will not be able to hold out much longer, but such predictions have been frustrated before.

Regardless, it’s not just overcapacity that’s weighing on sentiment in bongdaso ìno trucking industry. Compared with bongdaso ìno pre-pandemic era of 2017 to 2019 (a period also host to a freight recession), yearly growth in inflation-adjusted consumer spending on goods has fallen from an average of 3.7% to nearly 2% in 2024 thus far. Consumer spending on durable goods — a valuable source of truckload volumes that includes furniture and home appliances — has fared even worse, with yearly growth more than halving from an average of 5.6% to 2.5%.

bongdaso ìno rapid and unsustainable growth in consumer spending that did occur in 2020-21, bongdaso ìno growth that led to bongdaso ìno current overcapacity crisis, was an ill-timed prelude to bongdaso ìno surge in inflation set off by Russia’s invasion of Ukraine in 2022. Left with little savings after a historic spending spree, consumers began to rely on credit to cover bongdaso ìno rising costs of living. Accordingly, consumers have pulled back on discretionary purchases.

A slowdown in consumer spending was bongdaso ìno outcome desired by bongdaso ìno Federal Reserve, which raised interest rates at bongdaso ìno fastest pace in four decades to combat inflation. A less desired, though still intended, effect was that businesses found it more difficult to borrow money for capital investments.

bongdaso ìno industrial economy, but particularly bongdaso ìno manufacturing and construction sectors, is highly vulnerable to sustained quantitative tightening. bongdaso ìno industrial economy also happens to be bongdaso ìno largest supplier of freight to trucking markets. Despite bongdaso ìno Fed’s cutting rates on Thursday for bongdaso ìno second time this cycle, interest rates are still high and manufacturers are still pessimistic, putting out fewer shipments over bongdaso ìno road.

Surfing bongdaso ìno wave of imports

Yet any softness in manufacturing volumes is more than offset by 2024’s incredible growth in U.S. imports.

bongdaso ìno above chart shows bongdaso ìno shipment volumes cleared by U.S. Customs and Border Protection at all ports in bongdaso ìno country. What is first apparent is that imports have grown this year over 2023; as 2023 was a relatively weak year for import volumes, this feat is not so impressive.

But, for nearly two weeks in September, bongdaso ìno import volumes flowing through U.S. ports outshone bongdaso ìno historic growth of 2021 and 2022 — topping out at a level not seen in two-and-a-half years. If one has even bongdaso ìno dimmest memory about ocean shipping in 2021, demand for which led to record congestion at ports and container rates that tripled virtually overnight, one realizes how incredible 2024’s growth is.

This growth came at a cost, however: bongdaso ìno U.S. trade deficit also widened in September to its highest level in two-and-a-half years.

Although bongdaso ìno U.S. trade deficit (particularly with China) is a politically charged issue relative to bongdaso ìno broader economy, its growth is an unequivocal good for truckload markets — at least in bongdaso ìno short term. A greater deficit implies a high degree of consumer spending on imported goods, which are then moved via bongdaso ìno rails and on trucks.

Yet bongdaso ìno greatest downside of a large trade deficit comes from bongdaso ìno reliance on a foreign power for bongdaso ìno domestic supply of freight-intensive goods. Most trade is mutually beneficial, which usually makes this risk a distant concern — unless, say, a trading partner has geopolitical designs contrary to one’s own.

Under bongdaso ìno coming Trump administration, volatility in global trade is likely to be a constant. In addition to bongdaso ìno tariffs enacted in his first term, many of which have been retained or even amplified by President Joe Biden, Trump campaigned for a 60% tariff on Chinese goods and proposed a 10% blanket tariff on all imports.

bongdaso ìno short-term effects of this stance have been visible for months now. Import bookings, which precede bongdaso ìno arrival and processing of shipments by several weeks, have continuously been at their highest levels since 2020. Containerized intermodal volumes have performed similarly since June.

But bongdaso ìno rails are not bongdaso ìno only ones profiting from this boom: Survey data from bongdaso ìno Logistics Managers’ Index (LMI) has seen a divergence in bongdaso ìno growth of warehousing capacity and utilization, with bongdaso ìno latter rising at a rapid clip since August.

And, not to be forgotten, bongdaso ìno actual flow of truckload freight has seen yearly growth almost constantly throughout 2024 so far:

In short, shippers are so concerned about bongdaso ìno impact of any potential tariff increases that they have broadly elected to pull forward their freight by months or even years. Yet, as discussed previously, bongdaso ìno consumer is currently not in a great position to buy these goods.

So, shippers are stashing their freight at warehouses — hence bongdaso ìno rise in utilization relative to capacity — or they are moving it over bongdaso ìno rails at a leisurely pace, or they are pushing it inland via trucks. That bongdaso ìno trucking industry has been only a modest beneficiary of bongdaso ìno surge in imports implies that shippers are largely unconcerned about bongdaso ìno speed at which their freight gets to its final destination.

Feast or famine?

While bongdaso ìno short-term effects of Trump’s tariff proposals are immediately apparent, bongdaso ìno long-term consequences are up for debate.

If this trade policy works as intended, bongdaso ìno manufacturing sector will accelerate its ongoing process of reshoring operations. This process has been in motion to some degree since even before bongdaso ìno financial crisis of 2008, but bongdaso ìno trade war of 2018 and bongdaso ìno COVID-19 pandemic were two of bongdaso ìno prime catalysts that spurred companies to tighten their supply chains.

One such trend that was exacerbated by bongdaso ìno pandemic was an increasing distrust of China as a base of operations. Companies that retained a significant manufacturing presence in China during this period found themselves frustrated by bongdaso ìno country’s frequent and abrupt lockdowns, which halted bongdaso ìno production and export of goods on an unpredictable basis.

After bongdaso ìno sanctions imposed on Russia following its full-scale invasion of Ukraine in 2022, manufacturers are wary of housing operations in countries that could be exposed to international sanctions. bongdaso ìno obvious flash points here are Taiwan and bongdaso ìno South China Sea, as tensions around both have continued to escalate well into 2024.

But there are factors beyond China’s governance that are facilitating bongdaso ìno return of manufacturers to North America. One of bongdaso ìno key benefits of moving operations to China used to be its low wages. Yet, according to analysis from Bank of America, hourly wages in China’s manufacturing sector soared 700% from 2006 to 2021.

In Mexico, such wages have risen by only 5%.

To put it bluntly, if a 60% tariff on Chinese goods is introduced in Trump’s second term, it is likely to change only bongdaso ìno speed — not bongdaso ìno course — of manufacturers’ plans.

Yet critics argue that Trump’s tariff proposals, especially a 10% blanket tariff on all imports, would reignite inflation. In fact, bond yields surged after bongdaso ìno Republicans’ sweep, meaning that financial markets fully expect bongdaso ìno combination of tax cuts and tariffs to lead to a higher fiscal deficit and greater inflation.

Higher inflation would, in turn, compel bongdaso ìno Federal Reserve to withhold future rate cuts — if it does not begin to raise interest rates altogether. Higher interest rates would further depress domestic manufacturing and consumer spending in a one-two blow for bongdaso ìno trucking industry.

This scenario is not implausible and might well be likely. Tariffs have not been raised to this degree since World War II. bongdaso ìno global economy has changed vastly since that time, leaving little guidance (and much speculation) on how tariffs would function in a far more interdependent world.

But even if these worst fears come to pass, they do not preclude bongdaso ìno tariffs from also working as intended. For bongdaso ìno trucking industry, domestic freight demand will get a boost in bongdaso ìno coming months before bongdaso ìno tariffs are implemented. Once they are in effect, demand is likely to slow, being driven primarily by domestically produced goods and imports still lingering in warehouses.

During this soft period, bongdaso ìno final pockets of overcapacity will leave bongdaso ìno marketplace. Meanwhile, manufacturers will continue to reshore operations as described, a process that is hardly reversible.

Finally, once manufacturers have settled into their bases and are ready to ramp up production, domestic freight markets would see another boom in demand that bongdaso ìno industry is underprepared to accommodate — assuming that it sheds, as it usually does, too much capacity in bongdaso ìno downturn.

This imbalance of supply and demand would once again drive up carrier rates, attracting more capacity to enter or return to bongdaso ìno market, and bongdaso ìno cycle would begin anew.

Source: https://www.freightwaves.com/news/freight-markets-brace-for-impact-of-proposed-tariffs

Share this article