SONAR Monthly Market Update - A deep dive into the freight markets with unprecedented - FreightWaves

SONAR Monthly Market Update - A deep dive into the freight markets with unprecedented - FreightWaves
SONAR Monthly Market Update
  A deep dive into the freight markets with unprecedented
         charts, analysis and market commentary.

                  January 2019 Edition

For distribution and use by FreightWaves SONAR seat licensed users only.


SONAR Monthly Market Update - A deep dive into the freight markets with unprecedented - FreightWaves
Table of Contents

1.   Economic Outlook…….…………………………….……………………………….……………………………….………………...Page 3-4

2.   Manufacturing……………………………..……………………..….……………………………….………………………………….Pages 5-6

3.   Retail and Inventories…..………………..…………..……...………………………………….………………………..……….Pages 7-9

4. Labor Markets………………………...……………...……………………..….……………………………….……………..……...Pages 10-11

5.   Housing and Construction………..…………………………….…………………….……………….………………..…Pages 12-14

6. International Trade………...…………………………………..…………………………………………………..…………...…Pages 15-17

7. Pricing and Inflation…………………………………….………………………….…….……………..……….………..…….……...Page 18

8. Policy & Risks………………………………….………………………….……………………………….…………………….….….Pages 19-20

9. Freight Market Overview…………………….……………………….……………….………..…….…………….………Pages 21-32


SONAR Monthly Market Update - A deep dive into the freight markets with unprecedented - FreightWaves
Economic Outlook

Source: Survey of Professional Forecasters, FreightWaves Economics

Current Environment: Signs of a slowing economy

Growth in the economy continued to show some signs of slowing down over the past month,
even as performance remains generally above trend to round out 2018. The U.S. economy
enjoyed two of the most impressive back-to-back quarters of growth in the middle of the
year, with GDP growing at a 4.2% and 3.5% annualized pace during the 2nd and 3rd quarters.

During this time, several areas of the economy enjoyed robust performance, with retail sales,
manufacturing production, and goods trade all seeing the fastest growth in years. Aside from
some weakness in housing, the economy has essentially been running on all cylinders for
most of the year. This kind of growth from some of the key drivers of freight demand
contributed to one of the strongest years for surface freight in recent memory, straining
capacity in the industry and fueling rapid rate increases both in contracts and spot prices.


SONAR Monthly Market Update - A deep dive into the freight markets with unprecedented - FreightWaves
Across nearly almost every sector, growth rates have come down from the highs experienced
in the middle of the year. After a steady stream of positive results, signs are emerging across
the economy that suggest that the pace of growth is slowing headed into next year. Growth
in most key economic indicators has come down from recent highs, and the current
environment suggest further slowing as we head into 2019.

Consumer spending remains the primary engine of demand in the economy. U.S.
households have benefitted throughout the year from a strong labor market, and the rapid
pace of hiring and wage growth has fueled income growth in the economy. Going forward,
conditions for U.S. consumers are likely to remain favorable as the tight labor market fuels
additional strength in wage growth. However, U.S. households will not get the same boost in
2019 from a tax cut like they did in 2018, and the implementation of scheduled tariffs next
year will likely hit consumers harder next year. As a result, growth on the consumer side is
likely to be strong, but not as strong going forward.

Tariffs also appear to be taking a bite out of business demand, as concerns over the future of
trade policy have reduced the incentive for firms to invest. In addition, the recent plunge in
oil prices has take the legs out from underneath the U.S. domestic energy sector, which had
been one of the strongest areas of growth. This reduced appetite for investment has caused
manufacturing activity to stumble towards the end of the year, and data on orders for
investment goods suggests that demand will remain subdued in upcoming months.

Housing also continues to face challenges. Construction activity has been the lone consistent
source of weakness throughout 2018. Recent data has been distorted by weather-related
distortions due to the hurricane season, but rising mortgage rates and and challenges with
supply will again hinder housing activity in 2019.

All of this suggests that the U.S. will continue to grow slightly above trend in upcoming
quarters, but will slow significant from the rapid pace seen in the middle of the year. We
expect growth of 2.4% in the fourth quarter, and 2.6% for all of 2019.


SONAR Monthly Market Update - A deep dive into the freight markets with unprecedented - FreightWaves

In the industrial sector, industrial production (IPROG.USA) growth beat expectations in
November by advancing 0.6% from October’s levels. Year-over-year growth improved to 3.9%,
down from the rapid pace of growth in the 3rd quarter but still strong by historical standards.
However, much of the gain was driven by a surge in utility production during the month,
fueled by particularly cold weather across much of the country. This type of weather-related
surge does not mean much for the fundamentals of the industrial sector, as gains in one
month are typically reversed quickly once weather returns to normal.

                                                       Manufacturing industrial
                                                       production, which excludes utility
                                                       and mining production from the
                                                       total, stalled in November.
                                                       unchanged from October’s levels.
                                                       In addition, results from the
                                                       previous two months were revised
                                                       downward, leaving behind a more
                                                       dismal view of the health of the
                                                       manufacturing sector as we near
                                                       the end of the year. Year-over-year
                                                       growth in manufacturing
production (IPROG.MFTG) has now tumbled all the way to 2.0% after reaching a multi-year
high of 3.8% a couple of months ago.

In addition, data on new orders suggests that manufacturing activity may remain subdued in
upcoming months.
Manufacturers’ new orders for
durable goods (ORDR.DG)
increased just 0.8% in November
from October’s levels, on the
heels of a 4.3% decline in the
previous month. The fluctuations
over the past couple of months
have been caused by swings in
the volatile transportation
equipment component, which
often experiences non-seasonal
surges in aircraft orders.
Excluding transportation equipment, durable goods orders actually declined by 0.3% as
year-over-year growth stayed below 5%. Core capital orders, which are a proxy for investment


SONAR Monthly Market Update - A deep dive into the freight markets with unprecedented - FreightWaves
Manufacturing (cont.)

spending on equipment, fell by 0.6% during the month. Durable goods orders serve as a
useful leading indicator of future durable goods shipments (SHIP.DG), typically leading
shipments in the economy by 1-2 months. Orders excluding aircraft have now declined in 2
out of the last 3 months, heightening concerns over the future strength of manufacturing
activity. Durable goods manufacturing has been one of the standout areas in terms of
                                                               industrial output throughout
                                                               the year, and a slowdown in
                                                               durable goods production
                                                               would further restrain output.

                                                                  Oddly enough, the hard data
                                                                  on output and orders is
                                                                  telling quite a different story
                                                                  than survey results from the
                                                                  manufacturing sector. The
                                                                  Institute of Supply
                                                                  manufacturing purchasing
managers’ index (PMI) continues to signal robust growth in the manufacturing sector.
Results from PMI data represent the percentage of survey respondents that report that
activity is expanding, so numbers above 50 signal expansion in the manufacturing sector.
PMI data historically has a tight correlation with year-over-year growth in manufacturing
production, with readings above 55 signaling above average growth in manufacturing.

Because of this, it is a bit surprising to see the recent results from the manufacturing PMI
data (ISM.PMI), which has hovered between 55 and 60 throughout most of the year. PMI data
has come down slightly from the 14-year high of 61.3 set in August of this year, but still
remained elevated at 59.3 even as manufacturing production growth slowed considerably.
Moreover, survey responses related to new orders have also been exceptionally strong,
diverging from the hard data on new orders in the economy.

These type of disconnects in the data happen from time to time and are usually resolved
quickly, either through one of the series shifting to meet the other going forward or revisions
to previous data showing that the disconnect never existed. Some of the regional surveys of
manufacturing activity have also declined recently, which would suggest that the national
PMI data will soon come down to match the actual output data.


SONAR Monthly Market Update - A deep dive into the freight markets with unprecedented - FreightWaves
Retail and Inventories

As mentioned earlier, after a brief lull in spending to start the year, consumer spending has
been one of the real highlights in the economy throughout 2018. This trend in retail spending
largely continued in November, though total sales in the sector rose just 0.2% from October’s
levels. Year-over-year growth (RESLG.USA) moderated to 4.2%, which is well below the 6+%
                                                                   highs seen earlier this year
                                                                   but still strong by historical

                                                            In addition, the gain in
                                                            November came despite a
                                                            sizeable decline in gasoline
                                                            sales . Retail sales figures are
                                                            nominal measures, and the
                                                            collapse in gas prices
                                                            throughout the month
                                                            depressed sales figures at gas
                                                            stations. Core retail sales,
which exclude motor vehicles and gas, rose 0.5% in November and are now up 4.6% from this
point last year.

Gains during the month were generally broad-based with every other major industry
category except for building materials, apparel, and restaurants expanding during the
month. Electronics stores, furniture stores, and nonstore (mostly online) retailers led the way,
with each industry seeing stronger than 1% monthly growth.

November’s retail result give the first official
glimpse at sales performance during the
holiday season, and the strength of core
spending during the month points to an
impressive peak season for retailers.
Anecdotal reports and data from private
companies such as Mastercard and Adobe
Analytics further underscore this strength,
indicating that holiday growth in 2018 was
one of the strongest in recent years.

We expect the official holiday sales
numbers, which exclude auto, gasoline, and
building material sales, to come in at 4.5%
higher than they were in 2017.


SONAR Monthly Market Update - A deep dive into the freight markets with unprecedented - FreightWaves
Retail and Inventories (cont.)

This would place it slightly below the 5.3% pace seen in 2017, but still makes 2018 one of the
strongest years for holiday retail in the past decade. As has been the case all year,
e-commerce likely grew in above 15% during the holiday season, continuing to gain
significant share in the retail space.

It is also worth remembering that e-commerce during the holiday season works a bit
differently than it does during the rest of the year. Because so many of the purchases are
gifts for others, there is typically a surge in return volume in the weeks following Christmas.
This typically keeps parcel demand high through the early part of January, and for LTL
carriers may require some deliveries from a residential location to a warehouse or retailer.

However, there are signs emerging that retail growth may begin to slow down going
forward. Consumers are likely to still find themselves in a generally favorable environment in
upcoming months, with solid job growth and rising wages providing the fundamentals for
retail spending. However, consumers will not another boost to disposable income in 2019 as
they did in 2018 with the passage of the Tax Cuts and Jobs Act. As a result, disposable income
growth should remain healthy, but not as strong as it was throughout 2018.

Secondly, the next wave of tariffs on imports from China will target more consumer goods if
they are implemented as planned in 2019. This means that the prices of things that
households typically purchase may experience a level shift as retailers are forced to
accommodate the higher cost of imported goods. This would further restrain consumer
spending in the economy and lead to weaker retail performance in 2019.

Lastly, equity markets have plunged over the past couple of months. The S&P 500 has
declined nearly 15% since peaking on October, with nearly 10% of that decline coming in
December alone. This reduces the amount of household wealth in the economy, which
negatively affects consumer spending. There are also signs that suggest that this recent drop
in the stock market is starting to affect consumer confidence. The Conference Board’s
consumer confidence index experienced the largest monthly drop in over three years in
December, with a severe decline in consumer expectations about the future health of the
economy. Confidence is still generally high even after the dip in December, but if the collapse
in stock markets deepens and confidence falls further, consumers may not be willing to go
out and spend even if they have the ability to go and purchase products.


SONAR Monthly Market Update - A deep dive into the freight markets with unprecedented - FreightWaves
Retail and Inventories (cont.)

On the inventory side, levels have climbed steadily over the past couple of months after
falling in the 2nd quarter of the year. Due to tariff concerns much of this inventory build has
been driven by US businesses importing more goods than they traditionally would. This has
caused inventory/sales ratios to creep up from the lows seen earlier in the year. The total
                                                                 business inventory-sales ratio
                                                                 (TBIS.USA) reached 1.35 in
                                                                 October after hitting a
                                                                 multi-year low of 1.33 in the
                                                                 middle of the year.

                                                                This trend is likely to continue
                                                                for the remainder of the year,
                                                                which should ease some
                                                                time-sensitive pressure on
                                                                carriers that were previously
                                                                held to just-in-time inventory

In addition, if businesses are indeed bringing goods into the ports earlier than normal and
storing them in inventory, then once tariffs hit there should be a shift away from port
volumes and a rise in shipments from warehouses to retailers or manufacturers. When this
happens, inventory/sales ratios should continue to drift downward, resuming the trend seen
earlier this year.


SONAR Monthly Market Update - A deep dive into the freight markets with unprecedented - FreightWaves
Labor Markets

Of course, any strength that emerges from the retail sector hinges on continued support
from job and income growth. The impressive pace of hiring and accelerating path of wage
growth boost consumer sentiment in the economy provide critical support for spending

Job growth slowed down as ​the the economy added 155,000 workers to payrolls during the
month, down from a downwardly-revised gain of 237,000 in the previous month. This fell well
short of consensus estimates of a 198,000 gain, but is still a solid number on the heels of last
month’s impressive result. Job growth has now been positive for a record 8 years and two
months in a row, and has averaged over 200,000 per month since the start of 2018.

                                                               Other measures of labor
                                                               market health suggest that
                                                               hiring conditions remain
                                                               generally tight in the
                                                               economy. The unemployment
                                                               rate (UEMP.USA) held steady
                                                               at 3.7%, matching the lowest
                                                               rate in the economy since
                                                               1969. Wage growth also
                                                               continued to advance at a
                                                               solid pace in this morning’s
                                                               report, as average hourly
earnings rose 0.3% from October’s levels. Yearly earnings growth exceeded 3% last month
and remained unchanged at 3.1% in November. This would suggest that the shrinking pool of
available workers is leading businesses in the economy to raise wages in an effort to attract
and retain employees.

Going forward, the combination of a lack of qualified available labor and higher wage rates
will likely cause the pace of hiring to slow from the current pace. The 155,000 jobs added
result seen in November is likely to become the norm for the labor market. The economy is
beginning to transition from a high job growth, modest wage growth environment to one
with more modest job gains but better wage growth. As long as economic growth in the
economy remains at or above trend, labor market conditions will remain tight and this shift
should continue in upcoming quarters.

However, like many of the other indicators in the economy, there are some concerns that
hiring in the economy may slow faster than expected. Survey data has increasingly reported
that businesses in the economy are concerned about all of the uncertainty surrounding trade


Labor Markets (cont.)

policy. The U.S. recently agreed to a cease-fire in the ongoing trade dispute with China, but
has yet to reach a concrete resolution. What this means is that the air of uncertainty
surrounding tariffs is likely to remain at least through the early parts of 2019, and businesses
may be more reluctant to hire new workers.

Our view is that a prolonged trade dispute will eventually have a negative impact on hiring
trends in the economy. However, most of the job growth in the economy comes from the
service sector, which is less affected by tariffs and trade policy. As a result, job growth is likely
to remain strong enough to keep the labor market tight in upcoming quarters.Despite the
sowing pace of job growth in the overall economy, hiring within the transportation and
logistics industry remained strong as employment grew by 25,400 during the month. As was
the case in October, much of the gain was driven by parcel companies, which saw the largest
monthly job gain in nearly two years with 9,900 workers added to payrolls. Warehousing and
storage also enjoyed strong employment growth, adding 6,200 jobs in November

                                                             The trucking industry also saw
                                                             solid hiring during the month,
                                                             adding 4,500 workers during
                                                             the month on a seasonally
                                                             adjusted basis (EMPS.TRUK).
                                                             This was offset by downward
                                                             revisions to previous data,
                                                             which revealed a slight
                                                             decline in trucking hires in
                                                             October. Still, trends within
                                                             the industry continue on a
                                                             general climb, and
employment within for-hire trucking is now 2.5% higher than at this point last year.

To put this in perspective, consider that employment in the economy overall is growing at a
1.7% pace. This would suggest that the trucking industry is gaining some ground as it
attempts to address the capacity crunch. Hiring in the industry is not occurring as quickly as
it among parcel companies and warehouses, which benefit from exceptionally strong growth
in e-commerce demand. Trucking employment is growing faster than other modes of
surface transportation however, and is even outpacing manufacturing hiring in the economy.


Housing and Construction

As mentioned earlier, housing and construction has been a consistent source of weakness for
freight demand and the economy overall. Housing continues to be plagued by problems on
both the supply and demand side of the market, restaining the amount of activity that most
expected at the start of this year

On the construction side, housing starts(HOUS.USA) jumped in November, rising to a 1.256
                                                            million annualized pace from
                                                            a 1.217 pace in the previous
                                                            month. The gain in November
                                                            was entirely driven by a rise in
                                                            the volatile multifamily
                                                            component of housing starts.
                                                            Single family home starts fell
                                                            4.6% in November and are
                                                            now 3.6% lower than at this
                                                            point last year.

                                                                 As was the case in September
                                                                 and October, data on
November housing starts was distorted by weather events. While results in previous months
were restrained by hurricanes hitting the South region, November data on single-family
home starts was held back by the recent wildfires in California. Single-family starts in the
West region (HOUS.URWT) fell
by a whopping 24.4% in
November, helping to bring
down the overall housing
numbers. This decline was
partially offset by a 6.8% gain
in the South, likely boosted by
rebuilding activity after the
hurricane season.

All of these weather-related
fluctuations have made it
difficult to interpret the
underlying trends in recent months. On one hand, the results from the single-family
construction sector were not as bad as the numbers might suggest, because the downturn
in the West is only temporary. In fact,


Housing and Construction (cont.)

the weakness in November should lead to additional construction in upcoming months, as
residents look to either rebuild or replace their damaged homes.

On the other hand, there was already some rebuilding activity helping to boost single family
construction during the month. In addition, the West wasn’t the only region to experience a
decline during the month. Every other region except for the rebuilding-aided South saw
declines in single family home construction during the month, suggesting that the softness
in the sector is much broader than just a temporary weather problem.

The fact is that housing had already been a disappointment before any of these major events
occurred, and once all of the rebuilding happens, the construction industry will still be faced
with some key concerns. The construction industry continues to struggle with finding skilled
workers to build homes. In addition, home builders have struggled with a lack of developed
lots for building. This shortage of available lots for construction means that prospective home
builders have to pay more for the limited supply available. This adds to the costs of building
new homes, and further contributes to the disappointing building activity in 2018. Headed
into next year, there are no easy solutions for these problems, and we expect housing starts
to continue to struggle once all of the weather effects fade.

Unfortunately, it may be quite a while before we get a clear picture of construction trends.
Even without major weather events like hurricanes and wildfires, housing data can be
difficult to interpret during the winter months. Abnormally cold or warm weather in
December, January, and February can cause unusual jumps or declines in building activity.
Add to that all of the pent up building activity caused by damages from recent events, and it
is likely that housing construction data will be quite volatile through the early part of next

On the demand side, sales have also been a disappointment throughout the course of the
year. However, recent signs suggest that the pace of sales may be picking up as we near the
end of the years. Purchases of previously-owned homes rose for the second straight month,
rising to a 5.32 million annualized pace in November from a 5.22 million pace in October.
However, even with improvement in recent months, existing home sales are still 7.1% lower
than they were at this point last year.

The lack of available inventory for purchase remains a key issue for existing home sales.
Home building activity has been weak, so potential buyers are having a hard time finding
homes for purchase. This, in turn, has pushed up prices in the economy throughout the
course of the year and further affected demand.

Rising mortgage rates may also be curbing activity. The pace of home price appreciation has
eased in recent months but the 30-year mortgage rate has increased by 60 basis points


Housing and Construction (cont.)

throughout the course of the year. This has further affected the ability of potential consumers
to purchase a home.

Lastly, the recent change in the tax code contained some provisions that were unfavorable to
homeowners. Specifically, the limits placed on the amount of property taxes that can be
deducted from taxable income have removed some of the incentives for purchasing
higher-end homes, particularly in high property tax states in the Northeast. As with
construction, these issues are not disappearing any time soon, so expect home purchasing
behavior to advance at a slow pace in upcoming quarters.

The softness in home buying has begun to affect some of the connected industries in retail.
Home buying typically drives remodeling and renovation spending, as well as additional
spending on home furniture and household appliances. Retail spending on building
materials and appliances have seen growth in 2018, but have lagged behind overall retail
spending in the economy. It is through these channel that home sales affects freight
demand in the trucking industry, and weakness on the home sales front combined with
softness in home building has negative implications going forward.


International Trade

In the trade sector, all eyes have been focused on goods import and export numbers for signs
that the recent implementation of tariffs on many imported goods is beginning to affect
global trade patterns. To this point, tariffs have certainly introduced some volatility into usual
trade behavior, but overall trade volumes remain generally strong as we round out the year.

On the export side, much of the volatility has been driven by agricultural exports. China
                                                                implemented tariffs on US
                                                                exports of agricultural
                                                                products such as soybeans
                                                                and sorghum in July of this
                                                                year in retaliation for some
                                                                tariffs that the Trump
                                                                administration placed on
                                                                imports from China. This led
                                                                to a surge in agricultural
                                                                exports during the 2nd
                                                                quarter in advance of the
                                                                tariffs, and pushed overall
                                                                goods export growth
(GOEXG.USA) to a multi-year high above 13% in May.

China followed up the tariff hike with an outright ban on soybean imports from the U.S. As a
result, exports of agricultural products have struggled in recent months, dropping 6.8% in
October after an 8.0% decline in September. This has weighed down overall export growth,
which has fallen below 9% in the most recent data. China has recently agreed to lift the ban
on soybean imports, which should help export performance in upcoming months

Not everything here is tariff related however. Global growth among some of the U.S.’ key
trading partners is beginning to show signs of slowing down, most notably the UK and the
rest of the European Union. This makes for a tough export environment, and will likely
continue to be an issue in upcoming quarters even if tariffs are not increased any further. In
addition, the U.S. Dollar has appreciated over 5% in real terms since the start of the year. This
makes U.S. made goods comparatively more expensive and further hampers export

On the import side, the U.S. has already implemented 10% tariffs on a number of Chinese
imports, in addition to earlier tariffs on imports of steel and aluminum. Up until recently, the


International Trade (cont.)

U.S. appeared set to raise the tariffs on Chinese-made goods to 25% at the start of 2019, which
led many businesses to begin bringing in imported goods ahead of schedule to avoid the
potential tariff hike. As a
result, goods imports
(GOIMG.USA) have surged in
recent months, with growth
reaching as high as 11.5%
before moderating in
October. Like exports, there
will likely be some payback
on the import side in
upcoming months. Even if
tariff increases never
materialize, businesses
already find themselves with
higher than normal
inventories of imported goods, and will likely scale back import behavior while these
inventories get drawn down. This may disrupt some of the normal seasonal patterns,
particularly those are Chinese New Year which takes place early next year.

Also like exports, there are some fundamentals at play in the recent import results. The
strength in the domestic U.S. and general tightness in capacity for U.S. businesses
encourages imports of goods from the rest of the world. In, addition, the gain in the value of
the U.S. dollar makes foreign goods comparatively cheaper and further encourages import

What this means is that the trade deficit may rise even with the U.S. placing or increasing
tariffs on goods from the rest of the world. There are likely to be some wild swings in import
and export performance as the U.S. and other countries hash out their plans for trade policy,
but the deficit should tend to generally widen in upcoming quarters

A widening trade deficit is not necessarily bad news for freight demand, however. Both
import and export movements are good for ocean, air, and surface freight demand, so as
long as overall trade is growing, it is generally good news for carriers. October’s results were a
bit of a disappointment in this regard, as the decline in goods exports outweighed the gain in
imports. Still, year-over-year growth in to the total value of traded goods (exports plus
imports) is growing at al healthy clip despite all of the global concerns over U.S. trade policy.
Growth has hovered near double digits since the end of 2017, and has yet to show any real
signs of slowing.


International Trade (cont.)

The bigger concern from a trade perspective isn’t whether or not tariffs will increase to cost
of trading with other countries, it’s the state of global growth. With signs in the U.S. economy
pointing towards a less impressive year of growth in 2019 and growth among major trading
partners also beginning to slow, overall trade volume growth will likely moderate from the
rapid pace seen in 2018.


Prices and Inflation

Overall, signs from nearly every areas of freight demand point to softening growth headed
into next year. In addition, hiring trends within the industry suggest that trucking has been
adding capacity at a decent clip. As a result, trucking will likely feel less capacity-constrained
in 2019 than it did in 2018.

As a result, rate increases should calm somewhat within trucking. Year-over-year rate
inflation in the trucking industry is facing increasingly tough comparisons to last year, which
is going to put downward pressure on yearly gains going forward. Freight rates began their
surge last in August in the aftermath of Hurricane Harvey, and continued through the
impressive holiday season of 2017 and the ELD mandate. As a result, the tough comparisons
                                                                 should lead moderating yearly
                                                                 rate growth even if rates
                                                                 continue to climb.

                                                                 This phenomenon is already
                                                                 playing out in the Producer
                                                                 Price Index (PPI) data released
                                                                 by the Census Bureau, which
                                                                 measures the prices that
                                                                 businesses receive for the
                                                                 goods and services they
                                                                 provide.. Year-over-year
                                                                 growth in the PPI for the
trucking industry (PPIG.GFTK) has come down from the record high of 9.8% set in July of this
year, settling in at 8.3% in November. However, rates are still making solid advances in the
industry, with the PPI for trucking making an impressive 1.2% monthly gain in November
after a solid 0.5% increase in the previous month.

Gains during the month were largely driven by long-distance truckload services, which
posted a second consecutive monthly gain above 1% with a 1.3% gain in November. Both
truckload and LTL services enjoyed healthy gains during the month, with rates rising 1.2% and
1.6%, respectively. Local trucking rates also experienced a respectable 0.5% increase during
the month, and are now 10.1% higher than at this point last year.

This would suggest that carriers still retain some pricing power in this environment of
moderating demand,and have been able to extract higher rates across many different types
of freight. Year-over-year rate inflation probably will not reach the highs seen in July for quite
some time, but the pace of rate increases is still well above average as we head into next year.


Policy and Risks

Much of this outlook for above-average but moderating growth going forward hinges on the
policy environment as we head into next year. Drastic changes to fiscal, monetary, and trade
policy could have significant implication for the performance of the economy in upcoming
quarters, and there are a number of issues that remain unresolved at the end of 2018.

Trade policy has been at the forefront of the policy arena throughout much of the year,
beginning all the way back in February when President Trump announced the first tariffs on
steel and aluminum imports from the rest of the world. Much of the attention has been
focused on the U.S. trade relationship with China, which has turned into an escalating
dispute over what the U.S claims are unfair trading policies regarding U.S. intellectual

The U.S. was initially scheduled to increase existing tariffs on goods imported from China to
25% at the start of the year. In addition, the Trump administration threatened to broaden the
scope of the tariffs to potentially include all goods imported from China. However, President
Trump and President Xi Jinping of China met during the G-20 summit in Argentina at the
end of November and agreed to halt any escalation in the trade dispute until March while the
two sides try to come to an agreement on trade policies going forward.

The good news is that this gives the economy a bit more time before some of the more
painful tariffs kick in. As mentioned earlier, a broadening in scope of tariffs combined with
higher tariff rates would have a bigger impact on U.S. consumer and could damage
consumer confidence and cause a level shift in prices in 2019. Unfortunately, the agreement
reached during the G-20 did little in the way of actually solving any of the existing issues.
What this means is that the cloud of uncertainty that has lingered over the economy
throughout 2018 is going to remain an issue in 2019 as well. Businesses already appear to be
reluctant to make any big investment plans given the unresolved status of trade disputes,
and this trend will continue until some of these issues reach a conclusion.

In the fiscal arena, the partial shutdown of the government has thrown a surprising wrinkle
into the mix. President Trump and Congress were unable to reach an agreement to fully fund
the government by the December 21 deadline, leaving several key areas of government such
as the Department of Homeland Security and the Department of Transportation without
money at the end of the year.

Historically, government shutdowns are fairly short-lived. The government had already shut
down twice in 2018, with each shutdown lasting only a few days. The last significant
shutdown came in October of 2013, when President Obama and Congress argued over
funding for Obamacare. and shuttered the government for two weeks. GDP growth during


Policy and Risks (cont.)

that quarter was noticeably impacted, with the shutdown subtracting approximately 25 basis
points from quarterly growth.

This current shutdown will likely be less painful on a week-to-week basis, because most
agencies have already secured funding through previous agreements. However, most signs
point to this shutdown being considerably longer than average. Congress is out of session
until January 3, and has made no plans to hold emergency sessions to resolve the shutdown.
In addition, the Trump administration has drawn a hard negotiating line over funding for the
border wall along the Mexico border, and will soon have to deal with an incoming House
where Republicans no longer hold the majority. If this shutdown drags on, the economic
impact could be much larger even if only part of the government is not operating.

In addition, questions have emerged over the future pace of monetary policy. The federal
Reserve increased interest rates for the fourth time this year in December The prevailing
feeling from the Federal Reserve for most of the year has been that there would be an
additional 3-4 hikes in the key federal funds interest rate next year, matching the pace seen
throughout 2018. However, the Federal Reserve has recently changed its tone, suggesting
that there will be a pause in rate increases next year. With inflation low, unemployment near
historical lows, and signs emerging that growth is slowing, the Fed may decide to hold off on
rate increases entirely.

It is worth noting that there is a considerable lag between when monetary policy is enacted
and when it actually takes hold on economic activity in the economy. What this means is that
the economy next year will be affected by the rate increases that were put into place
throughout 2018, particularly for the housing and automotive sectors. Even if there are not
further increases from this point, much of the impact on 2019 growth have already been put
into place.


Freight Market Update
The November freight market recovered slightly after bottoming near the end of October.
Tender rejection rates increased slowly through the first couple of weeks before spiking near
the Thanksgiving holiday. Volume was a factor as the national tender volume index
(OTVI.USA) averaged approximately 1.5% higher than October during the month. There was
not a lot of volatility aside from the typical holiday disruption. As with October there was no
noticeable event that lead to national disruption.


Even with volume increasing slightly over October, there was not enough to destabilize the
market like we saw in 2017. Last year the market was still reeling from the hurricanes and was
entering one of the biggest retail shipping seasons in the past five years. Even though total
volume was higher in 2018 there were numerous issues with imbalance as trucks had moved
to the gulf coast region for the recovery efforts.

The big story this year has been the tariffs and their impact to the economy and
subsequently freight market. Maritime shippers have been able to capitalize on increased
volume as the international shippers scrambled to pull inventory into the U.S. in order to buy
time to reorganize their supply chains. This activity has put increasing pressure on ports and
drayage carriers. A lot of the volume hits the largest port in the country in Los Angeles, but it
has overflowed to some of the eastern ports like Savannah.

November saw rates continue to increase for most of the month, but then took their first
significant downward turn in November for the first time since the summer. The volume
spilled into the freight market in November, fueling the L.A. markets with outbound freight.


The Cass Freight Expenditure Index – an index that measures total freight spend including
intermodal and rail – fell for the second consecutive month, returning to a more normal
pattern after increasing during this time in 2017. After hitting record highs from May to
September, the index has dropped from a value of $2.99 to $2.85 in November. The drop is
another indication demand is weakening in relation to supply, and volatility is lower.

Along with signs of freight market slowing there is indication the capital expenditure side is
slowing as used truck prices for 3 (UT3.USA)and 4 year (UT4.USA) models contracted together
for the first time this year. The stimulus from the tax breaks and booming freight market


revenue may be running low as orders are filled and signs of a slowing economy are visible.
There are still reports of backlogs from OEMs as there is about a 6-9 month cycle from order
to delivery, but it looks as though demand on the used truck end may have peaked.

The big story of the month was the continued volume coming out of Southern California.
After having a record month, both the port of Los Angeles and Long Beach cooled down –
L.A. loaded inbound volume down 8.8% and Long Beach up 0.2% YoY. This did not translate
to the outbound freight due to the delay of getting freight off the ship to a facility to prepare
for inland shipping. Some of the freight does get put straight onto the rail but a lot of it will
be brought to a transloading facility or stored until needed.


Related to the inbound container volume, intermodal containers shipped on rail have been
steadily increasing since 2017 and hit the second highest weekly volume of all time the last
week of November – 271,198 containers. The biggest volume week occurred in late
September of this year at 272,955 containers.

With L.A. and intermodal dominating the freight market in November, tender rejection rates
increased 416 bps in the first two weeks. They hit the top on November 23​rd​, the day after
Thanksgiving, at 14.67% before starting to fall and ending the month at 8.54%. The
rollercoaster ride was the result of carriers moving off and on the coast as there was little
freight moving back into the market.

Aside from the abundance of port volume, reefer demand also played a big role in keeping
L.A. heated most of November. Reefer rejection rates hit summertime levels around
Thanksgiving as holiday demand fueled a lot of food product movement. Reefer rejection
rates topped 35% in late November – a level higher than all of May and most of June when
produce season in normally in full swing. With the main production areas for lettuce and
other Mediterranean crops moving south these rates subsided quickly by the end of the


Further up the coast in the Northwest tender rejection rates hit annual highs as the apple
harvest and Christmas trees moved out of the region. Oregon is the number one producer of
Christmas trees in the country and the week of Thanksgiving is the heaviest week on
average. The Outbound Tender Rejection Index for the Northwest region (OTRI.URNW)
reflected this with the index peaking at 27.96% after Thanksgiving.

The Northwest markets typically have more inbound than outbound loads -backhaul- but
trended the other direction this month. The Portland Headhaul Index (HAUL.PDX) hit its
highest value of the year of -10.52, an indication that outbound volume had increased


significantly in relation to inbound volume. This is the time of year carriers can go into the
region and have a good chance at landing a load without deadheading long distances.

The rural Pendleton, OR (OTRI.PDT) and Twin Falls, ID (OTRI.TWF) markets hit their highest
rejection rate levels of the year in late November after trending up from August through
October. As mentioned, the late fall harvests had an impact on capacity, but this was
probably exacerbated by the rush of freight coming out of L.A. as trucks were occupied
deeper into the 4​th​ quarter than usual.


The extended port season had little impact on the rest of the U.S. as volume was relatively
low in other major markets. The Dallas market which is heavily tied to activity on the West
Coast did experience a boost of volume after declining steadily since the end of June.

Subsequently rates coming from L.A. to Dallas increased and topped their summer peak
level, hitting the annual high of $2.52/mile the day after Thanksgiving. This did not last long as
the rates swiftly recovered after peak demand to around $2.00/mile a week later.

The rates from L.A. to Seattle increased but not to the same extent as that had in relation to
the summer peak in years past. Thanksgiving rates are typically 13-17% lower than summer
peak levels. 2017 was an anomaly as the Thanksgiving rates were only 1.6% lower than the


summer peak. This year we saw rates 22% lower than the late June peak. This is a function of
June being the hottest month for freight in over a decade and the general market cooling.
Rates were still up approximately 7.7% year-over-year.

The market remained relatively quiet on the east coast. Chicago was flat with a little hitch in
volume occurring around Thanksgiving. Volume took a quick dip in the Joliet market, where
several railheads are located, prior to the holiday and then jumped after the break as the L.A.
freight hit the market for the holiday rush. Capacity was plentiful as tender rejection rates fell
throughout the month, however.


Further east Harrisburg, PA experienced declining volume but decreased capacity, save for
the days immediately preceding Thanksgiving. With carriers supplying the west coast this
left the northeastern corridors exposed to reduced capacity even as volume declined.
Volume dropped approximately 13% the first 16 days of the month then spiked 13% before
dropping 21% to finish the month well below where it started. Tender rejections also
recovered after the break.

Atlanta was relatively quiet in November along with most of the Southeast. Volume was
relatively falt but did take a few turns during the month. Capacity was not as available as it
had been leading into the holiday but moderated to close the month.


The major port in the southeast is the port of Savannah. As the west coast ports were clogged
with freight, maritime shippers discounted rates to the east coast to help relieve some
pressure. This did not hold for long as rates and volume increased after the first week of
November. Outbound volume surged after Thanksgiving as well as freight was moved from
the port to regional distribution centers and cross dock facilities. Many major shippers like
Home Depot and Amazon have facilities nearby.


Heading into the colder months weather becomes an increasing factor on day to day
movement. Unlike tropical storms the winter events tend to be short lived disruptors versus
the months it can take to recover from a hurricane. Aside from a few bigger systems that
moved across the upper Midwest and into the Northeast there was little major impact from
any significant weather event. The days leading up to Thanksgiving were very quiet in terms
of precipitation across the country.

Looking Ahead

Moving into December we have not observed too many large disruptions. November was a
far cry from the November of 2017 and so far, December is proving to be much different as
well. Is it a return to normal or just a brief respite? Economic conditions are smoothing, but
freight volume is higher than it was a year ago. The biggest difference seems to be the lack of
large disrupting event that throws the market out of balance. The heavy port volume may
have been a bit of a pulling forward of volume which may leave the winter months with less
to move. Although there is a surplus of freight sitting in warehouses that will move
eventually. It is just a matter of how much is needed and when.


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