Times are good right? Economic growth is strong. Unemployment is low. Business and consumer confidence remains high. It’s pretty easy to say that most small business owners are doing pretty well this year. Except if you’re in the trucking business.
That’s according to a number of recent reports that cover the freight industry. They are not great.
For example, a regular analysis by industry researchers at Morgan Stanley has confirmed that shipping rate expectations have sunk well below 2016 levels and a “meaningful rebound in the second half of the year” is not expected. Adding to the industry’s woes is a recent report from Supply Chain Drive that other industry reports as well as the closely-watched Cass Freight Index have all shown declines in shipment and rate levels over the past few months.
“With the drop in May, we see the shipments index as going from ‘warning of a potential slowdown’ to “signaling an economic contraction,” Donald Broughton, the author of the Cass Freight Index wrote in his study. “Bottom line, more and more data is indicating that this is the beginning of an economic contraction.”
Broughton has been right before. Is he right now?
He could be. Broughton points to declines in international air freight, domestic railroad and chemical shipments as significant negative factors. He and others believe that the ongoing trade dispute between China and US is having an impact not only on this year’s shipments but contributed to a spike in last year’s volume as firms ordered more in advance of a potential trade war. A decline in oil and drilling investments is also not helping.
All of these factors make sense. And they’re having their impact. Already, a few trucking firms – such as LME in New Brighton Minnesota and ALA Trucking Inc in Anderson, Indiana – have had to close their doors because of factors related to the slowdown. Small truckers like Christopher Powell are also suffering. “I don’t know how long I can stay in business if things don’t pick up,” he told Business Insider. Powell’s earnings before expenses have dropped from $7,000 to as little as $3,500 per week over the past year.
Is the economy to blame? Sure. But there’s something else behind the trucking industry’s woes: mismanagement.
I don’t mean anything illegal. I’m talking about cash flow and managing your business through the ups and downs of a cycle.
“The cyclicality in trucking is also based on the classic mismatch in the timing of demand for transportation that creates a capacity crunch because there aren’t enough trucks, as it had done last year, that in turn creates a boom in orders of trucks,” writes Wolf Richter in his finance publication Wolf Street. “And when a few quarters later those trucks are being delivered, this is precisely when demand for transportation is starting to slow down, cycling the industry from capacity crunch to overcapacity in a very short time.”
Some managers get this and some don’t. The ones that don’t suffer the consequences. The ones that do – like some of my smartest clients – ride things out.
The lesson for company owners in the freight business and other cyclical industries like it is simple: things are never as good (or as bad) as they seem. That means building reserves. Just because your industry – like the trucking industry – is having a boffo year (like last year) doesn’t mean the next year (like this year) will be as good. Don’t spend all that extra cash. Sock a good portion of it away because you’re going to need it to see you through the inevitable downturns.
The good news? Even though researchers at Morgan aren’t bullish, others think that things could be looking up later this year. One analyst, Tim Denoyer of ACT Research, says that “for the first time this cycle, we see evidence on the horizon for an eventual bottoming and upturn in spot truckload rates, thanks to low new truck orders and improving capital discipline from the trucking industry”.
Do you believe him? It doesn’t matter. What matters for trucking business owners is that you’ve got the cushions to see you through even if he’s wrong.