The global supply chain landscape continues to present complex challenges, with experts closely monitoring shifts in demand, policy, and geopolitical events. Lee Klascow, a seasoned transportation analyst for Bloomberg Intelligence, recently shared insights from their mid-year forecast, offering a clear perspective on the next 6 to 12 months in the freight markets. Bloomberg Intelligence, the research arm of Bloomberg, comprises over 500 analysts and strategists worldwide, covering a vast array of industries, including all modes of transportation.
A significant factor shaping the current market is the unpredictable nature of tariffs. While initial expectations focused primarily on China, the current administration's policy of pursuing new trade deals simultaneously with multiple partners has been extremely disruptive to supply chains. This uncertainty has created erratic "pull forward demand" followed by periods of no demand, making it difficult for networks to plan resources and maximize profitability.
Recent consumer confidence data for June came in below expectations, highlighting potential cracks in what has long been a resilient consumer base. If consumer confidence continues to falter, it could weigh heavily on economic activity, with GDP expected to remain below 2% this year. Although the risk of a recession is currently considered relatively low, the probability on the Bloomberg terminal has risen to 40% from a low of 20% a few months prior.
The full inflationary impact of these tariffs is yet to be seen, but it is anticipated to become evident in the coming months. The question remains how significant this impact will be, whether adding a few tenths of a basis point or leading to more substantial increases. Should inflation reduce consumer spending power on discretionary items, it could directly impact freight volumes, potentially causing freight growth to fall below GDP growth.
The industrial economy, as measured by the ISM index, has been in contraction territory for 29 of the last 31 months. This index is a strong indicator for Less-Than-Truckload (LTL) demand, which has experienced mid-single-digit declines. However, the LTL industry benefits from its consolidated structure, providing it with pricing power and discipline. Consequently, LTL pricing, excluding fuel surcharges, is still expected to increase in the mid-single digits this year.
In contrast, the truckload spot market has shown only painfully slow signs of tightening. Weaker freight demand is expected to hurt this market more significantly than LTL, which has already been feeling the pressure for some time.
On the intermodal rail side, volumes have been strong this year, primarily driven by international shipments and "pull forward demand". Intermodal volumes are up around 5% year-to-date, though this growth is expected to moderate in the second half of the year due to tougher comparisons. Intermodal tends to perform better when rail operations are smooth, and while dwell times have significantly improved, speeds have seen less progress. The competitive edge for intermodal also relies on higher fuel prices, as it typically offers a 10-30% discount compared to trucking. With abundant capacity in the spot market and lower trending fuel prices, domestic intermodal currently faces challenges.
The persistent spread between spot and contract prices in the full truckload market is a major concern. Any meaningful change in rates is projected to be supply-side driven, necessitating more carriers to exit the market. Many truckers are currently operating from a cash flow standpoint rather than profitability, barely covering costs like their truck payments and insurance, with little left over for themselves. This unsustainable situation could lead more truckers to temporarily park their vehicles or seek alternative livelihoods.
Looking ahead to 2025 and 2026, consensus expectations for GDP growth in the Bloomberg terminal are 1.4% and 1.6% respectively. These figures suggest that the broader economy is not anticipated to experience exceptional growth. However, the trucking market itself could outperform the overall economy if supply continues to contract, leading to better earnings driven by a tighter market rather than a surge in demand. The current "freight recession" has lasted approximately three years, longer than typical cycles of one to two years.
The tanker market has recently experienced significant volatility due to increased tensions in the Middle East, particularly concerning the Strait of Hormuz. This crucial waterway accounts for 20-25% of all crude oil movement. Rates for very large crude carriers (VLCCs) have surged by 120-140% over recent weeks, though a normalization is expected.
A more pervasive factor supporting rates across dry bulk, tanker, and container liner markets has been the effective shutdown of the Suez Canal due to security concerns. Ships are forced to take the longer route around Africa, adding 10 to 15 days to voyages and significantly absorbing shipping capacity. Once the Suez Canal reopens, a considerable drop in rates across these segments is anticipated. Other global risks include the potential normalization of trade patterns following a resolution to the Russia-Ukraine conflict and the ability of China's economy to rebound, as China is a massive importer of commodities and a key driver for dry bulk and tanker demand.
As earnings season approaches, particular attention will be paid to releases from major providers. FedEx, which reports off-cycle, is expected to come in at the low end of its guidance due to weakness in the B2B market. The removal of the de minimis exemption for low-valued goods, which previously allowed duty-free imports, has also impacted freight volumes for parcel providers like FedEx, UPS, and DHL.
When the regular earnings season kicks off with JB Hunt in mid-July, the focus will be on contract rates. The outlook for contractual market increases has been considerably moderated over the past six months, from earlier expectations of mid-to-high single digits down to low-to-mid single digits at best, largely due to policy uncertainty emanating from Washington.
Distinguishing between a genuine freight rebound and a temporary "dead cat bounce" in this noisy market is critical. Current increases in demand are largely seen as "pull forward" and ultimately unsustainable. The upcoming peak season is expected to be more of an "elongated plateau" rather than a sharp peak and trough, which could be beneficial in the short term but may lead to "air pockets of freight" once it concludes. For example, a large number of ships are currently heading to Southern California, a volume not seen since January, as shippers aim to get freight delivered before the July 8th tariff deadline.
A true and sustained recovery in demand requires a significant reduction in uncertainty. While complete certainty is unrealistic, businesses need clear "guard rails" and established rules to operate, plan, and invest effectively. The current high degree of uncertainty forces constant creation of backup plans and "what-ifs," hindering stable operations and long-term strategic moves. The industry is in uncharted waters, looking for stable parameters to navigate forward.