The global economy has been growing for years now. After the housing market crash of 2008, banks collapsed and the economy quickly contracted. But since about 2011, there has been steady economic growth— sometimes quickly, sometimes more slowly, but more or less constantly.
That may be about to change.
Economists are beginning to notice the early signs that a recession could be on the horizon, despite being in a period of economic growth. The shipping industry is often one of the first to exhibit those signs. As businesses anticipate a shrinking economy and reduced customer demand, they tend to slow production and reduce inventory levels. That means they need to move smaller and smaller volumes of goods. When the shipping industry sees falling demand and reduced rates — a slowdown, in other words — the rest of the economy is likely to follow.
Within the shipping industry, we’re not waiting for Recession 2020. Most measures say the slowdown is already here.
Signs of a Recession
A recession, strictly speaking, is two quarters of negative sector growth. ACT Research confirmed in July that their data meets that definition. “Every freight metric we look at has been negative for at least six months,” ACT President Kenny Vieth told FreightWaves.
Those metrics include five key datasets. The Cass Freight Index fell 6% year over year in May, marking its sixth straight month of decline. Less-than-truckload tonnage has fallen year over year in seven of the last eight months. Despite three good weeks at the beginning of 2019, volumes on Class I railroads have fallen for 26 straight weeks.
Further, the for-hire trucking index has been below neutral for six months. And the DAT Solutions Trendlines spot market loads have declined not just for the last six months, but for the last 10, most recently posting a 50% decline in year-over-year freight spot market loads.
In other words: Shippers across the industry are moving far fewer goods than they did a year ago.
The cycle of slowdowns don’t come as a huge surprise. Demand — and, consequently, revenues — soared in 2018 as the economy grew and shippers rushed to stock up on inventory before tariffs kicked in. Economists didn’t think 2019 was likely to keep up.
But they didn’t expect numbers quite this negative. Financial analyst Donald Broughton wrote in a DAT blog post that the industry is modulating its expectations now: “First, it was ‘We don’t expect growth to be as strong as 2018, but see no reason to predict a recession. Now, it’s ‘in almost every sector, in every mode of transportation, in every part of the globe, freight flows are signaling economic contraction,’” he wrote.
Understanding the Shipping Industry Recession
It’s important to note that there are often seasonal fluctuations within the shipping industry. The current slowdown can be blamed in part on the U.S. trade war. In anticipation of tariffs against Chinese goods, many businesses imported much more than they needed in 2018 so they would have inventory on hand into 2019. Those who didn’t or couldn’t get ahead of the tariffs may have reduced import activity anyway.
Naturally, this produces year-over-year declines in freight volumes. It’s possible that this is merely an industry correction, as artificially inflated demand in 2018 falls to more sustainable levels. It’s also possible that if the U.S. and Chinese administrations end the trade war, these headwinds will fade or vanish altogether.
But shippers shouldn’t count on that. Economists have been saying for years that post-Great Recession growth can’t continue indefinitely. The question isn’t if a recession is coming, but when. These weak numbers should be a forceful reminder to prepare your business for an economic contraction, especially since it may hit soon. Market analysts’ projections for an upcoming global financial crisis should be a strong encouragement to strengthen your bottom line.
Taking Proactive Steps to Protect your Business
A slowdown in the shipping industry could be indicative of a broader global recession. According to a survey from Suplari, 77% of procurement and finance professionals expect to see an economy-wide recession within the next two years. If one does happen, 30% of the professionals surveyed feel their companies are totally or completely unprepared.
“Finance and procurement professionals… are likely to be the first in their organizations to perceive and deal with the impact of a recession,” Nikesh Parekh, co-founder and CEO at Suplari, said in a press release about the survey.
To take proactive steps against a recession, Suplari recommends reigning in costs, gaining greater supply chain visibility, and developing a better understanding of operational continuity risks — the up-front investment could keep your company well above water during periods of financial crisis. In Suplari’s survey, 82% of companies said they were working on reducing costs this year, up from 76% last year. That included reviewing office and travel spending, renegotiating contracts, and consolidating vendors.
We recommend setting specific savings goals of between 5% and 14%. If a financial crisis is on the horizon, now is a good time to reinvest in long-term economic expansion projects and focus on strengthening your bottom line.
Fortunately, that’s what Reveel is here to do. We have a proven track record of saving our clients 15% or more on shipping by renegotiating contracts, auditing invoices to ensure maximum savings, and more. Reach out today to see what Reveel can do to help recession-proof your business.