Import volumes, trucking market conditions, and a West Coast recovery are all factors.
Any examination of the falloff in intermodal volumes so far this year must begin with the caveat that year-over-year comparisons are being contrasted with the record-breaking first half of 2022, the height of the COVID-19 consumer buying binge. As the economy began to normalize, and consumer spending shifted towards services rather than goods beginning in the second half of last year, containers carrying consumer goods arriving at major North American ports began to decrease, leading naturally to fewer of those containers ending up on the rails.
The latest numbers show that the decline in intermodal volume may be moderating, which would indicate brighter prospects for the second half of this year and for 2024, but there are still other factors working against intermodal. One is the increased competition from the full truckload sector, where massive capacity increases combined with stagnant volumes led to rate drops. (See box Truckload—taking a bite out of intermodal volumes) Another factor is the shift of imports from West Coast to East Coast and Gulf ports, where intermodal is less competitive. Despite a new contract having been reached between management and labor which averted a threatened West Coast port strike, any major cargo shift back from East to West has yet to materialize.
During the first seven months of 2023, U.S. railroads’ intermodal volumes were down 9.6% from last year, according to numbers supplied by the American Association of Railroads (AAR). That compares somewhat favorably to total U.S. intermodal traffic for the first six months of 2023—which was down 10.3%. Looking at the monthly numbers, declines in March and April were both well into the double digits—13.3% and 12.7%, respectively—while May intermodal volumes were down 11.1%, June’s were down by 7.0%, and July’s by 5.5%, indicating the possibility of the beginning of an anticipated freight rebound.
Rail intermodal largely carries consumer goods, noted John Gray, senior vice president of the AAR, “but recent spending on goods has cooled considerably and, with it, intermodal volumes.” But, he added, “the three non-July 4 weeks in July were the three highest volume intermodal weeks of the year.”
Around half of U.S. intermodal shipments are related to international trade, “so what happens at ports is extremely important to railroads,” said Gray. “U.S. port volumes, especially on the West Coast, have already been trending down for months and are a major reason why rail intermodal volumes have been on the decline in 2023.” Import container volumes at West Coast ports declined by 20.4% in the second quarter of 2023 and 18.9% in June, according to The McCown Report.
On a regional basis, the seven highest-density intermodal corridors, which collectively handle over 60% of total volume, were all down in the second quarter, according to statistics from the Intermodal Association of North America (IANA). The decreases ranged from 18.3% in the Southeast-Southwest lane to 7.1% in the intra-southeast corridor.
“Slower year-over-year demand for goods and a competitive freight environment,” i.e., the lower trucking rates, “have taken its toll for a second quarter,” said Joni Casey, President, and CEO of IANA. “On the other hand, the numbers suggest a later peak this year and an improved picture for the second half of 2023.” Overall, IANA expects total North American intermodal volume to see a 7.7% decline for this year.
Inventory Still an Issue
Intermodal volumes for the remainder of the year will also depend upon how retailers deal with their excess inventory. “Coming into the first half of 2022,” said Darren Field, executive vice president and president of intermodal at J.B. Hunt Transport Services, “our customers made significant orders, and they had a lot of inventories on hand as sales began to decline. They were flush with inventory, and it took them some time to burn through that.”
As a result, retailers are being more careful about accumulating inventories this year. “I’m not aware of any customer that wants to miss a sale because they don’t have inventory,” said Field. “They’re just being a little bit more cautious in the ordering process. The supply chain is now allowing customers to get their orders faster than they were during the pandemic. All of those factors are playing a role” in the timing and the velocity of new orders.
Continued excess inventory and more circumspect ordering practices are playing into IANA’s expectation, as reflected in a recent report, that “the freight outlook for the full year continues to look soft.” “Consumers have been resilient in this high inflation environment,” the report noted, “but spending in recent months shows some slowing compared to the first quarter. Retail inventory levels remain high with out-of-season and out-of-favor goods that will take time to work down. The softer outlook for goods sales, along with warehouses that are still full, is putting downward pressure on domestic production as well as imports.”
And the gateway for those imports is also playing a role in the expected fate of intermodal transportation for the remainder of this year and beyond. “Volume that shifted to the eastern U.S., which is less favorable to rail intermodal, has yet to shift back to the West Coast,” said the IANA report. “At the same time, the collective bargaining agreement for the East and Gulf Coasts is set to expire next year.”
On the brighter side, C.H. Robinson believes, according to a recent report released by the company, that, “with drayage and rail capacity being abundant, now is a perfect time to consider intermodal solutions that were not available in recent years. There are no capacity constraints on domestic container markets. A number of new domestic North American options have come to market this year.”
The intermodal market has “shown signs of returning to regular seasonal patterns,” said the report. “Volumes are forecasted to increase month over month, building into a muted peak season.”
