By Richie Lin    Photo：PEXELS

Every day, we would face lots of information from shipping lines, news, rumors, gossips about the trends of ocean freight rates. However, the fundamental analysis of economic indicators are the truly accountable numbers for us to make up decisions. There are always fears, emotions, speculations circling in the market. At the end of the days, it is always the rule supply and demand to determine the prices of some goods and services.  

Donald Trump was elected to be the 47^th President of the United Sates of America. Based on the promises Mr. Trump made during the campaign, the de-coupling with China, the reshoring or nearshoring of supply chain will be accelerated in the next four years. Henceforth, market assumes that there will be a surge of imports from China to USA before or at the early period of Trump administration and will inevitably push up the freight rates. In the meantime, we read on the news that there is possible or current strikes at the ports in USA and Canada,  there is the delay or even blank sailings caused by dangers, labor shortage during the transit. Also the mega workshop for all over the world- China will have New Year Holidays after January 20^th 2025. Several factors are working hand in hand recently to give many people the expectations that shipping lines will increase the rates in the near future. However, do we have another factors to predict the trends more acutely than wishful expectations? Even though there are several transparent or hidden reasons behind the decision-making progress of shipping lines, freight forwarders, and customers, but we can use macroeconomic indicators such as PMI, durable goods orders, the inventory of manufactures and end-customers to predict the ocean freight trend in the near future.

Before we look into the data right now, we should spend some time to look into the historical data to corroborate the correlation between the economic numbers and freight rates increase or decrease. Let’s look into the data in 2020 and 2021 when the freight rates increased to an unprecedented level in the history. First, PMI was from the lowest 41.5 in April 2020 to the highest 64.7 in April 2021. Secondly, the increased rate of Durable goods orders was from the lowest -27.9% in April 2020 to the highest 53.63% in April 2021. Thirdly, the numbers which inventory of manufacturers deducted by the inventory in customer was from the lowest -21 in April 2020 to the highest 36 in April 2021. PMI, durable goods orders, the inventory of manufactures and end-customers were all dropping severely in April 2020 because of the lockdown caused by Covid-19. Then spurred by the  governmental compensations and convenient online shopping, the economic indicators began to rise gradually and reach the all-time high in April 2021. Usually, an order will take around 3 months from productions to reach the shelves in the stores. Therefore, we saw the ocean freight rates began to increase in around July 2020, then skyrocketed to the all time high at the early 2022. We even saw the unbelievable price of USD 20000 for just one 40ft container from China to the Los Angeles. People might said that the lack of labor at the ports and rail ramps, lack of containers, lack of drivers also pushed up the ocean freight rates. But the real driving force behind this gigantic increase were the true demands form the customers. That’s why we can see the ocean freight rates began to go down after the economic indicators started to reverse after April 2021.   

Now we circle back to the current economic numbers. October’s PMI is 46.5 which can show the economy is still not good and the gigantic inventory built up during the pandemic still restricts retailers and wholesalers to issue new orders. This is why the yearly increased rate of Durable Goods Orders in October was minus 2.1% if we deleted the orders of airplanes and defensive equipment. This meant companies in USA are still concerned about the sales of their products in several months and will keep restraining cautiously on issuing orders and productions. And we can also use the comparative numbers of inventory between manufactures and customers to show how bad is the economy. In the context of the ISM Manufacturing Index, if both the manufacturer's and customer's inventories remain low, it suggests that manufacturers in the overall manufacturing sector may have the opportunity to increase orders and enter a phase of replenishing inventories. By subtracting one number from another, we can understand the inventory situation upstream and downstream. When the difference between manufacturers’ inventory and customers inventory widens, it indicates that customer (end-user) inventory are at a low point, and the supply chain is in the phase of replenishing inventories. When the difference begins to decline or even becomes negative, it reflects a continuous increase in end-user inventories and a slowdown in the demand for goods, entering a digesting inventory phase, which also implies the end of the manufacturing cycle. In October, the inventory of manufactures is 46.20 and the inventory of end-users is 47.40. The difference is negative 1.2 points, which meant the economy is still in contraction period. The main target is to digest the inventory instead of manufacturing products for the future consumptions. 

After reviewing the latest PMI, yearly increased rate of durable goods orders, and inventory of manufacturers and end-users, we can definitely conclude that international ocean freight rates will not increase substantially in the near future. Basically, it will take 3 months from receiving the orders to manufacturing the products. Therefore, economic indicators happening in this month will have at least 3 months’ ripple effects. This means customers will not have many demands on the ocean freight, airfreight, or any other types of logistics until the first quarter of 2025. However, shipping lines will keep using blank sailings, fears of strike in ports, red sea crisis, and above all, the geopolitical conflicts to push up the freights rates. Every day, we would face lots of information from shipping lines, news, rumors, gossips about the trends of ocean freight rates. However, the fundamental analysis of economic indicators are the truly accountable numbers for us to make up decisions. There are always fears, emotions, speculations circling in the market. At the end of the days, it is always the rule supply and demand to determine the prices of some goods and services.

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