Freight fundamentals are at the bottom. Our industry contacts, industry trade data, and recent quarterly earnings reports from public companies reflect stabilizing demand fundamentals after arguably three years of a US freight recession. Freight demand across all modes remains significantly lower compared to last year, but trends need to stop deteriorating before they can improve, and over the past five months, the demand trends are showing this pattern. Subsequent to the significant drop in freight activity through the first quarter of 2009, the rate of decline has not worsened. This "stabilization" is an encouraging sign that fundamentals are at the bottom, setting the stage for an eventual recovery.

The rate of inventory depletion nears historical highs. Because of a historic rate of inventory depletion among retailers and industrial companies, the rate of double-digit decline in freight activity has far exceeded the general contraction in the general economy, which approached a 4% decline in 2Q as measured by GDP. This mismatch in the contraction rate of freight demand and the rate of contraction in economic growth is not sustainable. And as inventory depletion moderates, freight demand will more closely approach consumption levels. Our sense is that this moderation has already begun and is a key contributing factor to the stabilizing demand trends.

A sustained recovery still remains several quarters away Our outlook does not expect a meaningful or sustained recovery until mid-2010 at the earliest. Pockets of inventory replenishment and seasonal demand trends may drive periods of relative strength, but until we experience a stronger consumer (which reflects 70% of GDP), we do not expect sustained inventory replenishment nor sustained freight demand growth

But time to start planning for the upturn. With all that said, the worst conditions appear to be behind us, so shippers should begin to look ahead in order to understand the challenges that face them. The next several years are likely to include less consistent (and possibly less robust) demand trends, growing infrastructure and capacity constraints, and changing global sourcing patterns for international shippers. The time is now to plan for these challenges.

So while we cannot yet call an official end to the freight recession, stabilizing demand trends and economic data suggest we are very close. As such, preparing for the unique challenges ahead will be paramount to a smooth supply chain operation.

Jon A. Langenfeld, CFA, is Associate Director of Research at Robert W. Baird & Co.