Thank you so much for taking the time to read the February Truckload Market Update! This is a monthly newsletter, released the first or second week of every month, be sure to subscribe to be notified when the updates are released!
It’s becoming increasingly more important to monitor macroeconomic trends as we try to understand what is happening in the full truckload freight market this year. The freight recession we have been in continues to leave marks on the industry with more layoffs announced in the last several weeks, as brokerages point to lower freight volumes and compressed margins. As I write this month’s report I cannot help but feel divided as my confidence in the US economy grows, but my outlook for the trucking market remains much more cautious. Let’s unpack the reasons why.
Experts are noting that carrier capacity needs to continue to exit to allow us to reach equilibrium, supply = demand, but there has been substantial progress already. There is little doubt that we are going to be awaiting a supply driven recovery. A supply driven recovery will mean an increase in freight volumes. Something will need to act as the stimulus for that supply recovery, and right now I would say that will likely be dependent on interest rate cuts. However, interest rate cuts seem unlikely to begin until the FED can see signs of controlled inflation. While inflation has come down substantially, the strength of the labor market and strong consumer spending continues to make officials nervous that inflation would begin an upward trend again if rates are to be lowered prematurely.
Sarah Foster writes for Bankrate:
“Defying theory, higher interest rates and slowing inflation haven’t slammed the brakes on economic growth. In the final two quarters of 2023, the U.S. economy expanded at the fastest pace since 2021. Unemployment has remained at a historically low level below 4 percent for the longest stretch of time since the 1960s, and job openings are still more plentiful than at any point before the pandemic.”
Part of the FED’s job is also to ensure maximum employment in the US economy. Which as of right now they have done an excellent job of. The fear becomes if they keep interest rates too restrictive for too long, the labor market suffers, but if they get too lax too soon, inflation spikes and more pain is needed to control it yet again. As of right now, the FED seems unlikely to start cutting rates in March.
Wage Growth and the Labor Market:
Recent revisions to wage data will definitely have to factor into the FED’s next round of decision making in March. Matthew Kline writes:
“Before the revisions, the 12-month growth rate in pay for non-managerial private sector workers outside of retail, leisure, and hospitality looked as if it had slowed down from about 5% at the end of 2022 to 4.5% by the end of 2023.1 Revisions now imply that wage growth did not slow down and is still running about 5% a year.”
Matthew goes on to explain that wages are currently rising about 2-3 percentage points faster than they did in the pre-pandemic period. Something that will be very interesting to track is the personal savings rate.
“If the data on consumer spending are not also revised upwards, this means that Americans have likely been saving more than previously believed, and that household balance sheets are correspondingly stronger.”
While consumer spending has been strong, if there are no more revisions it might indicate that households are also working on building back up their savings.
Joseph Politano does an excellent job of illustrating the correlation between wage growth and consumer spending in his recent publication:
“That rise in spending has remained supported by strong income growth—increases in real aggregate wages have accelerated from their 2022 lows to the fastest pace since late 2021 and are now outpacing consumption growth. Real personal income excluding transfer payments are also at a record high, rising 3.1% over the last year, with real disposable personal income rising 4.2% as a fall in government transfer payments was more than offset by a drop in taxation.”
Jason Miller also calls out the recent uptick in retail trade sales:
“It appears inflation adjusted retail trade sales will likely tick up a percentage point or two in 2024 from where they were in 2023. This suggests slight growth in containerized imports, which could be especially beneficial to the West Coast ports given current water issues in Panama and the Red Sea Crisis.”
As this is a truckload market update I want to pause to make some important callouts. The truth is the overall US economy is looking quite optimistic, but we know the reality is that the domestic trucking industry has been and is continuing to suffer a freight recession. Several key callouts:
We need to see a meaningful increase in activities that produce freight volumes in order to insert that supply spike into the trucking market. Barring unforeseen events, I believe we will continue to wait on that until at least mid-year. Edward Jones seems to echo this sentiment claiming they do not see interest rate cuts coming in March or May. They write:
“The resilience of the labor market should raise confidence that the economy is not in such a fragile condition that holding rates steady for longer threatens a dramatic toppling of GDP growth. Further, a notable figure from January's payroll report was the uptick in wage growth, which increased to 4.5%, the highest since last September. This is helpful to consumer spending, but less so for the falling-inflation narrative. We're careful not to put too much weight on one reading (particularly when it tells a different story than much of the other recent data, including the unit-labor-cost figure released last week, which showed wage pressures have moderated significantly), but we think the combination of strong payroll gains and firm wage growth supports the case for the Fed to wait longer before cutting rates. In our view, this should remove any expectations for a rate cut in March or in May. We think the summer is the most likely point at which the Fed can confidently begin to pencil in the first cut.”
Donald Broughton, the author of the NMFTA 2024 US Economic Outlook report seems optimistic that the healthy consumer position will eventually drive increases in goods spending once again. He writes:
“While the consumer, had been spending more on experiences and services, and less on goods during the first 3 quarters of ‘23, the continued strong growth in consumer income signals that when they start spending on goods again, they will have plenty of money to spend. The recent upturn in container volumes suggests that may already be happening.”
I remain optimistic about the strength of the American consumer. I believe their financial health has been overly doubted due to rapidly rising inflation. And while that did sting for some time, as inflation has declined, payroll data has risen or maintained its strength. Savings rates may be increasing again, and consumers are feeling more confident. Interest rates stagnating have also given them some measure of confidence that the worst is behind us. As interest rates are cut this year, I think there is a strong chance for spending on goods and the residential housing market to make strong comebacks.
Checking our rate charts this month I have little doubt that we have since passed the spot market floor. Things have been steadily trending upwards for a couple of months. There is still a notable spread in the average contract and spot rates, which means we are unlikely to see any rapid pricing shock in the near future, but we may be safe to say we are past the worst of it. However, as I have said in the past, as things start to look up for carriers it is the brokers’ turn to worry. As contracted rates have seen little movement, and many sources have told me that there has been additional downward pressure on contracted rates during this months’ RFP award cycle, broker margins are compressing. Not only will contracted rates remain neutral, or decrease in many shipper networks, but as spot rates inch up, brokers covering in transactional markets will continue to see slimming margins. A very interesting study conducted by Ken Adamo the Chief of Analytics at DAT placed the average brokerage margins at just 13%, but with a large number of loads operating at 0-10% margins already. There is not a lot of room to give.
Reefer contracted rates have also remained fairly neutral, while spot rates have seen some gains.
If you like to look at the YOY % Change, we see the convergence of the spot and contracted rates has already been found.
Extra Content:
Eyes and ears are on this supreme court case as we await a decision that would confirm some FourKites employees seem to lack basic business ethics:
“Chicago-based freight brokerage Coyote Logistics confirmed Friday that it has slashed a number of jobs in its sales and operations divisions, but it declined to disclose the number of employees affected or the percentage of the company’s workforce that was part of the layoffs.”
"One bright spot for Hunt was a 6% increase in intermodal volumes, in which freight switches off between rail and trucks. That increase tracks recent growth in import volumes at the neighboring ports of Los Angeles and Long Beach, the main ocean gateway for imports from Asia."
Meet Me For Coffee Recent Podcast Episodes:
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Episode 29 with Kevin Hill - Brush Pass Research
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Episode 30 - CONTENT COMING THIS WEEK AT MANIFEST THE FUTURE OF LOGISTICS IN LAS VEGAS!
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