[Excerpt from The Pickett Line May 2021 Issue]
After a series of volatile freight months characterized by market shocks and sometimes violent swings in relative capacity levels and rates, the last few weeks of April and into May have been relatively tame in comparison – despite CVSA Roadcheck May 4th-6th, the Mother’s Day flower surge, and the first waves of produce season in the US. That said, preliminary Q1 2021 GDP & Consumption data and April Industrial Production numbers produced some early fireworks with regard to the implied strength of the Consumer in the months ahead as the post-COVID recovery picks up steam. As we remarked last month when setting expectations for the current quarter, “where just about every market and economic data point will look outrageously positive when compared to last year’s Q2 COVID crash”, that is exactly what we are starting to see. The post-COVID economic spring has sprung and any reports of the impending demise of the rise in goods Consumption in lieu of an increasingly available Services sector have been greatly exaggerated – so far at least.
As you may recall from last month’s note, upon entering Q2 we were focused primarily on four market themes that would ultimately determine the path of the 2021 US Truckload Market roller coaster ride from here. Specifically, how long should we expect to hover up here at the cycle peak and how steep is the eventual deflationary correction likely to be in the quarters ahead? In order of perceive relevance, those themes remain in place as follows:
1. Winter Storm Uri Hangover: With Uri as the suspected primary catalyst, the DAT Spot TL Index surged $0.20 higher (+9.3%) from February to March to close at $2.39. Through April 19th, it had only given $0.02 of it back, though faded another $0.03 to close April at $2.34. With this run up already baked into the market, we expected that much of this year’s otherwise expected produce season inflation had already been priced in. This meant that this produce season could be less chaotic and challenging than many feared at the time, at least with regards to incremental Spot TL inflation.
2. Produce Season: The seasonal harvest, which historically runs from April 15th through July 4th depending on climate conditions and in waves starting in the southern US before marching north, would act as the direct counter to the Uri hangover. In a typical market, these short-term TL supply vs. demand dislocations result in temporary TL spot market inflation outbound from active harvest regions. Again, the question this year would be to what extent those dislocations could drive markets higher still from current Uri-induced levels.
3. TL-Intensive US Consumer Spending: After rebounding sharply in Q3 2020 out of the Q2 COVID trough, activity sputtered a bit in Q4 as the recovery appeared to level off somewhat. Though as additional fiscal stimulus has been pumped into the economy, strong retail sales numbers in recent months had been promising. The degree to which that continued across the more TL-intensive Durable and Non-Durable Goods segments (vs. Services) would continue to shape the Demand support propping up the TL Spot market as incremental Supply continues to enter. And with a monster of a preliminary Y/Y Q1 Durables Consumption number, and to a lesser extent Non-Durables, the demand-side outlook for the US TL market remains pretty rosy. And as further noted below, given the apocalyptic Q2 2020 COVID comparison value, it is likely that Y/Y numbers surge even higher this quarter. Then it becomes a question of Consumer stamina over the back half of the year as stimulus programs phase out and presumably much of the post-COVID euphoric expressions of Consumption run their course.
4. Q2 2020 COVID TL Market Comp: This one was more a static technical consideration rather than a market force that continues to evolve, but from a year over year standpoint (which is how we fundamentally assess the US economy and the TL market in our methodology), an “unnaturally” low comparison number will yield an “unnaturally” high relative comparison value. Given, this has zero impact on the actual interaction of TL supply vs. demand this quarter – just in how our selected metrics look when plotted on the % Y/Y charts we use to describe the outcome of those interactions over time.
So with another month now behind us, what have all of these counteractive and interrelated forces yielded so far with regard to rate action on the quarter? So far at least, not a whole lot – all things considered. While we didn’t mention the potential impact of this year’s CVSA Roadcheck on May 4th-6th in last month’s note (recall that it was postponed to September last year due to COVID so was not a factor for Q2), that has arguably been the only observable market-moving catalyst so far. The DAT Spot Van Linehaul index showed $2.28 coming into Roadcheck week on May 3rd and rose +$0.11 (+5.0%) to $2.39 by the end of the week. Since then, it has faded $0.02 lower to $2.37. Both Reefer and Flatbed rates continue to edge slightly higher, but for the most part, we haven’t seen anything wildly inflationary as a result of produce season-related market dislocations. Again, we’re only halfway through so there is plenty of time left for an upside surprise or two before quarter end. And with our first named storm of the season (Tropical Storm Ana) showing up last week in the Atlantic near Bermuda, we get one more element to remain vigilant about in the months ahead.
Recall that our initial Q2 2021 DAT Spot TL Linehaul Index reported last month measured +54.2% Y/Y – up sequentially from +38.9% Y/Y in Q1. The Cass Linehaul Index, which we use as our proxy for the contract TL market showed a final Q1 value of +8.5% Y/Y. Our updated Q2 Spot Index now sits at +55.5% Y/Y while our initial Q2 April Cass reading has spiked higher to +12.7% Y/Y. So not a lot of net rate action in Spot but certainly another material leg higher in Contract, though this hardly comes as a surprise given the number of routing guides that tend to reset (higher this year) in April and the continued march higher in the Spot market.
From here, it will be all eyes on the Spot market as produce season runs its course, the economy continues to re-open, and incremental TL Supply continues to enter. The shape of past US TL rate cycles continues to point to a Y/Y deflationary Spot market by Q4 this year while most individual demand and supply indicators certainly suggest otherwise. We believe that market behavior over the remainder of this produce season (i.e. this quarter) will give us a clue as to the extent that history will continue to rhyme this year the way it has over the past 15 years of observed TL market cycles or if we have another inflationary kink or two to reckon with before all the COVID-related distortions are finally behind us. If Spot TL rates scream higher through June, that would imply that TL Supply has yet to catch up with Demand and that we should expect to stay Y/Y inflationary for longer. If they don’t and we get another month of relative stability, then our forecast for a Y/Y deflationary Q4 remains intact and we expect to see the market cycle unfold through 2022 in a way that continues to resemble the past. Hope everyone is enjoying the ride. It doesn’t look to get any less wild from here.