[Excerpt from The Pickett Line June 2021 Issue]
Well, the jury is back and the verdict is in. You may recall that the theme of last month’s The Pickett Line was “In the case of ‘To Peak or not to Peak?’, the jury’s still out.” Halfway through the most extreme cycle kink observed in15 years of tracking the US TL market, our Q2 US TL Spot Index was tracking at +55.5% Y/Y compared to our proposed Q4 2020 cycle peak of +40.2% Y/Y and we were approaching June with all eyes focused on what remained of the 2021 US produce season. Our position at the time was that this year’s harvest would be a relative non-event with regard to incremental Spot TL rate inflation, given the rapid run up in rates in March from Winter Storm Uri. Or in other words, that the supply chain dislocations created by Uri in March had already generated the level of Spot market inflation that produce season typically generates as Q2 progresses, and we weren’t likely to see another material leg higher barring another Uri-like event. Though if Spot rates did indeed accelerate higher through June with no Uri-like catalyst to point to, as is typical during an otherwise “normal” year, that would be a signal that the rate of new capacity entering the market was clearly not keeping pace with demand, that harvest-driven dislocations could drive rates still higher, and that the inflationary leg of the current cycle would likely be extended by another couple of quarters.
Now with four more weeks of data behind us and with just two weeks left to go before the July 4th holiday weekend and the unofficial close of the primary US produce season, the US TL spot market has continued to merely tread water at its post-CVSA Roadcheck levels from early May. And our Q2 US TL Spot Index sits just 60 basis points higher than the May read of +55.5% Y/Y. In fact, June MTD TL spot index rates are slightly lower than May, albeit only by -0.5%, whereas June ran +10% higher month over month on average in each of the last three years. While it remains entirely possible that we get enough of an end of month spike to erase this anomaly considering we also have Amazon Prime Day to contend with June 21-22nd, this seems unlikely given recent market patterns which show spot Van and Reefer rates fading consistently lower over the last 7-10 days – again even if only slightly.
So as it stands, as we come down the 2nd quarter home stretch, Q2 has shaped up pretty much as expected back in late March. We got a series of outrageously positive Y/Y economic data points due to the ongoing recovery and compounded by an incredibly soft Q2 2021 to compare against. But with April 2020 marking the worst of the COVID worst, the comps will get tougher from here – though perhaps more realistic and more relevant in serving as signals for where the economy and the TL market go from here. And we got a produce season that, at least at the aggregate level, has indeed proven to be a relative non-event market-wise. We take this all to be a confirming signal that after several quarters of record high Y/Y market rates – both Spot and Contract – enough incremental capacity has already entered the US TL market to dampen the seasonal capacity tightness and rate inflation we typically see during a produce season. And that barring either an extreme leg higher in TL demand in the coming months or a market-moving hurricane season, neither of which are high-probability scenarios, Spot TL rates are likely to decelerate sharply on a Y/Y basis over the back half of 2021 and go Y/Y deflationary by Q4 – which is directionally consistent with the forecast line we plotted almost a year ago. Which really just means that the market is behaving in much the same way that it has over the last 15 years that we have been paying attention. When demand outstrips supply, for whatever reason, market rates surge higher. When rates surge higher, suppliers add more trucks and raise driver wages to address equipment and labor shortages, thus increasing net exposure to favorable economic market conditions. Eventually, the market overshoots after reaching a maximum level of Y/Y rate inflation as dictated by the nuances of the times and each particular cycle, then collapses Y/Y deflationary until a sufficient rate level is found to drive out excess supply thus resetting the cycle.
And as we prepare to close the book on the month and the quarter, let’s one last time revisit the four market themes that we proposed back in April would ultimately determine the path of the Q2 2021US Truckload Market roller coaster ride – and revise that list for the quarter ahead. In order of perceived relevance, those Q2 themes were 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. With this run up already priced 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. It turns out that this was largely true, though not before a temporary bump higher over CVSA Roadcheck week in early May.
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. The question this year was to what extent those dislocations could drive markets higher still from then current Uri-induced levels. It turns out, not so much. For those that are relatively new to the industry and have yet to experience a full capacity cycle or two, take special note of this. Accepted industry dogma is that produce season means that rates out of active harvest regions always spike the market sequentially higher during Q2. This year however, we see that is simply not always the case.
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 was pumped into the economy, strong retail sales numbers 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. But with a monster of a preliminary Y/Y Q1 Durables Consumption number, the demand-side outlook for the US TL market remains pretty positive. Now it becomes a question of Consumer stamina over the back half of the year as stimulus programs phase out and the post-COVID euphoric expressions of Consumption have run their course.
4. Q2 2020 COVID TL Market Comp: This one was always more a static technical consideration rather than a market force that continued 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 had zero impact on the actual interaction of TL supply vs. demand over the quarter – just in how our selected metrics looked when plotted on the % Y/Y charts we use to describe the outcome of those interactions over time. Now with this technical consideration behind us, the Y/Y economic indicators should get more useful as a signal for the range of potential outcomes ahead.
As we begin to reset expectations for the quarter ahead, we can strike three of the four out as no longer relevant and narrow our new Q3 list to two, as follows (again, in order of perceived relevance or likelihood):
1. TL-Intensive US Consumer Spending: This one remains as our primary demand-side wild card as the pace of the recovery likely slows a bit as the Service sector re-opens, stimulus programs expire, inflation builds, and fed policy begins to tilt more hawkish over the coming months. The Q2 2021 GDP and Consumption numbers will be especially interesting as we look for any evidence of a material shift in consumption patterns to favor Services at the relative expense of Durable and Non-Durable Goods, which again tend to be more TL-intensive than the Service sector while Services continue to represent almost two thirds of total US GDP. Unfortunately, we will have to wait until the August note to comment given preliminary Q2 data is released at the end of July. If Durables and Non-Durables hold up, we should see a more gradual Y/Y deceleration lower in TL Spot rates – all else equal. If they do not, we can expect a steeper ride towards Y/Y deflation land in the US TL Spot market.
2. Hurricane Season: As we recently experienced with Winter Storm Uri, a storm of sufficient magnitude, duration, and geographic impact can have a material effect on the US TL market. Not enough to change the shape of the cycle overall, but certainly enough to create a hell of a temporary kink. And while we expect the US TL Spot market to be decelerating quite rapidly through Q3 on a Y/Y basis, it will likely remain Y/Y inflationary overall. And any time the market remains in an inflationary state, it is vulnerable to anomalous events like major storms. So if we do get another Uri-like event as the 2021 hurricane season unfolds, it is quite possible that our current inflationary leg gets extended by yet another quarter. This would simply shift our cycle forecast forward by one quarter at most.
So in summary, the jury is back and the verdict is “Peak”. We have arguably been atop our proverbial roller coaster stuck in overshoot mode for the last two to three quarters but are finally about to find out how steep the ride down will be as the US TL Spot market begins to collapse Y/Y deflationary from here. Though keep in mind that the ride down will almost certainly be as full of twists and turns as the ride up. So as always, keep those seatbelts fastened tight and try to enjoy the ride – as stomach churning as it might get.