[Excerpt from The Pickett Line September 2021 Issue]
As we worked our way past the Uri-driven inflationary cycle kink in Q2 and faced the likelihood of a deflationary Spot TL market as early as this next Q4, we noted Hurricane season as one of the only likely forces that could stall our journey any further. But that “it would likely take a Category 4 or 5 storm churning along the gulf coast and impacting population centers with active port operations or other supply chain infrastructure like Houston or New Orleans.” And a Category 4 storm making landfall near New Orleans is exactly what we got, though most of the market damage was arguably done as the system made its way inland leaving catastrophic flooding in its wake through the Midwest and Northeast – especially in parts of Pennsylvania, New York, and New Jersey. And as with any storm of this magnitude, scope, and geography, severe dislocations were created in the US TL market as infrastructure was compromised, inbound relief and recovery supplies surged, and outbound activity ground temporarily to a halt – all to the tune of a 13 cent spike (+5% M/M) in National DAT Spot Van rates to kick off September. Rates have since faded 4 cents lower and now sit at $2.49 for the month, compared to August’s $2.41.
So here were sit at +22.5% Y/Y on the US Spot TL index, only slightly higher than the last month’s QTD read of +21.1%. And with only a week left to go, this is likely where we will finish plus or minus a percentage point. So as compared to Q2’s +56.1% Y/Y, the shape of our market cycle remains firmly back on track just as characterized in the last two issues. And while we will close Q3 well above our forecast of +10% Y/Y, we continue to believe that we are in the latter stages of this cycle’s inflationary leg and should be expecting a Y/Y deflationary US Spot TL market through most of 2022. As a reminder, our post-Uri Q4 forecast was revised to -10% Y/Y. But with Ida’s wrath now baked into the market, it is quite possible that this first deflationary read is deferred to Q1 – though we will likely wait until we get another month or two of data behind us before revising our forecast line should that be warranted. So while Hurricane Ida no doubt left a mark on this leg of the market cycle, just as with past major storms, the impact is not expected to last more than a quarter and therefore not likely to disrupt the shape of the market cycle itself.
With the Q3 Cass Linehaul Index now two thirds of the way baked with the August release, the current read of +12.3% Y/Y implies a potential cycle peak as compared to last quarter’s +13.9%. If the Q2 peak read holds, it would be coming one quarter early relative to our post-Uri 2021 forecast expectation of +15% Y/Y this quarter before bending Y/Y deflationary by mid-2022.
With preliminary Q3 GDP, Consumption, and Import numbers not due until the end of next month, we don’t have as much new demand-side data to dissect in this issue compared to the last. But the fresh Industrial Production, Inventory to Sales, and TL Demand data points we did get continue to paint a relatively downbeat picture for the quarter ahead. Our Q3 Industrial Production read edged slightly higher to +6.2% Y/Y, compared to the July’s +5.9%. And while this remains the highest Y/Y read since Q1 2011, it pales in comparison to last quarter’s +14.6% Y/Y Q2 Covid recession correction and suggests further deceleration ahead.
Our first print on the Inventory to Sales Ratio for Q3 (July read) came in at 1.25, slightly under Q2’s 1.26, which means we have yet to find our bottom. The inventory situation will be especially interesting to monitor in the months ahead as the surge in Q2-Q3 import activity continues to overwhelm ocean trade lanes and port capacity resulting in cascading bottlenecks and delays across global supply chains – further clouding the outlook for the Q4 peak holiday season.
Our two US TL Demand indicators, one from the ATA and the other from Cass Information Systems both point lower as compared to last quarter with the gap between the two remaining relatively wide, which as noted in the past could imply that as overall TL demand begins to slow incremental TL capacity continues to enter at an accelerated pace – just as it almost always does during this phase the market cycle, so no real surprises there.
Finally, while Diesel prices continue to edge slightly higher, with September MTD’s $3.37/gallon notching +39.7% Y/Y, we do see signs of the growth rate continuing to level off – up only 2 cents vs. August’s $3.35 for example. But again, even at these levels, they are not expected to dent motor carrier operating incomes enough to force any measurable capacity out of the market given current spot and contract rate performance. Though if they remain elevated through 2022, that could raise the floor as to how low the next deflationary leg of the cycle will go. Again, we generally find that that during the inflationary leg of any TL cycle, which is where we have been since early 2020, net capacity tends to enter the market…not leave. And we certainly see signals of that indeed happing in the delta between our two TL demand indicators as well as the historic surge in new FMCSA motor carrier operating authorities being granted over the last year.
So as we prepare to put a bow on this 3rd quarter of 2021, we will continue to focus on the same two wild cards that we introduced as we closed Q2 as the primary drivers for the shape of market through the remaining week of the quarter – and introduce a third for the quarter ahead:
1. TL-Intensive US Consumer Spending: Especially given the choppy start with Q3 Industrial Production, the Cass Shipments Index, and some of the early Retail Sales numbers, this one remains our primary demand-side market force as the pace of the recovery likely slows a bit as stimulus programs taper off, inflation marches higher, and fed policy likely begins to tilt more hawkish over the coming months. And now with the COVID Delta variant continuing to hamper the pace of the economic reopening overall, the Services is dealt yet another blow as mitigation measures continue to re-activate across counties and states with trending infection and hospitalization rates.
2. Hurricane Season: As we experienced with Winter Storm Uri and Hurricane Ida, 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 temporary kink. And given the Atlantic hurricane season officially runs June 1st to November 30th, we are only two thirds of the way through. But again, given where we are in the cycle, it would likely take another Category 4 or 5 storm churning along the gulf coast and impacting population centers with active port operations or other supply chain infrastructure like Houston or New Orleans.
3. Supply Chain Shortages: As Hurricane Season winds down and drops from this short list, Inventory levels and supply chain shortages step into the spotlight as a twin wild card with TL-Intensive Consumer Spending. If Consumption, and therefore Industrial Production, run weak into the holiday season, the question will be whether it is due primarily to diminished appetite to spend or an absence of products on the shelf to consume. From a TL demand and market cycle standpoint, it arguably doesn’t really matter what the root cause is. If Supply is growing at a greater clip than Demand, Spot TL rates have no choice but to eventually bend lower. But depending on how each of these forces is resolved in the quarter ahead, it could have a profound impact on the pace at which that rate correction happens and where exactly we ultimately find our next deflationary inflection point.
So onward we go. We continue to be optimistic with regard to overall US consumption and spending through this upcoming peak holiday season. But given the uncertainty around what, how, when, and where those Consumers will consume given both the impact of Covid variants and mitigation efforts and the growing list of supply chain calamities, it will make capturing that demand incredibly challenging for many businesses. Though if there is one piece of good news, it is that we continue to believe that the underlying US Truckload market will be much more forgiving than it was this time last year with regard to relative capacity and market rate behavior – barring yet another Uri or Ida. Unfortunately, we can’t say the same about just about every other mode of transport be it ocean, air, LTL, IMDL, or parcel – all much more consolidated markets with barriers to entry that prevent supply from responding nearly as quickly as we get in Truckload.
And just when thought the white-knuckle portion of our proverbial roller coaster ride was behind us last month, along came Ida to remind us that in this market, anything can and will happen. So keep those seat belts fastened as the ride continues. Next stop, October and Q4.