[Excerpt from The Pickett Line October 2021 Issue]
Well, we survived yet another quarter of this 2021post-COVID US TL Market roller coaster so onward we go into one of the most dynamic and challenging to predict Q4s in recent memory. We are all well aware of the general state of disruption and chaos that most global supply chains appear to remain in, mostly because we can’t go a day without reading about critically congested ports and “the everything shortage” on the front page of the Wall Street Journal or hearing the latest doomsday holiday inventory predictions on CNBC or the nightly news – so we won’t belabor those headlines in this October issue of The Pickett Line. What we will do is review the current macroeconomic landscape as updated with the most recent US industrial activity data and through the lens of the US Truckload Market Cycle. And what we see from that perspective continues to offer a very different market outlook for the quarters ahead relative to what we currently perceive to be general consensus – one that you all can consider with the other sources of market intelligence that you take into your planning process and hopefully produce a more balanced view on the potential scenarios that await us in the months and quarters ahead. So that you can then position your respective organizations to adapt nimbly, outmaneuver your competition, and continue to delight your Customers and Stakeholders regardless of which of those potential scenarios may ultimately come to pass.
So without any further ado, let’s briefly summarize the Q3 we have just completed before peering into our crystal ball in an attempt to makes some sense of the quarter ahead. As noted last month, after finally showing signs of directional consistency, our crystal ball suddenly got a lot more cloudy starting August 29th when Hurricane Ida made landfall near Port Fourchon, LA and later went on to march inland and towards the Northeastern US over subsequent days leaving a path of catastrophic flooding and wind-related damage in its wake. Ida’s combination of intensity, duration, and geography was sufficiently disruptive to trigger a +5% M/M spike (+13 cents) in National DAT Spot TL Van rates to kick off September and further stall the TL spot market’s eventual correction lower over this back half of 2021. When last reported on September 25th, the Q3 DAT Spot TL Index sat at +22.5% Y/Y – well above our forecasted +10%. It was fading directionally lower as expected, just not as quickly as projected given the recent bump higher from Ida. With all of September now accounted for however, the final Q3 read landed just 40 basis points lower at +22.1% Y/Y as the Ida-related inflation continued to work itself out of the market with September National DAT Spot Van rates ultimately settling at $2.48.
You may also recall from last month’s note that we remained on “inflection watch” with the Cass Linehaul Index, which we use as our proxy for US Contract TL Market rates. After closing Q2 2021 at +13.9% Y/Y, the September QTD read was showing +12.3%, which if it should ultimately close lower than Q2’s +13.9% would signal the inflationary inflection point – or market top from a Y/Y inflation perspective – in the contract TL market. And should this come to pass, we would get our inflection point a quarter earlier than expected with our Q3 forecast showing slightly higher than Q2 at +15% Y/Y and representing our cycle top. With the September release now baked in, we see that it has indeed come to pass with a final Q3 read of +12.9% Y/Y and we see a chart pattern shaping up with regard to Contract vs. Spot TL market rates that looks very similar to the one we observed towards the end of 2018 just before Spot rates plunged Y/Y deflationary going into 2019. While the infection signal – with Q3 reporting only 100 basis points below Q2 – is hardly decisive, it nevertheless meets the mathematical criteria and serves as further support for our Y/Y deflationary forecast for the US TL Spot Market in 2022. That said, we’ll need to get our first glimpse of the Q4 read when Cass releases the October report in a few weeks before a stronger case can be made. So stay tuned for the November issue as it looks like we’ll remain on “inflection watch” in the Contract market for at least another month.
And after a long wait contemplating shifting post-COVID consumption patterns and the implication for industrial activity and inventory levels, we will finally have preliminary Q3 GDP, Consumption, and Import numbers out next week which we will cover in next month’s issue as well.
In the meantime, we did get our September Industrial Production read which took the final Q3 number slightly lower to +5.7% Y/Y – compared to the QTD August read of +6.2% – so activity continues to correct lower there after Q2’s Y/Y COVID correction of +14.6%. And with the August Inventory and Sales numbers now baked in, the Q3 Inventory to Sales ratio has edged up ever so slightly to 1.26. If this level holds, or moves higher with September, compared to Q2’s revised 1.25, it would imply perhaps that we have finally found our bottom and that inventory levels are finally starting to rebuild from the COVID-induce surge in the consumption of Durable and Nondurable Goods. Assuming the Services sector continues to emerge from its (also COVID-induced) deep freeze in the months ahead, we should expect this pattern to continue with the Inventory to Sales ratio hitting the 1.3s by Q1. The next concern, however, will be to what extent supply chains will have overshot or otherwise incorrectly forecasted Q4 demand patterns and, once bottlenecks are cleared and freight flows are restored, inadvertently set in motion the makings of an inventory glut of epic proportions – with too much of the wrong stuff in the wrong places at the wrong time. This one will be especially interesting to see play out.
Our two US TL Demand indicators, one from the ATA and the other from Cass Information Systems both continue to point lower as compared to last quarter with the gap between the two remaining relatively wide. As noted in the past, this could imply that as overall TL demand begins to slow, incremental TL capacity continues to enter the market at an accelerated pace. And once relative equilibrium is reached and then exceeded, look out below. Again, no real surprises here relative to past cycles. This time around, the question will be to what extent the level of goods-related consumption, and the demand it creates for TL transportation, will hold up in the quarters ahead relative to recent surges. We expect that it won’t, but only time will tell.
Finally, with October MTD national retail diesel prices coming in +5.7% higher than just a month prior at $3.578/gallon, we have yet another reminder that what goes up…can continue to go up…as Supply and Demand continue to battle it out. After showing signs of leveling off through most of the summer, a combination of factors has spiked us +49.8% higher Y/Y. Though even at these levels, our stance on diesel prices as it relates to the US TL market remains steady. Even all the way up here, diesel prices are still 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 should diesel remain elevated, as both Spot and Contract rates continue to decelerate in the quarters ahead, there will come a point where we will see enough compression on the operating income line that many fleets may have no choice but to begin idling or otherwise shrinking capacity – something we could see as early as the midpoint of next year.
So with the 3rd quarter of 2021 now in the books, it is time to revisit our three market wild cards that we continue to believe will govern marketplace dynamics and behavior through this final quarter of the year:
1. TL-Intensive US Consumer Spending: Most market indicators remain mixed on just how much goods-related spending we will see take place over this holiday season. While household balance sheets have arguably never been stronger, the jury remains out as to how that ultimately manifests itself in Q4 consumption given the uncertainties that remain around evolving COVID variants, vaccination rates, and the ultimate impact on school and workplace attendance policies. With stimulus programs tapering, inflation surging, rampant supply chain shortages, and the specter of rising interest rates now on the horizon, Consumer retail spending has never been more challenging to predict and position for. The next time you meet a Demand Planner, give them a hug (in accordance with all current community health and safety protocols of course). They could use it.
2. Supply Chain Shortages: As Hurricane Season winds down and drops to the bottom of our wild card 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. However, from a TL Demand and market cycle standpoint, it doesn’t really matter – Demand is lower. And if Supply is continuing to expand at the same time given the relatively slow rate at which market signals are often relayed and interpreted, Spot TL rates have no choice but to eventually bend lower. It is just a matter of when.
3. 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. But with the Atlantic hurricane season officially running June 1st to November 30th, we are just about through and expect this one to drop from our list altogether next month…unless of course we get another Category 4 or 5 storm churning along the gulf coast near Houston or New Orleans between now and then.
Now 24 days into October and the 4th quarter, our DAT TL Linehaul Spot rate index currently rests at +13.3% Y/Y – as compared to the previous quarters +22.1% and a revised Q4 forecast of +5.0%. In response to Ida’s temporary impact on US spot TL market rates, we are effectively shifting our 2021-25 cycle forecast ahead by one quarter, which means we now expect to go Y/Y deflationary in spot TL rates next quarter rather than reaching the -10% Y/Y we had previously expected to see this Q4.
So as we remarked at the top, onward we go – through one set of challenges and into the next with TL market participants continuing to re-position their spend and their fleets for what might lie ahead. We remain generally optimistic with regard to consumer spending through the holidays and the state of the US economy overall. But given increasing uncertainty around expected consumption patterns and inventory availability, supply chain flexibility and speed will be king. It will pay to be nimble. But to be nimble, you need alternatives. And as compared to other more consolidated and less elastic transportation modes, we believe that the US Truckload market may represent your best bet in search for those alternatives this holiday season as inventories are positioned…and re-positioned…to stay one step ahead of the competition in pursuit of the next commercial transaction. Happy Holidays to all and may the best (prepared and managed) supply chains win.