[Excerpt from The Pickett Line December 2021 Issue]
But here we are at last: the December 2021 issue of The Pickett Line. If you are reading this, it means you’ve just about done it. You’ve just about made it to the end of 2021. You’ve managed to survive the stomach-churning twists and turns over the last twelve months aboard the roller coaster that has come to define the US Truckload Market Cycle since Q1 2020. You and your teams have navigated from one crisis to the next as the COVID-19 pandemic kicked off a game of supply chain whack-a-mole the likes of which the world has never seen. And while we would like nothing more than to put it all behind us and focus on the global economic recovery ahead, here comes the Omicron variant to remind us that this game is far from over. And if supply chain disruption itself is now the new normal, then supply chain resiliency and nimbleness may be what more than ever determine the winners and the losers across any industry involved in the manufacturing or distribution of physical goods. Which means that we are now in the age where the supply chain practitioners and service providers constructing and managing these complex interconnected networks are more relevant than ever. So get used to your families and friends finally taking more of an interest in what you do for a living. And take pride in the role that you have played in keeping the US economy going this year, regardless of how many black swans came a-swimming our way.
Now that we have gotten that 2021 supply chain survival victory lap out of the way, we all still have some work to do before tying a bow on the year and digging in for 2022. And to that end, let’s start with an update on Q4 before turning our sights to the new year ahead. As with last month, let’s start with the US TL market itself. Rather than fading lower as expected, our Q4 DAT TL Spot Linehaul Index edged 90 basis points higher from last month’s read to +14.6% Y/Y and $2.59/mi – again compared to +13.7% and $2.57/mi. We haven’t seen any wild peak season spikes yet, but we haven’t seen rates bend lower sequentially yet either. And we would need a pretty steep move lower to hit our Q4 forecast of +5.0% Y/Y. At this point, it’s instead looking like we will close the quarter at +13-16%. From a cycle standpoint, we now stand in our 6th quarter of this Y/Y inflationary leg. Which puts us dead even with the last cycle’s inflationary leg that ran exactly 6 quarters from Q2 2017 through Q3 2018. So as wild and unprecedented as the last two years have arguably been, the shape of the TL Spot Market cycle remains entirely consistent with historical patterns – at least so far. The real test comes over the next 2 quarters and how long it ultimately takes for our index to break negative and run Y/Y deflationary. So it will unfortunately take just a little bit longer to know whether things really are different this time around.
But while TL market rates continued their sequential march higher, TL contract market rates faded slightly lower in November with the Cass Linehaul Index edging 1.4 points down from October’s 150.9 to 149.5 and taking the Q4 average down further to +10.4% Y/Y. Which, if you have been following along the last couple of months, you know that the more distance we put between the current read and Q2’s +13.9%, the more conviction we have that Q2 will continue to represent our TL Contract rate cycle inflationary inflection point. And if that remains the case and historical patterns repeat, we should expect steady Y/Y deceleration over the next couple of quarters before breaking Y/Y deflationary by the middle of next year. In all likelihood, with only the December read left to bake in, Q4 will close plus or minus a percentage point from the current read and therefore very close to our forecast of +10.0% Y/Y. So after the last few quarters of chasing both the Spot and Contract markets with forecasts running materially behind actuals, we may be finally starting to catch up. Though we will have to wait until mid-January to find out for sure when the December read is published.
We don’t have as much to dig into on the demand side this month with Q4 Consumption and Imports not due until the end of January. Though now with the Omicron variant beginning to cast its shadow across the Service sector as reminiscent in some ways of the first COVID wave in Q1 2020, it will be interesting to see what impact that has on Goods spending this time around. Will the global supply chain get some welcome breathing room to continue its recovery? Or is it possible there remains a slug of pent-up demand still out there for Pelotons and patio furniture that didn’t get fulfilled during the last shutdown? We’ll find out soon enough.
We did, however, get an update to Q4 Industrial Production with the November update edging the quarter slightly higher to +4.8% Y/Y vs. October’s +4.4%. The trend continues to the downside relative to Q3’s +5.6% but is starting to flatten out with this most recent update. And at least some part of this stabilization may be explained by early Q4 signals in relative inventory levels. We got our first peek at the Q4 Inventory to Sales Ratio with the October read coming in at 1.24 – lower than last quarter’s 1.26 which we had seen as a promising sign that a bottom had possibly been reached and inventories were finally beginning to build again. No such luck it seems. If the quarter closes at current levels, we’ll know we have yet to reach our bottom and there may in fact be more room to run lower – which would be a constructive signal for future Industrial Production levels (and US TL Demand) as more and more inventory would ultimately need to be restocked to recalibrate depleted supply chains. And finally, as far as an impending inventory glut ahead from early or over-ordering to capture peak retail season demand, we see no such signal yet in the October Inventory to Sales read. Though I suspect if we were to see such a signal, it wouldn’t be until December or January at earliest anyway. So this will be another storyline we look forward to monitoring closely as it unfolds in 2022.
In similar fashion with the slight improvement in Q4 Industrial Production this month, November’s update to the Cass Shipments Index also edged its Q4 average a notch higher – up to +3.9% Y/Y from +3.2% in October. This remains materially lower than Q3’s +9.1% Y/Y but implies that the ultimate rate of the post-COVID correction may be less severe than preliminary indictors suggested. We also got more of the same with the October read on our other primary TL Demand indicator, the ATA TL Volume Index. The first read of Q4 showed a recovery all the way up to -1.2% Y/Y vs. the -4.9% that Q3 closed at. So still negative year over year, but increasingly less so as our two indicators finally begin to converge after running in opposite directions over much of the last 6-7 quarters of COVID pandemic disruption.
Now onto Net Class 8 Tractor Orders. We remarked last month that truck orders had proven to be perhaps the most consistent signal over past US TL cycles. Across the last four complete cycles observed since 2007, both the US TL Spot Index and Class 8 Net Tractor Orders have flipped Y/Y deflationary in the same period (plus or minus a quarter) as the cycle transitioned from its inflationary leg. We got our first deflationary Y/Y Class 8 read last month with October marking the preliminary Q4 average at -51.0% Y/Y. Now with November also delivering a historically weak number, Q4 has slid even further to -65.4% Y/Y. This means that if the historical pattern proves consistent yet again this time around, we should then expect to see Spot TL linehaul rates go negative Y/Y by next quarter – again, consistent with our general forecast. That said, the reported supply constraints (component & labor shortages, etc.) constricting 2021-22 production output has no doubt played a more significant role in this dynamic than in past cycles. OEMs are reporting a record 14-month order backlog and that much of the weakness in November net orders stems from manufacturers opting not to extend the backlog any further and therefore either not taking on new orders or cancelling pre-existing orders with delivery estimates beyond 2022. It is difficult to tell how much stronger net orders would be in the absence of these supply constraints, but it certainly calls into question how significant this particular TL market signal will prove to be through this current cycle.
And finally, with inflation accelerating across many commodity categories, we finally get our first signal of a potential Y/Y top in US retail diesel prices. After surging higher over much of the year, December MTD is showing $3.66/gallon (+41.6% Y/Y) – 6 cents lower than November’s $3.73 (+53.3% Y/Y). If we get further sequential weakness in the weeks and months ahead, made only more likely with the continued global spread of the COVID Omicron variant, we could see a reversal in quarterly Y/Y diesel prices as early as Q1 2022. And the lower diesel prices fade, the more accommodative it is for a deflationary US TL Spot market environment next year.
So with the last month of the last quarter of the 2021 year from supply chain hell just about wrapped up, let’s take one last look at our remaining two truckload market wild cards that have continued to shape marketplace dynamics and trading partner behavior this retail peak season. And while we’re here, we’ll also go ahead and add a third that likely takes charge going into next quarter:
1. TL-Intensive US Consumer Spending: As noted, most market indicators remain mixed on just how much goods-related spending we should expect to see this holiday season – with October retail sales coming in relatively strong while November disappointed. Was this just the result of a pull forward in holiday demand to get ahead of potential fulfillment and delivery delays? Or the sign of an increasingly tapped out US Consumer as federal stimulus programs taper off and household savings rates return to pre-COVID levels? With inflation proving to be less transitory than expected (at least so far), fed monetary policy shifting increasingly more hawkish as a result, and now the specter of the Omicron variant threatening the pace of economic recovery and putting a dent in Consumer confidence altogether, the outlook is decidedly less constructive than it was even just a month ago.
2. Supply Chain Shortages: With ocean and inland transportation networks remaining persistently congested despite the US government’s best efforts to help resolve, inventory levels and supply chain shortages remain front and center as we look to predict the direction of the economy and US trucking industry over the coming months. If Consumption, and therefore Industrial Production, continues to break lower through what remains of the holiday season and into January, the question will continue to be whether it was due primarily to diminished appetite to spend or an absence of products on the shelf to consume – one of which is likely to resolve itself faster than the other. However as noted in the past, from a TL Demand and market cycle standpoint, it still doesn’t really matter. The demand for truckload transportation to move stuff is lower. And the longer it takes for the supply side to detect the shift and respond proportionately, the sharper the market correction in Spot Linehaul rates that becomes necessary before the market can finally rebalance itself. The only real question then becomes when we should expect to see this correction begin, as it certainly hasn’t shown up yet in sequential rate activity in a meaningful way.
3. The Omicron Variant: The pace at which the Omicron variant has spread across the globe over the last couple of weeks has been nothing short of terrifying. While it is too early to tell how bad this will get and for how long, one has to assume that it will set back the overall economic recovery at least to some degree even if only in the short-term – especially for the battered Service sector. Additionally, the continued volatility in consumption patterns will continue to make demand planning, inventory management, and market forecasting all the more difficult. And finally, its impact to the US TL market could go either way: a possible tailwind if the incremental demand for goods exceeds the decline in demand for services, or a likely headwind if not. But of course, there are also the supply-side effects to consider as well. We look forward to unpacking this one either way in the January note. But in the meantime, stay safe out there.
So here we are. The 2021 US TL Market roller coaster has run its course and we find ourselves at the end of one calendar year and leaning into the next. We expected some version of a post-COVID US economic recovery, and we got one – though wildly uneven and disproportionate. We expected a peaking and then decelerating Y/Y inflationary US TL Spot and Contract market, and we got them – though peaking much higher and staying inflationary for longer, extended by not one but two major weather events, namely Uri in March and Ida in September. Of course, there was also plenty that we didn’t expect to have to deal with along the way – like a prolonged run on Goods Consumption, a surge in US diesel prices, a persistent shortage of skilled labor despite strong overall employment numbers, and seemingly intractable congestion at the ports. But on the whole, the US TL Market Cycle held up relative to historical tendencies. The question, of course then becomes will it continue to do so in 2022. And if so, how can we leverage that insight to make better decisions and position our organizations for the best financial and operational outcomes possible? We look forward to finding out and will be first in line on the next US TL Spot Market roller coaster ride leaving the station in January. All aboard.
Happy Holidays. Stay Nimble.