[Excerpt from The Pickett Line August 2023 Issue]
Well, it’s official. The heat was on last month in a big way – so big in fact that NASA has indeed confirmed July as the warmest month on earth, at least within the 143-year historical record. And we haven’t gotten much of a reprieve this month either with temperatures still soaring across much of the country, the first tropical storm to make landfall in California since 1939 with Hurricane Hilary on August 20th, and now a possible Category 4 hurricane bearing down on the gulf coast of Florida. So while maybe not a record-breaking set of conditions, it has been uncomfortable and volatile nonetheless – which by the way sounds an awful lot like the US trucking market over the last year and a half. And here to, August has been no exception, though most of our market and macro updates remained constructive and in in line with our cycle-driven TL linehaul rate forecast for Y/Y inflationary environment as early as next quarter. But unlike last month, the signals were hardly unanimous in their direction so we’re back to the mixed bag of sometimes contradictory data points that we usually get as this market and the economy both struggle to find their footing.
That said, one thing was made abundantly clear since last month’s issue. As a way to beat the heat, recall that we recommended heading to a chilly movie theatre to comfortably enjoy the July issue of The Pickett Line – with the three-hour runtime of Oppenheimer perhaps giving it an edge over Barbie which only gives you an hour and 54 minutes of chill time. But that you should be you and choose accordingly. With Barbie raking in almost $600M so far at the domestic box office, making it the biggest movie of 2023 and double what Oppenheimer has pulled in over the same period, your voice has been heard loud and clear America. It’s Barbie for the win. Apparently pink is the new black. So with that now settled, let’s unbox this August 2023 issue of The Pickett Line and dive in headfirst.
To summarize a bit, recall that last month we reported a final Q2 US TL Spot Linehaul Index read of -18.8% Y/Y vs. Q1’s -31.8% and our Q2 forecast of -20.0% + 5% – so up decisively from the Q1 low and running slightly hotter than Q2 expectations. From there, we opened Q3 with a preliminary July read of -12.3% Y/Y vs. a forecast of -10.0% + 5%. And with August now just about in the bag, we have revised that read slightly lower to -14.4% Y/Y and further off our forecast line. Though the primary driver of the deviation this month came from the impact of rising diesel prices, which are up $0.40/mi or +10.3% vs. July. Because spot TL rates tend to be negotiated on an all-in basis as opposed to linehaul plus a fuel surcharge, the impact from changes in the diesel price at the pump are more nuanced on a real-time basis. Higher diesel costs are indeed inflationary to all-in spot trucking rates over time, but the impact can take time to materialize in an otherwise Y/Y deflationary market environment like the one we’re in. We’ll cover diesel prices in more detail a bit later but did want to make the point here that at July’s DAT fuel surcharge levels, our revised Q3 US TL Spot Linehaul Index would have posted at -12.2% Y/Y and much closer to our forecast line. And as the increase in diesel costs are further digested by the market in the coming weeks, we do expect our Q3 read to revise higher and to converge back in line with expectations – which is why our guidance remains unchanged with spot linehaul rates breaking Y/Y inflationary as early as next quarter and to run +40-50% Y/Y throughout 2024.
And with our Spot TL Linehaul Index running a little softer than expected this month, our first glimpse at the Q3 Contract (Cass) Linehaul Index is doing the opposite. Recall that we closed Q2 at -13.9% Y/Y vs. a forecast of -9.0% and given the recent momentum, noted that “it [was] reasonable to now expect that we’ll see a floor closer to -15.0% Y/Y, potentially as low as -17.5%, in the next quarter or two before inflecting higher to follow TL Spot rates into the next inflationary leg of the cycle in 2024.” But with the July read putting the preliminary Q3 mark on the board at -11.0% Y/Y vs. a forecast of -9.0%, it now looks like Q2 may have been a bit of an overshoot and we’re now beginning to snap back to our original forecast line which implied a floor of -9.0% Y/Y. If this holds, then Q2 will represent our deflationary inflection point in the US Contract TL market at -13.9% and our forecast remains unchanged in that we expect to see the Y/Y Spot Index cross over the Y/Y Contract Index by next quarter if not sooner and for many contract routing guides to begin springing leaks by late Q1 2024.
So what does that look like with regard to expected market behavior? As noted in recent issues and summarized again here for any new subscribers, with the projected spot market cycle bottom now in, many enterprise procurement teams will first look to extend the duration of their contracts to try and “lock rates in at the bottom” – which never really works over the long term yet represents a temptation that is often difficult to resist. That means look for all of those quarterly or six-month bids from the last couple of years to magically transform into 12-24 month commitments. But by early next year, we’ll look for many of them to begin to unravel as primary tender acceptance rates fade back to 2020-21 levels. That said, all is not lost if you are one of those procurement teams that runs this playbook, usually under duress from the finance organization or executive leadership looking to manage costs lower by any means necessary. You’ll just need to be especially agile as the freight market landscape shifts. To that end, if you haven’t done so already, we recommend that you invest in the technology and tools required to give your team the visibility and control they need to track the performance of your contract lanes and carrier partners on at least a weekly basis, and then be in position to take decisive action if necessary – from rebidding lanes away from underperforming vendors…to procuring surplus backup capacity at rates likely to be more attractive than what you’ll find in the spot market…to leveraging more dynamic contracts that adjust more frequently based on market indices or benchmarks. If you’re unable to position for long-term performance to begin with because global procurement best practices dictate otherwise, the next best thing is to build the organizational flexibility to pivot and adapt before your competitors do as the economy evolves and the freight cycle marches on.
Now on to the macro, where August gave us much less to work with compared to July where we got to unpack preliminary Q2 GDP and Consumption – though we’ll do our best with what we’ve got. You may recall that we started last month with an update to the dramatic narrative around ‘Consumption vs. Industrial Production: Which is telling the truth?’, so let’s begin there. After closing Q1 2023 with a constructive final print of +2.4% Y/Y, Q2 posted a flattish preliminary read of +2.3% Y/Y which we viewed as positive signal that a reversal higher from the post-COVID slide since Q2 2021(therefore skirting any version of a US economic recession) may just have some legs. And while a flattish consecutive read is hardly a decisive move higher, it’s certainly more constructive than the alternative. But just as with the last quarter, we’ll have to see where the subsequent revisions take us before overreacting one way or the other – the first of which we’ll report on next month in the September issue. We especially look forward to finding out whether the underlying strength in goods consumption beneath the headline number in Q2 holds. After finding their own local bottoms in recent quarters, both Durable and Nondurable goods consumption took another step higher in Q2 with Durables up to +3.4% Y/Y from +2.6% and Nondurables back on the inflationary side of the axis for the first time since Q1 2022 at +0.5% Y/Y from -0.4%. Services, despite the ongoing reallocation of consumer spending narrative, instead moved lower to +2.6% Y/Y from +3.3%. So, will those trendlines hold? Tune in next month to find out.
So with the protagonist of our story, Consumption, continuing to make its case that US Consumers remain resilient and that the current relative weakness in Industrial Production is unlikely to last, let’s check in with our villain for the time being – Industrial Production itself. After closing Q1 at -0.8% Y/Y and our first deflationary print since Q1 2021, Q2 continued the trend to closer still lower at -1.6% Y/Y. The question coming into Q3, as we look for relative signal between the two, then becomes whether we rebound higher to converge back towards Consumption (i.e. Consumption is telling the truth), fade lower into more weakness (i.e. IP is the truth teller), or hold flat to build on the drama. With our preliminary Q3 read now on the board with July’s -1.8% Y/Y, a mere 20 bps lower than Q2, it looks like the drama will build for yet another month as we await the next revision and hopefully a more decisive signal either way. You’ll all have to remain perched on the edges of your seats until then.
As a quick refresher for any new readers this month, as noted above Industrial Production closed Y/Y deflationary in Q1 2023 for the first time since the Q1 2020 Covid recession – a move that almost without exception over the last 35 years has been a harbinger of recessionary economic conditions ahead. And while not off-the-charts deflationary at -0.8% Y/Y, it was a deflationary print nonetheless. And with Q2 coming in at a still lower -1.6% Y/Y to reinforce the move, we’re still pointed down not up. But with our first Q3 read now on the board, the question becomes how steep is our line and what does that imply going forward? Again, even at a slightly weaker -1.8%, we’re still looking pretty flat which is a positive signal that perhaps the bottom isn’t about to drop out of the industrial economy after all. In fact, we could see some version of the exact opposite over the back half of 2023 and into 2024. But as we all know, one month hardly make a quarter and one quarter hardly makes a pattern. And while we continue to believe there is a lot to be optimistic about as to where we go from here, we need to see a few more months of data before getting too much conviction one way or another. Until then and in line with last month’s theme, we must keep our cool.
So as our dramatic ‘Consumption vs. Industrial Production: Which is telling the truth?’ storyline remains unresolved for yet another month with Consumption unchanged and IP looking a tiny bit worse, let’s see if our Inventory to Sales Ratio indicator gave us any clues this month. Though it is important to note that this is one of our more delayed economic data points with regard to its release, so this month we get the June read to bake into last month’s revision to give us our final Q2 print to tie a bow on. Recall that the preliminary April Q2 print gave us a pretty negative move with the ratio moving three bps higher to 1.40 from the prior quarter’s 1.37 that poured more than a little bit of cold water on our ‘weak but could be worse’ signals from Consumption and IP. But with this month’s revision keeping Q2 flat at the same 1.40, that ‘weak but cold be worse’ narrative now applies here too. We still have no sign of a local peak, but it’s not moving any higher either…at least for now. Recall that historically, the Inventory to Sales Ratio runs inverse to Industrial Production – which makes sense as bloated inventory levels diminish the need to make more stuff to restock shelves. That means once we finally do observe a local top in the Inventory to Sales Ratio, we should expect to see a local bottom in IP – and vice versa. But until then, the long-term macro-outlook remains cloudy at best.
So with Consumption, Industrial Production and relative inventory levels all still treading water for the most part, let’s turn to our primary TL demand indicators – the Cass Shipments Index and the ATA TL Volume Index, where we got a little more action this month. After settling in at -0.2% Y/Y for Q1 2023 and -4.2% Y/Y in Q2, the trend coming into this quarter was decidedly negative. And boy did it get a lot more negative with July’s preliminary Q3 print coming in at -9.5% Y/Y – the lowest mark since Q2 2020’s COVID-induced -21.4%. Again, we need to be cautious not to overweight some of these preliminary numbers, but if this one holds up over the next two revisions, it would certainly signal a much weaker TL demand environment than both the ATA TL Volume Index and Industrial Production itself are suggesting. So it’s a question of whether this is a Q3 2019 moment where Cass Shipments led IP lower over subsequent quarters, or a Q1 2022 moment where Cass’s divergence lower from IP proved short-lived before rebounding to snap back to the IP line a quarter later. We’ll get our first signal next month when the August revision drops.
In the meantime, the ATA TL Volume Index revised in the completely opposite direction. Recall that after a period of pretty extreme divergence from 2019 through mid-2022, this one had been running hand in hand with its sister TL demand indicator for the last few quarters. And we saw that streak continue into Q2 2023, though with our second revision coming in at -3.6% Y/Y and slightly higher than the prior month’s preliminary -4.5%. And now with our final mark on the board at -3.1% Y/Y, we see that steady trend higher continue. But with our preliminary Q3 Cass Shipments Index again gapping lower to -9.5% Y/Y, we’ll soon find out whether the convergence will continue for another quarter or if this will be our twin TL demand indicators once again beginning to diverge with Cass pointing lower and ATA pointing higher. If we continue to see our ATL index trail Cass, it likely means that the pace of supply-side rationalization is picking up – or in simpler terms, the rate at which unprofitable motor carriers are forced to exit the market has accelerated. And it is only when a sufficient number of these uncompetitive, over-costed carriers is unfortunately forced to exit the market that spot TL linehaul rates finally find their Y/Y deflationary floor and the market can mount a recovery – which as we all know, was confirmed in Q1 2023. We’ll no doubt see more and more of these exits in the months ahead as more carriers run out of options as the market turn continues and rising diesel prices now act as a secondary headwind.
Now let’s now shift our attention to the supply side and Net Class 8 US Tractor Orders – where we just got our first “normal” quarterly print in over a year at -48.4% Y/Y. Recall that just when we thought we were back to historic cycle patterns, which meant increasingly Y/Y deflationary order activity through 2022-23 as the US TL Spot market worked through its own excesses, we got a rocket ship of a number, relatively speaking, in Q4 2022 at +86.5% – thus forming a pattern completely unprecedented relative to past cycles. At the time, we noted that this wasn’t entirely unexpected. Back then, we suggested that the unprecedented disruption in tractor OEM supply chains had created enough of a market distortion that the cycle correlations perhaps got nudged a couple of quarters out of phase. And if so, perhaps we would see Class 8 net orders go Y/Y inflationary with the same 2-3 quarter head start that they led deflationary beginning in late 2021. But as the subsequent quarter closed flat Y/Y and with Q2 closing at a still lower -8.0% Y/Y, we were back in line with historic patterns – albeit somewhat muted. This meant we could take the “2-3 quarter nudge”’ hypothesis back off the table and reframe Q4 2022 as more of a one-off head fake likely driven at least somewhat by OEM’s finally opening back up their 2023 order books as their supply chains normalized at a time when plenty of the supply side remained eager to buy. It was a time when much of the market’s frothy enthusiasm from the 2020-21 boom remained despite an increasingly uncertain outlook for the US economy as a whole – which didn’t last for very long. And given the weakness reflected in most reported Q1 and Q2 2023 motor carrier earnings performances, the softness in YTD net order activity isn’t surprising. And our preliminary Q3 read at -48.4% is back to where we would expect it to be given where we are in the US Spot TL Linehaul rate cycle and relative to past cycles. From here, we expect the reversion to historic patterns to continue which means another quarter or two of Y/Y deflationary tractor order reads before swinging Y/Y inflationary with TL Spot Linehaul rates by Q1 2024.
While Net Class 8 Tractor Orders have bounced around over the last couple of quarters, up until recently US retail diesel prices had settled into a sustained seven-month Nov ’22 to Jun ’23 downtrend after spiking through much of 2022 on Russia’s unprovoked invasion of Ukraine. To recap diesel’s wild ride for anyone that hasn’t been paying attention, the price of diesel had finally started to correct lower in mid-2022 after exploding steadily higher for much of the year up to that point – from $3.727/gal in January 2022 to $5.754/gal in June before retreating slightly to close September just barely under $5/gal at $4.993. This took the final read on Q3 2022 to +53.8% Y/Y after peaking at +70.7% in Q2. Unfortunately, however, diesel reversed once again to jump +5.0% (+$0.26/gal) higher through November to close at $5.255 on fears of a US diesel shortage driven by diminished refinery capacity in the northeast. Ultimately, those fears proved to be unfounded as diesel instead reversed course once again and had since settled -27.7% in June 2023 at $3.802/gal and a Q2 average of -28.1% Y/Y – so continuing to run Y/Y deflationary for the first time since February 2021. But just when we were starting get bored, July came along and signaled yet another potential reverse in trend in coming months after moving 8 cents higher than June at $3.881 and a preliminary Q3 print of -25.0%. We went on to comment last month that “should this inflationary trend pick up any steam, it would only hasten the exit of over-costed capacity and therefore accelerate our journey to the next Y/Y inflationary leg of the next cycle”. Here we are one month later and that is exactly what is happening. So far in August, diesel has surged another 40 cents (or +10.0%) higher to $4.283/gal higher and back above $4 for the first time since April. And while the pace has slowed this week, momentum suggests we have more room to run in the months ahead. Suffice it to say, we’ll be watching closely as the quarter develops further as the higher diesel goes the quicker that over-surplus capacity will be forced to exit the market and the quicker the recovery in spot rates as the cycle marches on.
As noted in past issues and repeated here for any new readers, the last time we saw anything like last year’s spike in fuel prices was in 2008 where diesel climbed to +66.6% Y/Y that June – in the throes of The Great Recession. During that particular US TL Spot Linehaul Rate Cycle, unlike this one, diesel spiked higher several quarters ahead of spot and contract rates. As a result, we saw an unprecedented wave of motor carrier bankruptcies and exits as profitability was violently wiped out – especially for those most exposed to the spot market. The key difference this time around is that spot and contract rates led diesel by several quarters, which allowed the market to absorb the diesel shock without forcing carriers out of the market in material numbers at the same rate. And so far at least, it has been a much more gradual exit. As the battle between spot market rates and carrier operating costs rages on, the role that diesel prices have played has been in helping to set the ultimate market bottom where our Y/Y US TL Linehaul Spot Index line finally inflected higher as sufficient surplus capacity has been forced to exit as their operating margins evaporate. And as noted here, we believe we found that bottom with the confirmation of Q1 2023 as our deflationary inflection point. Going forward, diesel’s role becomes that of a pacesetter. If prices turn again to fade lower, then the pace of exits likely continues at the current rate or possibly slows down a little. Should they instead continue to charge higher, then the pace of exits likely picks up which would be a tailwind to TL spot rates and would accelerate the overall market recovery back towards Y/Y inflationary conditions.
So here we are most of the way through Q3 2023 and are looking at a Spot TL Linehaul chart pattern that so far at least continues to track directionally in line with our most recent Q1 2023 revision that pushed our deflationary inflection point forward a quarter from Q4 2022. And with Q2’s close at -18.8% Y/Y, Q1’s -31.8% Y/Y mark was confirmed as our cycle bottom which sets the stage for a recovery in the Spot TL market through the end of the year and into 2024. Now roughly two thirds of the way into Q3, our current index read of -14.4% Y/Y vs. a forecast of -10.0% is tracking in that direction as well – although we believe is temporarily distorted by the rapid run higher in diesel prices over the last few weeks. For context, at July’s DAT FSC (i.e. flat fuel) the revised Q3 Spot TL Linehaul rate index would be posting 220 bps higher at -12.2% Y/Y. And as noted last month, with July closing three cents lower than June’s $1.73, we are reminded that the recovery is not likely to be linear in nature. We could very easily see down weeks and months yet remain on track with our longer-term cycle projections. So in that regard, the month ahead will be especially interesting as we’ll find out whether the market takes us further off our Q3 forecast line in September or begins to snap back as inflationary diesel prices are absorbed by the spot market and the compound effect of storm activity and seasonality begins to nudge rates higher.
We also questioned last month whether “the impact of the Yellow Corp. bankruptcy in progress would prove to be an inflationary catalyst for the truckload spot market?” So far at least, the answer to that one is No.
We also pondered whether “the resumption of student loan payments on September 1st after more than three years of COVID-19 forbearance materially dent goods consumption in a way that we haven’t seen up this point in the recovery?” The jury is still out on that one, but we doubt it.
And finally, we wondered “whether record high temperatures would somehow collude with the Atlantic hurricane season to generate a market-moving weather event?” No jury deliberation required for this one. Not only do we have a potential Category 4 hurricane bearing down on the gulf coast of Florida at the time of writing, Southern California saw the first tropical storm make landfall there in more than 80 years last week with Hilary. So apparently there is now a Pacific hurricane season to contend with as we make our way through the rest of 2023. Super.
So after making its return to the monthly wild card leader board last month, after many many months of TL-intensive Goods Consumption and Retail Diesel Prices dominating this part of the conversation, the Atlantic Hurricane season is moving up to the #2 spot and will now simply be known as ‘Hurricane Season’ as Pacific ocean storms muscle their way into the supply chain disruption party. Then without any further ado, let’s dive in as we shift our gaze to the road ahead of us after an unusually eventful August:
1. Diesel Prices: As noted, now that we’ve hit our Y/Y cycle bottom, we believe that diesel prices in the weeks and months ahead will help set the pace at which spot market rates recover from here. And while prices had been on a bit of a roller coaster ride over the back half of 2022, we suspect the downtrend we’ve been on through the first half of the year only prolonged our time down here at the bottom of the cycle. The lower diesel goes, the lower the market will allow Spot linehaul rates to go. After declining steadily from June through September 2022, diesel reversed higher in October and into November. But then reversed once again, fading $1.45 or -27.7% lower to June’s $3.802. We noted last month that “with July’s eight cent bump higher to $3.882 and increasingly bullish crude oil forecasts through the end of the year, it’s quite possible we have found our local bottom and diesel prices are poised to run higher from here. And if that happens, we should expect more over-costed spot market dependent carriers to exit at a quicker pace and for spot TL rates to accelerate higher at a greater clip as a result.” Check, and check. With prices up another $0.40 (+10.3%) in August MTD, this is exactly what we see happening and expect to see more of in September.
2. Hurricane Season (Jun-Nov): Returning to the podium after an extended hiatus with other market forces running the show, we welcome back the Atlantic (and now Pacific) Hurricane Season as a potentially market-moving wild card in the month ahead. As we prepare to enter our fourth month of this year’s season, experts are no longer as mixed on their outlook as they were last month. NOAA forecasters have revised their early season prediction of near-normal activity this year to above-normal – which now means 14-21 named storms (winds > 39 mph), 6-11 hurricanes (winds > 74 mph), and 2-5 major hurricanes (Category 3,4,or 5 with winds > 111 mph). Meanwhile, Colorado State University maintains their forecast of an above-normal season with 18 named storms to make landfall with nine hurricanes, four of which they predict will become major hurricanes. As outlined last month, both prediction models are based on decades of historical data and take into account conditions that include sea surface temperatures, sea level pressures, vertical wind shear levels, and El Niño – which thanks to Chris Farley (RIP) in one his most underrated Saturday Night Live skits of all time (look it up, it’s worth a google), we know is Spanish for “The Niño”. And with two major storms making landfall in just the last two weeks, it certainly feels like we are in for a bumpy ride ahead. And not even Southern California is beyond the reach of “The Niño”. So be prepared to batten down the hatches on your supply chains and transportation networks in short order if you need to. You’ve been warned.
The last market-moving storm we got while in the deflationary leg of the cycle was Hurricane Matthew in Q3 2016 along the SE US Atlantic coast, which accelerated the recovery in spot linehaul rates into Q4 that year but then set up a relative stall in the trend line in Q1 2017 before breaking Y/Y inflationary a quarter later. So that’s what we’ll be looking for should we get a storm of sufficient magnitude, duration and geography (think Texas/Louisiana Gulf Coast, probably not Florida) to distort the balance of US truckload supply vs. demand enough to move spot rates higher for an extended period of time. Yes, that means we don’t expect Idalia to make much of sustained dent in the market given the current storm path, even if it does make landfall as a Cat 4. Though regardless of what may ultimately come to pass on this one, just keep in mind that in a rising spot market, rates are much more vulnerable to short-term dislocations like major storms. So, the risk level this year is logically going to be much higher than in 2022 when the spot market was in a virtual free fall.
3. TL-Intensive US Consumer Spending: Conditions remain tough to say the least for the average US Consumer, despite ample signal that peak Consumer Price Inflation (CPI) is well behind us after many months of slow yet steady sequential decline – from June 2022’s +9.1% Y/Y to July 2023’s +3.2% Y/Y. But while the Fed’s tightening monetary policy is well on its way to achieving its end, progress has been slow and most of the guidance from Powell and the gang remains hawkish overall with the most recent 25bp raise last month after June’s pause. That said, the US Consumer continues to hang in there for the most part, as evidenced in the preliminary Q2 GDP & Consumption print – especially with regard to TL-intensive goods consumption. However, questions remain as to how long the Consumer can hold up or whether existing cracks will widen given signs of a slowly but steadily cooling labor market, rising household debt (albeit at a slowing Y/Y rate), tightening credit conditions, and the resumption of student loan payments coming up in September. That said, so long as Consumer spending remains steady-ish, the probability of a soft landing (or no landing) for the economy remains squarely on the table if not the most likely outcome. In any case, while Consumption moved to the back burner relative to diesel prices back in March and now Hurricane Season this this month, we don’t see this wild card going anywhere anytime soon.
So with our deflationary inflection point in for Q1 2023 and the second leg of Q3 confirming the direction of the market recovery, we are entering territory that we haven’t navigated since late 2019 as that cycle came to an end, thus setting up the one we’re currently in the process of wrapping up. What does that mean for supply-siders and demand-siders alike over the balance of the year? As outlined last month and revised here for any new long-time fans/first-time readers, we propose the following:
For motor carriers and brokers operating on the supply side of the market, this likely means keep doing what you’ve been doing over the last year and a half – at least if that means cutting costs, getting leaner, and conditioning your teams to be able to do more with less. While we absolutely see the light at the end of the tunnel with a recovery in Spot TL Linehaul rates over the next year, the market correction is virtually guaranteed to be uneven – with different industries, geographies, and equipment types all evolving at their own pace. Also, as noted last month, while the rate of recovery can look pretty dramatic on our Y/Y cycle charts, the sequential development of the market rates each of us experiences will feel altogether different. For example, even Spot rates go on to close Y/Y inflationary by Q4 this year as currently projected, that only represents a +10-15% increase from current levels. And we don’t expect the contract market to correct materially higher for another couple of quarters after that. But regardless of the ultimate pace at which the market flips Y/Y inflationary over the quarters ahead, there is little downside in remaining disciplined and pursuing operational excellence in whatever it is you do. And as you prepare for 2024, the months ahead will represent a welcome opportunity to refine your commercial strategy and carefully consider the shippers that you want to partner with going forward into the next cycle. As it is the shippers that reneged on contract awards (“Hey, Why are my contract lanes showing up on this min-bid?”) during the down cycle or unreasonably extended payment terms simply because they could that probably don’t deserve the same consideration and partnership as those that chose to operate differently. So choose wisely as those that navigate the cycle most successfully over the long run tend to be the ones with the most durable long-term commercial relationships with partners that have earned their trust through both the ups and the downs.
And for shippers (and brokers that operate on both sides) on the demand side of the marketplace, our guidance is similar. What is left of this current Y/Y deflationary leg of the cycle represents a tremendous opportunity to recalibrate your transportation strategy for the Y/Y inflationary leg that is looming ahead. The race to the bottom of the TL market that you have enjoyed this year is mostly over, but its lingering impact is almost certainly masking weaknesses and deficiencies that will take a toll in 2024 if left unaddressed. So now is the time to examine your current and projected freight flows to understand where alternative modes, operating models, and capacity partners could create a comparative advantage – whether it be from cost, speed, utilization, or flexibility – in an inflationary TL market. With both the cost of capacity and the cost of diesel on the rise, the penalty for waste only gets greater from here. So focus on filling your trailers and intermodal boxes, or find a way to only pay for the space you need (the price to ship air is only going up). And work to eradicate empty miles and excessive dwell times from your networks. Remember that next year’s winners will be determined by the actions taken over the balance of this one. So don’t squander this opportunity just because you’re beating your 2023 freight budget and service levels are at an all-time high. Look to be a ‘Shipper of Choice’ throughout the cycle, not just when the financial pressures of an inflationary rate environment force you to.
Now on to September and the final leg of Q3. Everyone stay cool [and now dry] out there. After spending most of last month in the movie theatre (it really does take 2-3 viewings of Barbie to truly appreciate the dramatic arc of the story), this month we’ll be hunkered down in the Pickett Research freight lab glued to the Weather Channel if you need us.