[Excerpt from The Pickett Line September 2023 Issue]
It’s been a crazy week here for the team at Pickett Research, which is saying something given the inherent crazy-ness of the US Truckload Spot Market – our primary focus of study and the subject of our unwavering and arguably unhealthy obsession. We published our inaugural issue of The Pickett Line back in December 2020, and 33 issues later we learned this week that we’ve finally gone viral. Not only was ‘Picket Line’ cited by the Merriam-Webster dictionary as a Word of the Week on September 29th, it also spiked as an internet search term according to Google Trends – well outpacing previous surges in July, April, and January of this year (those were all great issues too).
We knew it was only a matter of time before we would captivate a global audience, no doubt winning countless hearts and minds along the way – we just didn’t know it would be the August 2023 issue that would do it. We only wish they would spell Pickett correctly, but who are we to argue with our growing fan base. Now we know how Taylor Swift must feel. So if there are any NFL team owners out there looking for a brand ambassador to play catch up with the Chiefs after last week’s game in Kansas City, Pickett Research is available. Yes, even you Chicago.
However, we also realize that it is possible that this wave in public interest could be tied to what is shaping up to be the biggest year for organized labor activity in the last forty – so far including 362,000 workers that participated in 291 labor actions across 462 locations in the US according to the Cornell University School of Industrial and Labor Relations (ILR). The largest of these actions have centered around the entertainment (actors & writers), hospitality (hotel workers in Los Angeles), and healthcare (nurses in New Jersey) industries which tend not to have a material impact on the US trucking market. But the recently initiated United Auto Workers (UAW) strike, should negotiations with the Big Three auto manufacturers break down or otherwise drag out for more than a few weeks, could be an entirely different animal and place additional deflationary pressure on a US TL spot market that is struggling to climb out of its cyclical trough and correct higher into 2024.
So, after suffering the hottest summer on record – according to NASA – we now have record levels of potential labor disruption to contend with in the months ahead. And don’t get us started on the looming US government shutdown driven by continued dysfunction in Washington. The hits just keep coming. Oh yeah, and we still have two months of Hurricane Season to go – featuring major storms out of both the Atlantic and Pacific oceans this year. All the while, diesel prices continue to surge higher as WTI Crude trends towards $100/barrel. But with all these potential catalysts conspiring to disrupt the market in different ways, they represent only short-lived kinks in the long-term rate cycle at best. And despite revising our 2023-25 TL Spot & Contract Linehaul rate forecasts this month to account for some of these short-term deflationary headwinds, we see nothing on the horizon or in this month’s market and macro data that leads us to believe that the shape of the next cycle will look materially different than the last one – or the one before that. So with that as our backdrop, let’s get to work unpacking this September 2023 issue of The Pickett Line. We promise not to let our recent viral celebrity status go to our heads. Back to chopping wood and carrying water.
To recap 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 our Q1 cycle 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%. Our August revision then took us slightly lower to -14.4% Y/Y and further off our forecast line. And with our September revision now in, we’re going to close Q3 50 bps lower at -14.9% Y/Y – again, vs. a forecast of -10.0% + 5% so just barely in range. Though as we noted last month, we believe the primary driver of the forecast deviation this quarter came from the impact of rising diesel prices, which are up $0.76/gal or +20.0% vs. June. Because spot TL rates tend to be negotiated on an all-in basis as opposed to linehaul plus a fuel surcharge, the impact to market rates from changes in the diesel fuel price at the pump are more nuanced on a real-time basis. Higher diesel prices 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 a bit later but did want to make the point here that at June’s DAT fuel surcharge levels, our revised Q3 US TL Spot Linehaul Index would have posted at -11.3% Y/Y and much closer to our forecast line. And as the increase in the cost of diesel is further digested by the supply side in the coming weeks, we expect the rate of carriers exiting the market to pick up which would help accelerate the rebalancing of supply vs. demand and the recovery in spot and contract rates that follows. We expected to see more of that show up in the September data and for our Q3 spot index to revise slightly higher not lower, but it appears that those over-costed operators are proving to be a little more resilient than we gave them credit for. That said, while we are revising our Q4 2023 US TL Linehaul Spot from +5.0% Y/Y to -5.0% and effectively shifting the curve forward by a quarter as a result, we still expect spot linehaul rates to break Y/Y inflationary in 2024 and to run +30-40% Y/Y on average – and to remain Y/Y inflationary through 2025.
With our Spot TL Linehaul Index running a little softer than expected in recent months, our Q3 Contract (Cass) Linehaul Index continues to do the opposite. Recall that we closed Q2 at -13.9% Y/Y vs. a forecast of -9.0% and given the recent momentum, noted a few issues back 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 August read revising our Q3 mark from -11.0% to -11.2% Y/Y vs. a forecast of -9.0%, it is increasingly looking like Q2 may have been a bit of an over-shoot and we’re now snapping 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, while revised slightly to account for our revised spot market forecast, remains mostly unchanged in that we still expect to see the Y/Y Spot Index cross over the Y/Y Contract Index next quarter and for many contract routing guides to begin springing leaks by late Q1 2024 if not sooner.
What does that look like with regard to expected market behavior, you ask? Given these forecast lines on the chart, how are buyers and sellers likely to act? 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 are looking 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. We estimate that through the duration of the most recent inflationary leg of the rate cycle from Q3 2020 to Q1 2022, TL spot linehaul rates ran at an +18.1% premium (or penalty of you’re on the buy-side) to contract rates – with the first two quarters representing the worst of it at +20-23%. This compares to an average premium/penalty of +10.4% during the inflationary leg before that (Q2 2017 to Q4 2018), so cycle amplitudes are clearly increasing. Or in other words, the US TL spot market is getting more volatile, not less. So spot vs. contract linehaul premiums could easily exceed +20-25% by the end of next year. I guess when we put it this way, who could blame procurement teams from seeking to extend contract terms?
That means we should look for all of those quarterly or six-month bids from the last couple of years to magically evolve to one to two-year commitments. But by early next year as noted above, we should also look for many of them to begin to unravel as primary tender acceptance rates fall back to 2020-21 levels. That said, all is not lost if you are one of those procurement teams that runs this offense, usually under duress from a finance organization or executive leadership team looking to manage operating 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 September macro update, where the theme continues to be “flat is the new bullish” as the balance of our indicator reads came in once again more positive than negative but mostly flat. In addition to our usual bag of monthly signals, we also got our 2nd revision to Q2 2023 Consumption, GDP, and Imports to evaluate – which by the way were revised this month to billions of chained 2017 dollars vs. 2012 dollars as previously reported. But while the values themselves changed as a result, the % change from year to year for any given data series remained consistent with previous analysis and commentary. Our model update just took a bit longer to complete this month. Thankfully, the Bureau of Economic Analysis only does this once every five years.
In any case, you may recall that we have started the last couple of macro updates with our 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 +2.1% Y/Y, Q2 posted a flattish preliminary read of +2.0% 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. While we have since revised slightly lower to +1.8% Y/Y, we remain well above Q4 2022’s +1.2% and still flattish relative to the steady post-COVID downtrend that preceded it. And while a flattish consecutive read is hardly a decisive move higher, it’s certainly more constructive than the alternative. Again, “flat is the new bullish”. But just as last month, we’ll have to see where next month’s final revision takes us before getting too excited one way or the other. We especially look forward to finding out whether the underlying strength in goods consumption beneath the headline number in Q2 continues to hold. After finding their own local bottoms in recent quarters, both Durable and Nondurable goods consumption took another step baby step higher in Q2 with Durables up to +3.2% Y/Y from +2.7% and Nondurables back on the inflationary side of the axis for the first time since Q1 2022 at +0.1% Y/Y from -0.2%. Services, despite the ongoing reallocation of consumer spending narrative, instead moved lower to +2.2% Y/Y from +2.7%. So, will those trendlines continue to hold? Be sure to tune in next month to find out.
Now 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 close at a still lower at -1.4% Y/Y. The question coming into Q3, as we search for relative signal between the two, then became 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 hitting the board with July’s -1.8% Y/Y, 40 bps lower than Q2, we started the quarter firmly in the flat to weakness camp. But with our August revision now closing that 40 bp gap to take us to -1.4% Y/Y and dead flat to Q2, we’re back to maximum drama building as we once again await the final revision and hopefully a more decisive signal either way. Again, be sure to tune in next month to find out with us. Talk about must-see TV. We could be looking at another spike in viral Pickett Line internet activity when the October issue drops.
As a quick refresher for any new readers this month and 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 -1.4% Y/Y to reinforce the move, we were still pointed down not up. But with our second Q3 read now on the board, the question becomes how steep is our line and what does that imply going forward? At a dead flat -1.4%, we continue to see 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 third of 2023 and into 2024. But as we all know, one month hardly makes 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 – especially considering the additional storm clouds gathering above in the form of rising energy costs, organized labor disruptions, a cooling labor market overall, and a potential government shutdown. So, until then and in line with the July issue’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 both Consumption and IP running mostly flattish, let’s see if our first glimpse at the Q3 Inventory to Sales Ratio gave us any potential clues this month. Though, as noted last month, 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 July read to represent our preliminary Q3 mark. Recall that, compared to Q1’s 1.37, the preliminary April Q2 print gave us a pretty negative move with the ratio moving a full three bps higher to 1.40 which poured more than a little bit of cold water on our ‘weak but could be worse’ signals at the time from Consumption and IP. But with Q2 holding flat through subsequent revisions at 1.40 and Q3 now opening at a slightly lower 1.39, we finally get some signal that a local peak may have been reached. 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. So if this preliminary read holds up as the quarter develops, it would represent a constructive signal for industrial activity, the demand for TL capacity, and the economy as a whole.
With Consumption, Industrial Production and relative inventory levels all looking promising but 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. 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%. Now with the August revision holding the mark virtually flat at -9.4%, the move has been confirmed. Again, we need to be cautious not to overweight some of these preliminary numbers, but if this one holds up over the next revision, it would certainly signal a much weaker TL demand environment than both the ATA TL Volume Index and Industrial Production itself are suggesting. Though some of this could be explained by more Enterprise shippers driving more volume to their private fleets and not out to for-hire common carriers – as a way to dampen the supply chain volatility and disruption that defined the last couple of years. And these private fleet shipments wouldn’t likely show in the Cass data as there aren’t traditional freight bills for Cass to settle against. At this point, this is more conjecture based on market narrative, but will be looking for a data set that might help us better understand the degree to which this is really happening and whether it’s really moving the market. Until then, we’ll have to be a little more cautious in interpreting the implications of this indicator relative to both the ATA TL Volume Index and Industrial Production when assessing both the magnitude of industrial activity and the demand for for-hire common TL capacity. So it will be especially interesting to see where the next revision in October takes us.
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 where the final revision of -3.1% Y/Y landed materially lower than the prior quarter’s -0.3%. Though each incremental Q2 revision took us higher and higher, from a preliminary mark of -4.5% Y/Y to -3.6% to -3.1%. And with our second revision for Q3 now on the board a full 100 bps higher at -2.1% Y/Y, the trend continues and now signals a potential deflationary inflection point – which if it holds would support the argument for Y/Y inflationary TL linehaul spot market rates in 2024.
But with our revised Q3 Cass Shipments Index still gapping lower at -9.4% Y/Y, we’ll soon find out whether this is the beginning of the next divergence with Cass pointing lower and ATA pointing higher. If so, it likely means that the pace of supply-side rationalization is indeed 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 spot TL rates remain depressed while 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 are getting our first “normal” quarterly print in over a year at a revised -44.1% 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 reported Q1 and Q2 2023 motor carrier earnings performances, the softness in YTD net order activity isn’t surprising. And our revised Q3 read at -44.1% Y/Y, vs. last month’s preliminary -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 to lose interest, July came along and signaled yet another potential reverse in trend after moving 8 cents higher than June at $3.881 and a preliminary Q3 print of -25.0%. We went on to comment in that July issue 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 a couple of months later and that is exactly what is happening. So far in September, diesel has surged another 68 cents (or +17.6%) higher to $4.563/gal – taking the Q3 average to -17.3% Y/Y. And while the pace may have slowed in recent weeks, momentum suggests we have more room to run in the months ahead as WTI crude trends towards $100/barrel. Suffice it to say, we’ll be watching closely as the quarter closes and we kick off Q4.
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 unexpectedly 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 just about all the way through Q3 2023 and looking at a Spot TL Linehaul chart pattern that so far at least continues to track directionally in line with our Q1 2023 revision that pushed our deflationary inflection point forward a quarter from Q4 2022. 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 with Q3 just about baked, our current index read of -14.9% 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 in recent months. For context and as outlined at the top, at June’s DAT FSC (i.e. flat fuel in Q3) the revised Q3 Spot TL Linehaul rate index would have posted 360 bps higher at -11.3% Y/Y. And as noted last month, with July closing three cents lower than June’s $1.73 and September likely to close another seven cents lower at $1.63, 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. With that in mind, given the slower than expected implied exit of surplus capacity from the TL spot market compounded with the impact of a potentially sustained UAW strike and the impact of rapidly rising diesel prices, we noted above that we have revised our Q4 2023 forecast from +5.0% Y/Y to -5.0% – effectively pushing our US Spot Linehaul Index forecast curve ahead by one quarter. We still run materially Y/Y inflationary through most of 2024-25, we just don’t expect to get there until Q1 2024 now.
Given this assortment of new potential market catalysts suddenly swirling around us, what should we be paying special attention to as we dive into October and Q4? Recall that after coasting through the first half of 2023 with the same two wild cards jockeying for position from month to month, TL-intensive Goods Consumption and Retail Diesel Prices, we brought the Atlantic/Pacific Hurricane Season to the podium starting in July in anticipation of a more active year than usual – fueled by record-warm ocean temperatures. Now given the potential for a material yet no doubt temporary deflationary effect on overall TL capacity demand we are adding the ongoing United Auto Workers (UAW) strike to the lineup for next month – in the #3 position between the Hurricane Season and TL-Intensive Consumer Spending. At this point, we don’t believe that the ongoing fallout from the Yellow bankruptcy, the resumption of student loan payments in October (interest accruals restarted in September), stubborn consumer inflation, or a potential government shutdown will ultimately make much of a dent in the balance of capacity vs. demand in the US trucking market anytime soon – but as always, we will reassess next month. Until then, let’s dive into this gang of four as we look ahead to October and the final quarter of 2023.
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 continue to 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 went, the lower the market allowed 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 $0.68 (+17.6%) in September, this is exactly what we see happening and expect to see more of next month.
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 fifth month of this year’s season, though past the statistical peak on September 10th, 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”.
This one has been mostly a non-factor so far, despite a number of major storms making landfall on both coasts and Tropical Storm Ophelia currently wreaking havoc in New York and New Jersey – though thankfully none of which have lingered long enough to create enough of a market disruption to move rates. 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 this month should we get a storm of sufficient magnitude, duration and geography (think Texas/Louisiana Gulf Coast, probably not Florida or the East Coast) to distort the balance of US truckload supply vs. demand enough to move spot rates higher for an extended period of time. Though regardless of what may ultimately come to pass this season, 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. And next year even more so.
3. UAW Strike: Initiated on September 15th when thousands of members walked off the job at three plants in Michigan, Missouri, and Ohio, this is the first strike simultaneously affecting all of the Big 3 Detroit automakers – Ford, General Motors, and Stellantis. Still mostly deadlocked, the action has since expanded to impact 43 locations in over a dozen states. So far at least, the impact on overall shipping volumes and TL capacity demand has been negligible. But should the action escalate further in either scope our duration and automobile production levels slow or cease altogether, it is possible that the resulting drop in US transportation activity could create a deflationary overhang on national spot rates. At this point, we don’t believe the situation will escalate to the extent necessary for this to happen, but the risk is no doubt real. So until resolved, we’ll be monitoring closely.
4. 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 uneven sequential decline. Though after correcting all the way from June 2022’s +9.1% Y/Y to June 2023’s +3.0% Y/Y, we reversed course the last two months and we saw August bump slightly higher to +3.7% Y/Y – driven mostly by rising energy costs. 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, signaling that interest rates may need to stay higher for longer until inflation targets are met. That said, the US Consumer continues to hang in there for the most part, as evidenced in the revised 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 this month. That said, so long as Consumer spending remains steady-ish, the probability of a soft landing for the economy remains squarely on the table if not the most likely outcome at this point. In any case, while Consumption moved to the back burner relative to diesel prices back in March and now Hurricane Season and the UAW strike this this month, we don’t see this wild card going anywhere anytime soon.
With our deflationary inflection point in for Q1 2023 and the second leg of Q3 confirming the direction of the market recovery, we have entered 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 plans are made for the next one? As outlined in recent issues and revised here for all of you first-time readers, we recommend some version of 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, we’re not there yet and 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 Q1 2024 as currently projected, that only represents a +15% increase from current levels. And we don’t expect the contract market to correct materially higher for another quarter or two 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. 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 on the demand side of the marketplace (and brokers that operate on both sides), 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 increases 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 going up big time). 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 crushing your 2023 freight budget and service levels are at an all-time high. Aspire to be considered a ‘Shipper of Choice’ throughout the cycle, not just when the financial pressures of an inflationary rate environment force you to.
Now on to October and the first leg of the last quarter of 2023 where we now expect TL Spot Linehaul rates to move another +5.0% higher from here to close Q4 just short of Y/Y inflationary at -5.0%. From there, we go on to break higher in Q1 2024 and run increasingly inflationary through the end of the year as we kick off the next ~3-4yr US trucking market cycle. We expect Contract linehaul rates to run Y/Y deflationary through early 2024 then break higher over the back half of the year as primary tender acceptance rates deteriorate, routing guides spring leaks, and freight contracts are reset through a flurry of mini-bids – just like in 2017 and 2020-21. Though hopefully this time around, the industry and its trading partners will have more effective tools at their disposal to make better use of the capacity that already exists in the market (across all modes) such that the supply side won’t be baited into overshooting to the same degree as in cycles past. And that the dramatic volatility of this market can begin to be tamed such that we’re not all doomed to a future characterized only by higher peaks and lower troughs. But until then, the roller coaster continues. Good luck closing Q3 on a high note and digging in for what is likely to be another eventful quarter ahead. And remember, it’s ‘Pickett’ with two ‘t’s on those google searches.