[Excerpt from The Pickett Line October 2023 Issue]
Well, it was fun while it lasted. But with the viral blitz of national interest behind Picket(t) Lines and organized labor actions behind us for the most part, it’s back to basics this month at Pickett Research. And if recent progress in negotiations between the UAW and Ford in recent days is any indicator, we have reason to be optimistic that the entire action could be resolved in coming weeks, agreements will be ratified, and the entire automotive industry will be back to work in short order. And public interest in the topic will again wane once again until the next large-scale organized labor action, or the next issue of THE Pickett Line where our US TL Linehaul Spot Index finally breaks Y/Y inflationary, joy erupts across what’s left of the supply side of the market, and a global audience is once again captivated – whichever comes first. We can only hope that the internet can handle the surge in search traffic.
But just as organized labor was fading from the national headlines, another market bombshell dropped last week in the abrupt shuttering of Convoy’s digital freight brokerage business. Regardless of one’s opinions on Convoy’s strategy, business model, or influence on the US trucking market since their founding in 2015, this news should serve as a striking example of the danger that lurks in the later stages of the cyclical trough for all supply-siders – regardless of size, operating model, digital vs. analog, etc. – that are either unable or unwilling to adapt to this increasingly volatile yet historically consistent US trucking market. Just like time and tide, the cycle waits for no one. So with that in mind, let’s dive into this October 2023 issue of The Pickett Line to find out whether this most recent month of market and macro data gave us any clues as to exactly how much longer all of us are going to have wait before this particular cycle finally breaks higher.
Before we dive into October and our first glimpse at the first month of the final quarter of 2023, let’s look back at the Q3 we just wrapped to confirm our closing marks. Recall that last month we reported a revised September read on the US TL Linehaul Spot Index of -14.9% Y/Y, just barely within range of our forecast of -10.0% + 5%. And with the month and quarter now settled, we confirm that -14.9% remains as our final Q3 print. Though as we also noted last month, we believe the primary driver of the forecast deviation came from the impact of steadily rising diesel prices, which rose $0.76/gal or +20.0% from June levels. 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 – especially if they happen quickly. Higher diesel prices are indeed inflationary to all-in spot trucking rates over the long run, but the impact can take time to materialize in an otherwise Y/Y deflationary market environment like the one we’re in. In this case as a specific example, at June’s DAT fuel surcharge levels, our final Q3 US TL Spot Linehaul Index would have posted at -11.3% Y/Y and much closer to our forecast line at -10.0%. As the increase in the cost of diesel is further digested by the supply side in the coming weeks and months, we can only 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 or otherwise uncompetitive operators are proving to be a little more resilient than we gave them credit for.
Now with Q3 firmly in the rearview mirror and our preliminary Q4 read on the board at -12.0% Y/Y vs. a forecast of -5.0% + 5.0%, we find that their resiliency continues. That said, while we revised our Q4 2023 US TL Linehaul Spot forecast last month from +5.0% Y/Y to -5.0% thus effectively shifting the curve forward by a quarter, 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. And for this quarter to close within range of the revised forecast, or < -10.0% Y/Y. And while we don’t expect spot TL rates to surge materially through this peak holiday season, we do expect to see more inflationary pressures than deflationary and for rates to grind gradually higher between now and the end of the year.
But with our Spot TL Linehaul Index continuing to run 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 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 September read holding our Q3 mark flat at -11.2% Y/Y vs. a forecast of -9.0%, it now looks like Q2 was 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. And with this Q3 close, we have confirmed Q2’s -13.9% Y/Y as our deflationary inflection point in this current US Contract TL market cycle. This lags the spot market by one quarter, which is entirely consistent with past cycles and continues to point towards our first Y/Y inflationary read as early as Q2 2024.
Now, what does that mean with regard to expected market behavior, you might 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. Though we also can’t ignore the COVID-driven boom in the demand for goods that helped rally the 2020-22 leg. In other words, the US TL spot market is getting more volatile, not less. So spot vs. contract linehaul premiums could easily exceed +15-20% by the end of next year. And 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 into one- or 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 playbook, usually under duress from a finance organization or executive leadership team looking to drive 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 when you need them 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 operational flexibility to pivot and adapt before your competitors do as the economy evolves and the freight cycle marches on.
Now on to the October macro update, where this is one of the four especially magical months of the year where we get our first glimpse at the most recent quarter’s GDP, Consumption, and Import reads – among a bunch of other data points that the US Bureau of Economic Analysis releases with them. Coupled with the final September revision to Q3 Industrial Production, his means we get to unpack another chapter in our most recent dramatic narrative aptly titled ‘Consumption vs. Industrial Production: Which is telling the truth?’. Recall that the theme in recent month had been “flat is the new bullish” as the balance of our indicator reads mostly came in mostly flat but more positive than negative. But with Q3 2023’s preliminary read of +2.4% Y/Y coming in decisively higher than Q2’s +1.8%, we’ve finally broken higher to form a pattern that signals Q4 2022’s +1.2% Y/Y as a potential post-COVD Consumption bottom. If this holds over the next quarter or two, it would suggest that a recession in 2024 is unlikely – at least according to patterns observed over the last fifty years. That doesn’t mean it can’t happen, just that historical precedence suggests otherwise. We guess it’s back to just plain bullish being bullish, though given all the headwinds facing the US economy at the moment, from inflation to interest rates to wars in both Europe and the Middle East, flat still sounds pretty good if that’s where we end up.
Beneath the headline print, the implications for US TL demand were just as constructive though somewhat contradictory to the prevailing narrative around the reallocation of consumer spending from goods to services this year. After finding their own local bottoms in mid-2022, both Durable and Nondurable goods consumption took another material step higher last quarter with Durables up to +4.9% Y/Y from +3.2% in Q2 and Nondurables up to +1.3% Y/Y from +0.1% Y/Y. This made for the highest Durables read since Q4 2021 and the strongest Nondurables mark since Q1 2022. Services on the other hand, moved on only slightly higher to +2.4% Y/Y from +2.2% in Q2 where it has remained range-bound between +2-3% over the last five quarters. Given the relatively higher freight intensity required to satisfy the demand for Goods, a sustained recovery in in Durable and Nondurable Goods consumption is a bullish signal for future truckload capacity demand. As finished goods inventory is depleted over time, wholesale replenishment orders get triggered more frequently. If sustained, this drives factory orders higher that then require increased levels of industrial activity to fulfill those orders and replenish wholesale and retail inventories to satisfy future demand. And truckload capacity is likely going to be needed to move those goods through every step of that chain. Though with Goods consumption trending consistently higher over the last year, the consumption of Services has remained conspicuously flat from a Y/Y rate of change perspective. So while the argument for consumers reallocating their spending from goods to services in a post-COVID economy is logical, there is no evidence in recent GDP and Consumption data suggesting that’s what is really happening – at least not yet, as far as we can tell.
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 (IP) itself. If you’ve been following along and paying attention this year, you know that we reported our first Y/Y deflationary IP print since Q1 2021 in Q1at -0.8% and we have grinded along at -1.0-2.0% Y/Y since then. And that a Y/Y deflationary level of Industrial Production tends to occur during an economic recession. Well, in the September IP report from the Federal Reserve Board, we noticed a fairly material update to the historical data set. It wasn’t the magnitude of the change that got our attention, where we got a ~150 bp swing in this year’s quarterly Y/Y prints, but that the direction of the swing takes us back to the inflationary side of the axis. So the pattern hasn’t changed, but we now see IP bottoming dead flat at +0.0% in Q2 and Q3 revising slightly higher to close at +0.1% Y/Y. And with this ever so slight move higher Q/Q, we get our first signal that it is Consumption that is more likely to be telling the truth about the direction of the economy over the next few quarters. That said, we have two revisions to Consumption ahead of us before making the Q3 read official and a 10 bp improvement in IP is hardly decisive. Suffice it to say, this battle is far from over and we are already looking forward to the November issue to find out what happens next.
So while our dramatic ‘Consumption vs. Industrial Production: Which is telling the truth?’ storyline got a jolt this this month, it remains largely unresolved as we look for a little more signal strength. And one of the places we look for more signal is in relative inventory levels, where an accelerating Inventory to Sales Ratio is bearish for Industrial Production and a decelerating ratio tends to be bullish. Recall that, after closing Q1 at 1.37, Q2 took us slightly higher to 1.40 thus signaling that a local peak had yet to be reached and more inventory would have to be bled out of the system before we should expect any meaningful recovery in Industrial Production. With Q3 now revising slightly lower to 1.38 from our preliminary July read of 1.39, we’ve got a little more signal that Q2 may indeed represent that peak which would be strong confirmation that the fragile recovery in Industrial Production is likely to be sustained. As we all know, the Inventory to Sales Ratio historically 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. We’ll have to wait until next month’s final Q3 revision to get too excited, but the trendlines all look positive.
With Consumption, Industrial Production and relative inventory levels all showing the most constructive chart patterns since the 2020-21 COVID boom, 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%. Though with the final Q3 mark revising somewhat higher to -8.6% Y/Y, we have seen steady improvement over the last couple of months. But to get any real conviction around the narrative for a sustained higher in Industrial Production and TL capacity demand to satisfy the robust levels of Consumption levels, we’re going to need to see some evidence a bottom in Q4 and a print higher than Q3’s -8.6% Y/Y.
Though as noted last month, the UAW strike and a reported trend in the relative growth in private fleets could partially skew this index when comparing to past periods. If more Enterprise shippers are indeed driving more volume to their private fleets and not out to for-hire common carriers and these private fleet shipments don’t show up in the Cass data as there aren’t traditional freight bills for Cass to settle against, the Shipments Index could be understated. 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 November 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 on the board a full 100 bps higher at -2.1% Y/Y, the trend continues and now signals a potential deflationary inflection point. If it holds, it would support the recovery narrative and 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 -8.6% 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 as 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 final -23.1% Y/Y for Q3 2023. 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 increased weakness reflected in reported quarterly motor carrier earnings performances since Q1, the softness in YTD net order activity isn’t surprising. And our revised Q3 read at -23.1% Y/Y, vs. last month’s preliminary -44.1%, is back roughly 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 year, 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 ran -27.7% lower to 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 initiated the reversal in trend that we’ve been on since with prices marching steadily higher through September and $4.563/gal. And while we took a 4-cent step lower in October, the current 4.520/gal still leaves us 19% higher from June levels and a with a preliminary Q4 2023 mark of -11.5% Y/Y vs. Q3’s -17.3%. So the current trajectory, while still decisively Y/Y deflationary, continues to point higher – which if that continues, would support the case for a Y/Y inflationary TL spot market in 2024. It is important to remember that prior to the current cycle, which was clearly distorted first by the COVID pandemic and then the Russian invasion of Ukraine, diesel prices tended to track the US TL Spot Linehaul Index pretty consistently – usually leading it, but always generally in phase. So perhaps once these more recent distortions resolve, retail diesel prices will re-emerge as one of our more useful market signals for the future direction of US trucking market. As it stands, it is pointing to inflationary market conditions ahead. We’ll just have to wait a few months to find out whether it’s right or not.
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 with our usual basket of somewhat contradictory market signals. The macro picture came in mostly aligned and pointing to some version of an economic recovery ahead with Consumption, Industrial Production, and relative inventory levels all pointing in a positive direction. But will it last? While Consumers, and the US economy that they power, have remained resilient this year despite consensus forecasts otherwise, can they hold up into 2024 if the labor market cools and as interest rates remain at historically elevated levels? Will Q3’s strong GDP and Consumption prints prove to be an anomaly or can Consumers continue to power through? Only time will tell. But until then, we have to rely on the data we have and the historical patterns that they tend to follow. And from that perspective, the future looks pretty bright as most of our trendlines point higher not lower. That said, we also have a US TL Spot Linehaul Index that is running materially lower than forecast with a preliminary Q4 print of -12.0% vs. -5.0% + 5.0% and an all-in DAT National Dry Van Spot Index that has grinded along at $2.08-$2.11since June. So while it certainly looks like the spot market has reached a bottom, market forces haven’t yet been able to engineer any kind of a sustained move higher in rates. And it is exactly that move that we’ll need to see in the coming months for the markets to behave in a way that is in any way similar to the last five cycles which has us breaking Y/Y inflationary as early as next quarter and running increasingly hotter over the course of 2024 and into 2025.
Now where will the catalyst come from to break the current stalemate in market rates? Recall that last month we listed four wild cards to pay special attention to in the month ahead. 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 then added the ongoing United Auto Workers (UAW) strike to the lineup in September. But now with the storm season pretty much done, with no real market impact to show for it, we’ll drop that from the list which takes us back to three. At this point and with another month behind us, we still don’t believe that the ongoing fallout from the Yellow bankruptcy, the resumption of student loan payments in October, stubborn consumer inflation, or government gridlock 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 November and what remains of the final quarter of 2023.
1. Diesel Prices: As noted, now that we’ve hit our Y/Y US TL market cycle bottom, we believe that diesel prices in the weeks and months ahead will help set the pace at which spot market rates begin to recover from here. While prices had been on a bit of a roller coaster ride over the last two years, we suspect that the downtrend we got through the first half of 2023 only prolonged our time down here at the bottom of the cycle. The lower that diesel went, the lower the market allowed Spot linehaul rates to go. And after declining steadily by an aggregate -27.7% from November 2022 through June 2023, diesel reversed and marched +18.9% higher from there to October’s current $4.520 and back to January 2023 levels. That said, October is running four cents under September so the market did get a welcome pause in the run higher. If this pause is sustained or if we reverse direction once again and head lower, we should expect the pace of carrier exits to stall further which would continue to delay the recovery in spot rates. If prices instead begin to climb materially higher, then we get the opposite where the pace of exits picks up some steam thus expediting the cyclical recovery in US TL spot linehaul rates.
2. 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. With tentative deals now announced for all three as of Monday 10/29, it now comes down to how quickly those deals are ratified and to what extent those impacted plants come back online. So far at least, the impact on overall shipping volumes and TL capacity demand has proven difficult to measure with any real confidence. And while it appears that the disruption is indeed on the mend, it is possible that the resulting contraction in US transportation activity from the action could create a deflationary overhang on national spot rates. At this point, given the progress in negotiations, 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 fully resolved, we’ll be monitoring closely. Though this one likely drops from our wild card list next month.
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 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 in recent months and we saw August bump slightly higher to +3.7% Y/Y where it remained stuck in September – 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 strong preliminary Q3 2023 GDP & Consumption print – especially with regard to TL-intensive goods consumption. However, big 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, 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 the UAW strike last month, we don’t see this wild card going anywhere anytime soon.
With this cycle’s deflationary inflection point in for Q1 2023 and the subsequent quarters so far 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 that we’re currently in the process of wrapping up. And while this deflationary leg indeed took as far lower than those that came before (-31.8% Y/Y vs. last cycle’s -19.0%), the projected seven-quarter duration is so far tracking exactly in line with the seven-quarter deflationary leg of the last cycle (Q4 2018-Q2 2020) and the seven-quarter deflationary leg of the cycle before that (Q3 2015-Q1 2017). So challenging market conditions for sure for most of those on the supply side, but hardly ‘unprecedented’ or ‘generational’ in nature. And if this cycle is more like past cycles than it is different, we should be able to anticipate general market behavior as this deflationary leg slowly but surely comes to a close and the next inflationary leg begins – and recommend how best to position. So as outlined in recent issues and revised here for all of you first-time readers, we recommend some version of the following for supply-siders and demand-siders alike as we continue down the home stretch.
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 +17% 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 November and the middle 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 levels 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 defined by higher peaks and lower troughs. Until then, the roller coaster continues. So, keep those seat belts fastened and those operating expenses as low as possible. Because while better days no doubt lie ahead, you have to be alive and in the market when they get here. Just like we are reminded by the hit 1977 Broadway musical Annie, while “it’s the hard knock life” in this market right now, “the sun’ll come out tomorrow”. You can “bet your bottom dollar” on that. Now onto November.