[Excerpt from The Pickett Line November 2023 Issue]
As we closed last month’s issue humming bars of ‘Tomorrow’ from the 1977 Broadway musical Annie, we were reminded that despite how grim the economy and the US TL spot and contract markets still looked and felt at the time, the proverbial sun would indeed come out tomorrow. And that we were so certain in that outcome that one could confidently bet their bottom dollar (or last coin) on it. Well, with a month’s worth of “tomorrow” now behind us, we get our first signals as to how those bets are all faring.
Before we dive in though, there is a minor point of housekeeping to share. The editorial team at Pickett Research recently took the decision to modify the publication schedule going forward such that issues will now ship at the end of the first full week of the following month – as opposed to the last week of the issue month as in the past. This will allow us to assess a full month’s worth of data without having to look back each issue to make note of any material end-of-month data points or to officially close a quarter. We don’t know why it took us three years to realize that this made more sense for our audience (and for our analysts and writers, quite frankly), but here we are nonetheless. So with November as the first issue that ships on this cadence and December now dropping in early January, that makes this one our special 2023 holiday installment. And in true Pickett Research tradition, we must of course kick things off with a holiday poem that adequately captures the spirt of the season. But before we do, let’s first take a moment to pause and reflect on where we all were just twelve months ago as expressed in last year’s special December 2022 holiday issue of The Pickett Line:
‘Twas the eve of inflection, and all through the market
Not a Carrier felt optimistic. Thought they might as well park it.
Costs remain high, while rates remain low.
Cheaper diesel sure helps, but only softens the blow.
How long must we wait, before this market finds a floor?
This feels strangely familiar, like it’s happened before.
So let’s look backward in time, to see where we’ve been.
And use that as context to assess the position we’re in.
Then into the future, we’ll peer once more.
To consider just what does the next year have in store.
Will the cycle repeat? Is there reason for doubt?
The December issue is here, so let’s unpack and find out.
Yikes, so pretty dark. Yet within these heartstring-pulling verses came a ray of hope for the year ahead. ‘How long must we wait, before the market finds a floor?’ we wondered. Well, it turned out the answer to that was Q1 of this year where our Y/Y deflationary inflection point ultimately set in. And we’ve been grinding slowly yet steadily toward equilibrium and the next Y/Y inflationary leg of a new cycle ever since. But alas, we’re not there yet. So, much like this time last year, the question remains ‘How long must we wait’…before we finally break free of this deflationary leg of the current cycle to begin anew? Let’s once again get into the holiday spirit and find out:
‘Twas the late stage of the cycle, and all through the land,
Rate increases were scarce, suppliers all told to pound sand.
But how can this be? The market’s been brutal all year.
As spot and contract rates drift lower, profits soon disappear.
Then as more carriers and more brokers all take it on the chin,
RIFs are splashed across Freightwaves and celebrated by the trolls on LinkedIn.
Though like it or not, these are normal forces at play.
What the market cycle shall giveth, it shall taketh away.
But do not despair, brighter skies lie ahead.
For those still in the market and hanging, even if only by a thread.
So how long must we wait, for these dark clouds to part?
As we unpack November, we’ll assess chart by chart.
Then using data as our map, and history as our guide,
We’ll see that there’s reason for cheer in the new year,
As markets finally recover and begin to hit stride.
And with the tone now set, welcome to the November 2023 issue of The Pickett Line – our final installment of calendar year 2023 with December now scheduled to ship in early January. You may recall that last month’s issue held what was probably the most constructive set of macro reads we’ve seen all year. Now with another month of data behind us, we find that most of those green shoots indeed remain green. And that our US TL Spot Linehaul Rate Index remains poised to break Y/Y inflationary as early as next quarter with the US TL Contract Linehaul (Cass) Index trailing behind by a quarter or two. So without any further ado or any more corny holiday traditions to abide by, let’s get on with it.
Coming off a Q3 that closed at -14.9% Y/Y, just barely within our forecast range of -10.0% + 5%, our revised Q4 Spot Linehaul Rate Index print came in at -9.8% Y/Y vs. last month’s -12.0% and a forecast of -5.0% Y/Y + 5%. But while we are clearly beginning to close the gap and we expect additional sequential spot market rate inflation to close out the month and the year, we mostly likely end up closing the quarter somewhere in the neighborhood of -8.0-9.0% Y/Y.
But with our Spot TL Linehaul Index continuing to run a little softer than expected in recent months, our Q4 Contract (Cass) Linehaul Index has converged back to our forecast line after swooning materially lower in Q2. Recall that we closed Q2 at -13.9% Y/Y vs. a forecast of -9.0% and given the recent momentum at that point, 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 our Q3 print closing at -11.2% Y/Y vs. a forecast of -9.0% and our preliminary Q4 read on the board at -7.3% Y/Y vs. a forecast of -7.5% Y/Y, it now looks like Q2 was only a temporary overshoot as we’ve since snapped back to our original forecast line. And with this Q3 close and early Q4 read, Q2’s -13.9% Y/Y remains confirmed as our deflationary inflection point in this current US Contract TL market cycle. This lagged the spot market’s Q1 bottom by one quarter this time around, 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 logically 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? It’s just a matter of whether the suppliers on the other side of those agreements will ultimately honor them over the entire term.
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 late Q1 or early Q2 2024, 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 November macro update, where last month’s goldilocks report, green shoots and all, is subject to review – which includes the latest installment in our most recent dramatic narrative aptly titled ‘Consumption vs. Industrial Production: Which is telling the truth?’. Recall that the theme in recent months had been “flat is the new bullish” as the balance of our indicator reads came in mostly flat but more positive than negative. And while that remains to be the case with Industrial Production specifically, we see a number of signals this month that are starting to look not just flat, but downright positive. If we get a couple more of these, we’ll be back to bullish being the new bullish as flat will no longer do it for us.
Recall that the big news last month was a preliminary Q3 2023 Consumption read of +2.4% Y/Y, which was decisively higher than Q2’s +1.8%. Our guidance at the time was that if this trajectory 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. And with our first Q3 revision taking us only slightly lower to +2.3% Y/Y, it is increasingly likely that we’ll close well above +2.0% and still pointing up and to the right vs. the prior quarter. Then it will be all eyes on the preliminary Q4 release at the end of January.
Beneath last month’s 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 in Q3 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. Though the first revision took Durables and Services each down 20 bps to +4.7% Y/Y and +2.2% Y/Y, respectively. Nondurable goods consumption remained unchanged +1.3% Y/Y.
Given the relatively higher freight intensity required to satisfy the demand for Goods, a sustained recovery 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 link in 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 and used to help explain the recent strength in specific industries like the airlines, there is little 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 had initially reported our first Y/Y deflationary IP print since Q1 2021 in Q1 at -0.8% and went on to grind along at -1.0-2.0% Y/Y in subsequent quarters. 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 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 entirely 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, staying there in Q3, and staying put yet again with October’s preliminary Q4 print at the same +0.0%. That said, the October number captured the full brunt of the UAW labor strike that artificially constrained automotive manufacturing through the duration of the action that stretched from September 15th to October 30th – with the Automotive Products subset of IP tanking -10.3% vs. September. But with manufacturing levels now recovered back to pre-strike conditions, we expect the November revision to come in at least a little bit stronger to finally lift IP off the x-axis (y = 0.0%) that it’s been hugging since Q2 – so long as we don’t see material contraction elsewhere.
So while our dramatic ‘Consumption vs. Industrial Production: Which is telling the truth?’ storyline got a jolt last month (then confirmed this month), it remains largely unresolved as we look for a little more signal strength. And one of the places we continue to 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 2023 at 1.38, 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 closed at 1.37 with the September update vs. last month’s 1.38 and the 1.39 before that, we’ve got a little more signal that Q2 may indeed represent that peak which would be strong confirmation that the fragile stabilization and eventual recovery in Industrial Production is likely to be sustained.
As we all know by now, 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 trajectory holds in the quarters ahead, it would represent an increasingly 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 preliminary Q4 print to get too excited, but the trendlines all look positive.
With Consumption, Industrial Production and relative inventory levels all conspiring to show 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. And here we got more mixed signals 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 for the Cass Shipments Index 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. Recall that last month we noted that “to get any real conviction around the narrative for a sustained move 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 of a bottom in Q4 and therefore a print higher than Q3’s -8.6% Y/Y”. Now with our first peek at Q4 on the board at -7.3% Y/Y (hello, deflationary inflection point), we’ve got it and with it cause for at least a little more conviction in our recovery narrative.
Though as noted last month, the 90-day 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 we 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 takes us.
In the meantime, the ATA TL Volume Index once again 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%. But with Q3 closing at -2.3% Y/Y, we instead got a potential reversal in trend with the index pointing higher not lower. It proved short-lived however, as our preliminary Q4 print posted a -4.9% Y/Y – so we’ve got a lot of wobble around this one in recent months. It is possible that, just as with Industrial Production, the UAW strike has a negative impact on the October number and that subsequent Q4 revisions will take us higher. But whether they take us high enough to reverse the current down and to the right trendline remains to be seen. Suffice it to say, we’ll be watching this one closely over the next two months.
My what a difference a month makes. We commented last issue that “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.” Now we’re looking at the opposite, with a preliminary Q4 Cass Shipments Index pointing higher at -7.3% Y/Y while ATA is suddenly pointing lower at -4.9% Y/Y. Once the noise from the UAW strike is mostly out of the data in next month’s revision, hopefully we’ll get a cleaner signal as to where both of these indicators are likely to run from here. Never a dull moment in the US trucking market and the indicators we rely on to understand it! (said the freight nerds at Pickett Research).
Now let’s now shift our attention to the supply side and Net Class 8 US Tractor Orders – where we arguably got our first “normal” quarterly print in over a year at a final -23.0% Y/Y for Q3 2023. With preliminary Q4 now on the board at another more “normal” -14.3% Y/Y, got a Y/Y deflationary print that was slightly less so than Q3 (-14.3% > -23.0%) reflects a similar late cycle phase pattern that we have come to expect based on the last four cycles. If this pattern holds (> -23.0% Y/Y), it would then be reasonable to expect to see our first Y/Y inflationary Net Class 8 Tractor Order bar next quarter.
Recall that just when we thought we were back to historic cycle patterns last year, 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. But with our Q3 2023 read at -23.0% Y/Y and Q4 opening at -14.3% Y/Y, the trendline 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, as noted above, we expect the reversion to historic patterns to continue which means another quarter of Y/Y deflationary tractor order reads before swinging Y/Y inflationary with TL Spot Linehaul rates as early as Q1 2024.
While Net Class 8 Tractor Orders have bounced around over the last year, the roller coaster in US retail diesel prices over the same period has been arguably even more impactful to US TL market dynamics. After running -19.3% lower over the first half of 2023 ($4.714 to $3.802), we marched +20% higher in Q3 ($3.802 to $4.563), then reversed course yet again to fade -10.3% lower in Q4 ($4.563 to $4.092).
To zoom out a bit and further 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. But just when we were starting to lose interest, July came along and initiated the reversal in trend that took prices steadily higher through September and $4.563/gal. It proved to be short-lived however, with yet another reversal that looked temporary at the outset but has only picked up steam – with December MTD coming in at -10.3% from the September high mark. So with momentum now clearly pointing lower in the short-term while 2024 global energy forecasts diverge, it is hard to say where diesel goes from here in the short-term.
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 again becomes that of a pacesetter. If prices continue to fade lower, then the pace of exits likely continues at the current rate or possibly slows down a little. Should they instead reverse course once again 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, where rarely do we get a crystal clear picture as to what lies ahead for the market and the economy. Like last month, the macro picture came in again mostly aligned and pointing to some version of an economic recovery ahead with Consumption, Industrial Production, and relative inventory levels all pointing in a mostly positive direction. But will it last? Was Q3 GDP and Consumption a short-lived anomaly, as predicted by a number of pundits and economists? While Consumers, and the US economy that they power, have indeed remained resilient this year despite consensus forecasts otherwise, can they hold up into 2024 as the labor market cools, inflation remains high, and interest rates remain at historically elevated levels? Only time will tell. But until it does, we have to rely on the data we have in front of us and the historical patterns that they tend to repeat. And from that perspective, the next year 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 at the low end of the forecast range with a revised Q4 print of -9.8% vs. -5.0% + 5.0% and an all-in DAT National Dry Van Spot Index that has grinded along at $2.07-$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 materially 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 manner that is in any way similar to the last five cycles which would have us breaking Y/Y inflationary as early as next quarter and running increasingly hotter over the course of 2024 and into 2025.
So it becomes a question of where will the catalyst come from to break the current stalemate. After dropping the Atlantic/Pacific Hurricane Season from the wild card list last month, the November ratification of revised labor contracts that ended historic strikes affecting Ford, General Motors, and Stellantis resolved yet another unknown. This means we’re back to the two wild cards that jockeyed for position from month to month over the first half of this year, specifically TL-intensive Goods Consumption and Retail Diesel Prices. Fallout from the Yellow bankruptcy continues to be a nothing-burger, at least with regard to TL linehaul rates, while the resumption of student loan payments, stubborn consumer inflation, and ongoing government gridlock all fail to make any observable impact on TL market dynamics. But now with less than a year to go before the next US presidential election, we are getting a lot of questions as to how that might impact the balance of supply vs. demand, and therefore pricing behavior, in the US trucking industry. Surely, that must be a market-moving event – right? Biden vs. Trump? Other vs. Trump? Biden vs. Other? Other vs. Other? In our experience, and research over the last fifteen plus years and four elections of tracking these cycles, we have found no observable relationship between the political party taking or maintaining power and the shape of the US TL Spot Linehaul Rate cycle one year later, post-election. Specifically, this is how the last four elections went as well as our prediction for the next one:
Obama (D)’s 1st Term (Q4 2008): Inflationary Peak, 1-yr later in a Deflationary Trough
Obama (D)’s 2nd Term (Q4 2012): Deflationary Trough, 1-yr later in an Early-stage Inflationary Recovery
Trump (R)’s 1st Term (Q4 2016): Late-stage Deflationary Leg, 1-yr later in an Early-stage Inflationary Recovery
Biden (D)’s 1st Term (Q4 2020): Inflationary Peak, 1-yr later in a Late-stage Inflationary Recovery
TBD(?)’s ? Term (Q4 2024): Inflationary Peak, 1-yr later in a Late-Stage Inflationary Recovery
So with all of that said, before things get too political, let’s dive into our slimmed down list of market wild cards for the month ahead:
1. Diesel Prices: As noted, now that we’re well beyond our Y/Y US TL market cycle bottom, we believe that diesel prices in the months ahead will help set the pace at which spot market rates continue 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 +20.0% higher from there to September before reversing again to fade -10.3% lower to December’s MTD $4.092/gal. If this current trend is sustained and we continue to head materially 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 reverse to climb 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. 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. 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. Since then however, as noted above, energy prices have turned lower once again and as a result October CPI printed a materially lower +3.2% Y/Y which puts us back in line with June and July levels. But while the Fed’s tightening monetary policy is well on its way to achieving its end, progress has been slower than expected 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, and confirmed. 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 cooling labor market, rising household debt (albeit at a slowing Y/Y rate), tightening credit conditions, and the resumption of student loan payments. 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, we don’t see this wild card going anywhere anytime soon.
With this cycle’s deflationary inflection point locked in at 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 Y/Y deflationary leg slowly but surely comes to a close and the next Y/Y 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 to limp 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 +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 the cost of capacity increasingly 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, service levels are at an all-time high, and you are tracking to earn max bonuses. 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 December and the final chapter of the final quarter of 2023 where we now expect TL Spot Linehaul rates to move another +2.0-3.0% higher from here to close Q4 just short of forecast at -8.0-9.0% Y/Y. 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, and remember that this too shall pass. As this most recent survey of our market indicators shows, “there’s reason for cheer in the new year, as markets finally recover and begin to hit stride.” We just may need to work through a couple of more difficult months before we get there. But we will get there. Happy Holidays & Cheers to a prosperous 2024. On to the next.