[Excerpt from The Pickett Line December 2023 Issue]
And that’s a wrap folks. 2023 is officially in the rearview mirror and what a long, strange trip it’s been (hat tip to the Grateful Dead). We came into the year with a head of steam in search of the deflationary inflection point of the current rate cycle. But instead of holding up and confirming Q4 2022 as our bottom, we turned over in February and US TL Spot Linehaul rates faded steadily lower thus setting the stage for Q1 2023 to ultimately take the title. From there, we have since grinded slowly but surely towards market equilibrium and into the Y/Y inflationary leg of the next cycle. But speaking of hat tips and odd references, as we pause briefly to reflect on the year behind us, let’s take the opportunity to scroll through the 2023 catalog of Pickett Line issue themes – and the inspiration behind them (in parentheses):
January: In like a lion, out like a lamb. (The Old Farmer’s Almanac)
February: Now you see it, now you don’t. (every low budget magic act we remember seeing growing up, with a dash of WWE wrestler-turned-move star John Cena’s catchphrase “You can’t see me”)
March: Just when we thought we were out… (Michael Corleone, Godfather: Part III)
April: Okay, let’s try this again. (no idea, was the first thought that came to mind after Q1’s head fake)
May: Houston, we have liftoff. (Apollo 11 launch, 7/16/69)
June: Even a worm will turn. (The Pickett Line must have been where Michigan Coach Jim Harbaugh got his most recent catchphrase, from Shakespeare’s Henry VI, Part 3)
July: The heat is on. Don’t lose your cool. (Glen Frey 1984 single The Heat is On, Beverly Hills Cop soundtrack)
August: Steady as she goes. (debut single from Jack White’s The Raconteurs, 2006)
September: And the hits just keep on comin’. (phrase popularized by 1960s radio DJs)
October: The sun’ll come out tomorrow. (Annie, the musical – 1976 original Broadway production)
November: ‘Twas the late stage of the cycle. (annual holiday poem in the spirt of Clement Clarke Moore’s A Visit from St. Nicholas, 1823)
…and now we reveal December’s: Hold… Hold… Hold! (William Wallace in Braveheart, 1995)
From the themes alone, one can track pretty well the up and down…and up again market sentiment over the course of the year. And from the seemingly random sources of inspiration, one can draw a number of possible conclusions regarding the range of influences of the writers and analysts at Pickett Research…we’re just not sure what they are. What we do know is, that despite the anxiety and panic-inducing roller coaster ride that is the US trucking market, there’s no other beat we’d rather be covering. So with our whirlwind tour of 2023 complete, let’s get into this January 2024 issue of The Pickett Line – where we tie an official bow on December and Q4 2023 and dive into a new freight year full of both promise and peril, as is often the case depending on what side of the market you sit.
Recall that last month, we reported a revised Q4 US TL Linehaul Spot Index read of -9.8% Y/Y vs. the prior month’s -12.0% and a forecast of -5.0% Y/Y + 5%. At that time, we had expected that the quarter would close somewhere in the neighborhood of -8.0-9.0% Y/Y guided higher by seasonal demand strength and the potential for rising diesel prices from conflict in the middle east. While the diesel inflation never came, the late December surge higher in spot market rates did ultimately materialize yet was too little too late to make a difference. And we closed Q4 dead flat to last month’s read of -9.8% Y/Y – again vs. a forecast of -5.0% Y/Y + 5%. Our first early glimpse at Q1, though keep in mind we are only seven days in and still riding a peak season pricing surge, shows a preliminary read of -2.2% Y/Y. From here, we maintain current guidance that we break Y/Y inflationary in Q1 to land somewhere in the neighborhood of +5.0% Y/Y + 5% and officially kick off the next US TL Spot Linehaul rate cycle. But as consistent with normal seasonality, we expect we’ll have to take one step back before taking the next two steps forward. So we’ll likely fade 5-10 cents lower from our current position before turning higher in February and taking us 5-10% higher from where we started the year. Better keep those seat belts fastened.
Now with our Spot TL Linehaul Index showing some early heat as it starts to close in on our Q3 ’23 forecast line after running a little softer than expected, our Q4 Contract (Cass) Linehaul Index has converged even closer to forecast with a revised Q4 print of -7.4% Y/Y vs. a forecast of -7.5% and last month’s -7.3% Y/Y. Not too shabby. Will our final December read take us 10 bps closer to finish Q4 exactly on forecast? Or will we reverse course to fade lower and come up short? Or will we instead blow past our -7.5% mark and overshoot to the high side? Only time will tell. But all will be revealed in the next February issue of The Pickett Line – so stay tuned. But regardless of where we ultimately land on the quarter, we expect to remain deflationary in Q1 then break Y/Y inflationary in Q2 to follow the spot market higher into the next leg of the next cycle before peaking at +10-15% Y/Y in early 2025.
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 have logically looked 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 if 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 last inflationary leg before that (Q2 2017 to Q4 2018), so cycle amplitudes have clearly increased. Though we also can’t ignore the COVID-driven boom in the demand for goods that helped rally the 2020-22 leg, but to what extent we’ll never really know. 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 – which will at least somewhat be driven by the shippers’ own behavior over this recent cycle trough.
That means we should look for all those quarterly or six-month bids from the last couple of years to magically transform into one- or two-year commitments. But by late this quarter or early next, we should also look for many of them to begin to unravel as primary tender acceptance rates start to 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 course correct and adapt before your competitors do as the economy evolves and the freight cycle marches on.
Now on to the December macro update, where goldilocks-esque reports of the last couple of months, green shoots and all, remain 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 continue to see a number of signals that are starting to look not just flat, but downright positive. If we get a couple more months of these, we’ll be back to bullish being the new bullish as flat will no longer cut it.
Recall that the big news two months ago 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. Then last month’s first revision took us only slightly lower to +2.3% Y/Y, signaling that it was increasingly likely that we’ll close well above +2.0% and still pointing up and to the right vs. the prior quarter. Now with the second and final revision closing the quarter at +2.2% Y/Y, it’s official. But will the uptrend stand? Or will the preliminary Q4 2023 print due out January 25th tip us is in the other direction? As with our final read on the Q4 Cass Linehaul index, we’ll have to wait to find out in the upcoming January issue.
Beneath the last couple of headline prints, 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 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 final revision took Durables down 20 bps to +4.7% Y/Y and Services down 40 bps +2.0% Y/Y. Nondurable goods consumption, on the other hand, ticked 10 bps higher to +1.4% 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 accelerating 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 often 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 mostly staying put yet again with November’s revised Q4 print at -0.1%. 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 had expected 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. Well, November is on the board and, despite running 20 bps higher M/M, October revisions took the revised Q4 read slightly lower to -0.1% Y/Y. That said, every major component that we track moved higher vs. October – with the exception of Nondurable Consumer Goods. So no real improvement in signal strength from our villain of the story, which means we’ll have to wait another month to find out where Q4 Industrial Production is going to point us in the year ahead.
So while our dramatic ‘Consumption vs. Industrial Production: Which is telling the truth?’ storyline got a jolt in October (then confirmed in subsequent months), it remains largely unresolved as we look for a little more signal strength in the upcoming preliminary Q4 Consumption print and the final revision to Q4 Industrial Production. 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. When Q3 closed at 1.37 and now with our revised Q4 print holding flat at that same 1.37, 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 continue to 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 for the second month in a row. After settling in at -0.2% Y/Y for Q1 2023 and -4.2% Y/Y in Q2, the trend coming into Q3 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 in recent months 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 revision of Q4 on the board at -7.9% 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 we’ll hold off on the high-fives until we get our final December revision as, while sure we’re higher, there’s only 70 bps of daylight between the two.
However as we noted last month, the 90-day UAW strike back in Sept-Oct 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 final Q4 revision indeed takes us.
In the meantime, the ATA TL Volume Index once again revised last month 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. But with November’s revision taking us only 10 bps higher to -4.8% Y/Y, the wobble was decidedly less wobbly – though we’ll have to wait and see if the stability persists through our final revision coming up at the end of the month. We noted last month that “it is possible that, just as with Industrial Production, the UAW strike had a negative impact on the October number and that subsequent Q4 revisions will ultimately take us higher. But whether they take us high enough to reverse the current down and to the right trendline remains to be seen.” Again, not so much in November but we have yet to hear what December says on the matter. Suffice it to say, we’ll be watching this one closely over the next month.
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. And with our final Q4 print now on the board at another more “normal” -8.6% Y/Y, we got a Y/Y deflationary print that was slightly less so than Q3 (-8.6% > -23.0%) reflects a similar late cycle phase pattern that we have come to expect based on the last four cycles. With this pattern now confirmed (> -23.0% Y/Y), it would then be reasonable to expect to see our first Y/Y inflationary Net Class 8 Tractor Order bar as early as Q1. As we said before, stay tuned to find out. This next January issue is tracking to be a potential blockbuster given all the unresolved storylines it has the potential to blow the lid off of.
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 closing at -8.6% 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 Q4 was likely the last Y/Y deflationary tractor order read of the cycle before swinging Y/Y inflationary with TL Spot Linehaul rates as early as next quarter.
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 -13.0% lower in Q4 ($4.563 to $3.972). And have since run another 2.4% lower to $3.876 in January MTD.
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 coming in at -13.0% from the September high mark and January 2024 MTD another -2.4% lower still. 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 especially given the conflicts raging in the Middle East and Ukraine and disruptions in the Red Sea and the Suez Canal that connects it to the Mediterranean.
As noted in past issues and repeated here for any new readers, the last time we saw anything like 2022’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 once again 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 in recent months, 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’s relative GDP and Consumption strength a (now confirmed) short-lived anomaly, as predicted by a number of pundits and economists? Or can the performance be sustained? 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-ish, and interest rates remain at historically elevated levels? Only time will tell. But until it does, we can only rely on the data we have in front of us and the historical patterns that tend to repeat themselves. And from that perspective, 2024 looks pretty bright as most of our trendlines point higher not lower.
That said, we also have a Q4 US TL Spot Linehaul Index that is running at the low end of the forecast range with a final 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-$2.12 since 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 Q1 and running increasingly hotter over the course of 2024 and into 2025. With January 2024 MTD running at $2.15 all-in, it’s possible that this could be the beginning of just such a move, but it will depend on how much of the current run-up dissipates the further we get away from the holiday season and into Q1.
So it has become a question of where will the catalyst come from to break the current stalemate, if this isn’t it. After dropping the Atlantic/Pacific Hurricane Season and the UAW Labor Action from the wild card list in October, we know it won’t be them. Last month, that meant we were 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. We noted that the fallout from the Yellow bankruptcy continued to be a nothing-burger with regard to TL linehaul rates, while the resumption of student loan payments, stubborn consumer inflation, and ongoing government gridlock also failed to make any observable impact on TL market dynamics. Also as noted last month, we don’t believe that the upcoming US presidential election is going to have much of an impact on 2024 Spot and Contract Linehaul rate activity either. Looking back at the four previous presidential elections in our US TL market dataset, where we were directionally one year into the term was exactly where the cycle suggested we would prior to the administration taking office – regardless of whether they were new or the incumbent. And we see no reason why this election should be any different:
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
But do not despair thrill seekers and fans of chaos and uncertainty. Just when things began to feel downright boring, here come the Houthis to spice up global supply chains by lobbing missiles, drones, and manned speedboats at cargo ships transiting the Red Sea. So we’ve now got that going for us…which is nice. And until the situation resolves itself, the potential impact on global supply chains and therefore the US trucking market cannot be ignored. So welcome to the wild card list Houthis, even if you are only bringing up the rear in the three spot. Now let’s dive in:
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 -13.0% lower to December’s $3.972/gal and now another -2.4% into January MTD. 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 November CPI printed a materially lower +3.1% 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 (though softening in recent weeks), 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 Q3 2023 GDP & Consumption prints – 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.
3. Red Sea Conflict: As ocean shipping routes are redrawn as a result of the (presumably) Iran-backed Houthi offensive, with most lines now choosing to bypass the Suez Canal and the Red Sea altogether in favor of the much longer (and therefore more expensive) yet safer and more predictable transit around the Cape of Good Hope, global supply chains will no doubt face some level of disruption…not likely to be as severe as the one COVID drove but certainly more problematic than the Ever Given debacle in the Suez back in March 2021. Though on the bright side, maybe we’ll get another children’s book out of this one (we’re looking at you Ryan Petersen). We have to admit, the pages are getting a little dog-eared and worn on our Picket Research, LLC office copy of The Big Ship and the Little Digger at this point. The global supply chain needs a new hero to lift us from the collective malaise that has dampened spirits over the last 18 months. Maybe a lowly tugboat supporting Operation Prosperity Guardian that suddenly finds itself unexpectedly playing a starring role in the defense of the next Maersk vessel that comes under attack once they resume Red Sea transits? In any case, children’s book or not, depending on the duration of the conflict, the inflationary impact to US domestic transportation networks could be quite profound. If Shippers find themselves having to re-source goods from alternate suppliers or the balance of ocean traffic tilts further towards the West coast vs. the Gulf or the East Coast ports, we could see both trucking and rail intermodal spot rates rise as a result.
Now 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 typical 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 if Spot rates go on to close Y/Y inflationary by Q1 2024 as currently projected, that only represents a +7.5% increase from current January MTD 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. As you prepared for 2024, the final months of the year represented 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 hopefully you chose 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 little that 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 2024’s winners will be determined by the actions taken in 2023. So hopefully you didn’t squander the opportunity just because you were crushing your 2023 freight budget, service levels were at an all-time high, and you were 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.
From here, we expect to break higher by Q1 2024 close and to 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 proverbial 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 we endure what we believe to be at most only a couple of more months of downbeat TL spot market conditions in the US, we can’t help but think of the scene in 1995’s Braveheart where William Wallace (played by Mel Gibson) seeks to steady his men on the battlefield as the much larger and much better equipped English force bears down at full gallop. While his raggedy Scottish army stands across a long line waiting to engage the enemy, he calls out ‘HOLD…HOLD…HOLD…’ then finally ‘NOW’ when the English army is but yards away to signal the men to drop their swords and pick up the long pointy spears (military term) on the ground in front to form a phalanx that awaits the charging cavalry. It’s not that we are anticipating a brutal and bloody battle between the supply side and the demand side in the months ahead, despite how some shippers’ RFP processes can feel. But that at this stage in the cycle, when compound pessimism is at its most extreme and recency bias screams that ‘it’s always going to be this way’, one must find the will and the resolve to ‘HOLD… HOLD… HOLD’ the line. And to get ready to pick up those proverbial spears as the cycle flips Y/Y inflationary in the coming months. Now on to 2024.