[Excerpt from The Pickett Line February 2024 Issue]
Well, we did it. We made it through another freight month Ladies and Gentlemen. And what a month it was. If you had to pick the dullest, least interesting month of the freight year, February is usually at the top of the list. The post-peak season holiday cleanup in January has run its course, any inventory re-stocking for a new fiscal year has yet to kick in, and produce season remains at least a month out. Aside from the surge of imported flowers for Valentine’s Day, February tends to be a snoozer for the US trucking market. Not so much this year. After marching steadily higher from November, US Spot Linehaul rates seemingly fell off a cliff in February with our blended DAT index tanking 12 cents lower, or -6.5% from January’s trailing 12-month high of $1.78. And we’ve fallen another 5 cents through this first week of March as the market seeks a new short-term floor.
The last time we saw a February move this violent was back in 1929 and the Saint Valentine’s Day Massacre when seven men associated with Chicago’s North Side Gang were lined up in a Lincoln Park garage and executed by four unknown assailants, two of whom were dressed as police officers. Al Capone was widely suspected of having ordered the massacre, but the crime remains unsolved to this day as the perpetrators were never conclusively identified. When Chicago police arrived at the scene that day, one of the victims, a gang enforcer by the name of Frank Gusenberg, was still alive despite having been shot 14 times. When they asked him who did it, he reportedly replied “I won’t talk…For God’s sake get me to a hospital.” He died three hours later, taking the secret with him.
Hopefully, we’ll have better luck cracking the case as we interrogate the survivors in search of clues as to who or what killed the US TL spot market in this 2024 version of The Saint Valentine’s Day Massacre. Was it a sudden collapse in demand? Was it a surge in new supply? Did diesel suddenly get cheaper allowing truckers to run profitably at lower rates? Was it all of the above? Or none of the above? But more importantly, what does this mean for the long-term market cycle and our 2024-25 forecast? Let’s dive into this February 2024 issue of The Pickett Line as we work to make sense of it all. Because after the month we just endured, there are probably more than a few Carriers and Brokers out there that feel a lot like Frank Gusenberg that Valentine’s Day in 1929. Though hopefully, unlike Frank, they will find the strength to carry on – buoyed by the promise of a cyclical market recovery that has only been delayed, rather than canceled. Let’s get to it.
When we last checked in to summarize January, we reported a preliminary Q1 US TL Spot Linehaul Index read of -1.1% Y/Y vs. a forecast of +5.0% Y/Y + 5% – and well on its way to breaking Y/Y inflationary for the first time in over two years. We went on to note that “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 late February and March to take us another 5-10% higher on the quarter from where we closed January.” Well, with February now in the rearview mirror, we sit 12 cents lower than the January mark and with a revised Q1 read of -6.1% Y/Y vs. a forecast of +5.0% Y/Y + 5%. So we got every bit of that one step back, and then some. We just haven’t gotten any signal that the next two steps forward are going to get here in time to close Q1 Y/Y inflationary as projected. We do believe March will close higher than it opened, but due to February’s market massacre, we have revised the Q1 forecast down to -5.0% Y/Y + 5% – extending the current rate cycle by a quarter and delaying the long-awaited arrival of the inflationary leg of the next cycle to Q2. That said, despite the unexpectedly slow start, we continue to project that spot TL rates run +30-40% higher by the end of the year and remain Y/Y inflationary through Q1 2026. You can find the revised 2024-25 forecast chart in the Market Forecast chapter and super-sized in the Appendix as usual.
While our Contract (Cass) TL Linehaul Index has run closer to forecast in recent months, the revision in the spot forecast, effectively pushing the entire curve forward by a quarter, requires us to push the Contract forecast curve ahead by a quarter as well. Our first glimpse at Q1 2024 with the January print posted a -5.5% Y/Y vs. a forecast of -3.0%. Under the previous forecast, we showed Contract rates breaking Y/Y inflationary next quarter before rising to a peak of +15.0% Y/Y in Q1 2025. Our revised forecast takes the current Q1 down to -5.0% Y/Y and the inflationary break has been pushed to Q3. We still hit our projected peak of +15.0%, but now don’t get there until Q2 2025.
So what does the current market trajectory mean with regard to expected market behavior? Given these actual vs. revised 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 (though re-tested in February and now March), 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 short-term 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. Therefore, spot vs. contract linehaul premiums could easily exceed +15-20% by early 2025. And when we put it this way, who could blame procurement teams for 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. More specifically, if they went out and re-bid what had previously been characterized as contract awards prior to the end of the contract term, they effectively signaled to their supply base that it is acceptable to give back contract freight prior to the end of the contract term if it suits them. So it goes both ways.
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 even two-year commitments. But by Q3, 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 run 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 a 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 and market evolve and the freight cycle marches on.
Now on to the February macro update, again characterized by a mixed bag of ‘two steps forward, one step back’ prints – perhaps none more consequential than the revised read on Q4 2023 Consumption. Perhaps a material revision down would help explain the February swoon in spot TL rates. So where does the latest installment in our most recent dramatic narrative aptly titled ‘Consumption vs. Industrial Production: Which is telling the truth?’ take us? Recall that the theme in recent months has been “flat is the new bullish” as the balance of our indicator reads came in mostly flat but more positive than negative. While that remains to still be the case with Industrial Production specifically, Consumption came out of its corner swinging with a haymaker of a preliminary Q4 print of +2.6% Y/Y. But would it hold up? Well, it not only held up with the first revision, it ticked slightly higher to +2.7%.
Recall that the big news three 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 was 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 with the final revision closing the quarter at +2.2% Y/Y, it became official. But would the uptrend stand, we wondered? Or would the revised Q4 2023 read tip us in the other direction? With this +2.7% mark now on the board with positive momentum behind it, we remain decisively pointed up and to the right, much to the chagrin of most economists and market pundits that have been banging the “recession” drum for the last six or seven quarters.
But not so fast. How constructive are these recent prints, really? Was all of the strength in the Services segment at the expense of Goods consumption driven by a material reallocation of post-COVID spending, as many of those same economists and market pundits (and some public trucking CEOs) have suggested? Let’s take a look under the hood.
Beneath the last couple of headline GDP and Consumption prints, the implications for US TL demand were just as constructive though contradictory to the prevailing narrative around the reallocation of consumer spending from Goods to Services. And the most recent Q4 2023 revision was no different – with the acceleration in Durable and Nondurable Goods consumption once again materially outpacing Services. After finding their own local bottoms in mid-2022, both Durable and Nondurable goods consumption took another material step higher in Q4 with Durables up to +5.7% Y/Y (revised down from +6.1%) from +4.9% in Q3 and Nondurables up to +2.1% (revised down from +2.2%) Y/Y from +1.3% Y/Y. This still makes for the highest Durables read since Q2 2021 and the strongest Nondurables mark since Q1 2022. Services on the other hand, moved only slightly higher to +2.3% Y/Y (revised up from +2.2%) from +2.0% in Q3 where it has remained range-bound between +2-3% over the last six quarters. So for yet another quarter, it appears that the demise of Goods consumption (relative to Services) remains greatly exaggerated.
Given the relatively higher freight intensity required to satisfy the demand for Goods, a sustained recovery in Durable and Nondurable Goods consumption is clearly 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 which then requires increased levels of industrial activity to fulfill those orders and replenish wholesale and retail inventories to satisfy future demand. And US truckload capacity is likely going to be needed to move those goods through every link in that chain – even more so if more of that production happens in North America as opposed to overseas. But 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 or weakness in specific industries like the airlines vs. global logistics, there is little evidence in recent GDP and Consumption data suggesting that’s what is really happening – at least not since early 2023.
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 over the last year, you know that we had initially reported our first Y/Y deflationary IP print since Q1 2021 in Q1 2023 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 took us back entirely to the inflationary side of the axis – at least temporarily.
So the pattern hasn’t changed, but we now see IP bottoming dead flat at +0.0% in Q2 2023, fading ever so slightly to -0.1% in Q3 and then staying there in Q4. But with our preliminary Q1 2024 print on the board at 0.0% Y/Y we’re back to dead flat. We noted last month that “with most of the more freight-intensive sub-components, including manufacturing, revising steadily higher over the last quarter, we expect to flip Y/Y inflationary [in Q1] – especially when we consider the recent trajectory of Goods Consumption. Though we’ll have to wait until next month’s issue to find out.” Sure it’s only a 10 bp baby step, but we are definitely moving in the right direction. As always though, we’ll have to wait for our next revision before getting too excited one way or the other.
So while our dramatic ‘Consumption vs. Industrial Production: Which is telling the truth?’ storyline got another jolt this month, it remains largely unresolved as we look for a little more signal strength in the early reads on Q1 2024 Industrial Production. But one of the places we also 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 bleed out of the system before we should expect any meaningful recovery in Industrial Production. When Q3 closed at 1.37 and now with our final Q4 print holding flat at that same 1.37, we’ve got a little more signal that Q2 2023 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 for another month or two of data to get too excited, but the trendlines all continue to look positive.
With Consumption, Industrial Production, and relative inventory levels all still 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. Here, our chart patterns show quite the opposite with both still posting Y/Y deflationary and pointing lower not higher. After closing Q4 2023 flat to the prior quarter at -8.6% Y/Y, the Cass Shipments Index appeared as though it had finally found a deflationary bottom. But with our first glimpse of Q1 2024 on the board this month at -9.5% Y/Y, we find that we may not be there yet after all and there could be more room to run lower before eventually mounting a recovery. And with the ATA Index opening Q1 2024 at -6.8% Y/Y vs. Q4’s -4.2%, we are seeing more of the same. So no floor in sight here just yet as both indicators continue to move lower together.
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%) reflecting a similar late-cycle phase pattern that we have come to expect based on the last four cycles. With this pattern confirmed (> -23.0% Y/Y), we noted in December that “it would then be reasonable to expect to see our first Y/Y inflationary Net Class 8 Tractor Order bar as early as Q1” and that “the 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.” With the lid partially blown off the ‘Consumption vs. Industrial Production’ story we now have another one with a revised read on Q1 Net Class 8 Tractor Orders coming in at +27.8% Y/Y, only slightly lower than January’s +29.2% and holds as the first Y/Y inflationary read since Q4 2022’s surprisingly strong +86.6% Y/Y print and Q3 2021’s surprisingly light +49.0% before that. If this revised Q1 mark holds, and our US TL Linehaul Spot Index closes inflationary next quarter as projected, it could signal that this particular correlation was back in phase after this most recent cycle that was materially skewed by COVID-related supply chain constraints and disruptions for the OEM truck builders.
Recall that just when we thought we were back to historic cycle patterns in 2022, 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 2023, the softness in 2023 net order activity isn’t surprising.
But with our Q3 2023 read at -23.0% Y/Y, Q4 closing at -8.6% Y/Y, and now Q1 2024 revising to +27.8% 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 last month, we expect the reversion to historic patterns to continue which means Q4 2023 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 – which our revised January read certainly supports.
While Net Class 8 Tractor Orders have bounced around over the last two years, 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 +20.0% 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). From there, we ran another 3.0% lower to $3.854 in January, then bounced 5% higher to $4.044 in February before reversing course once again to fade 2 cents lower with a March MTD mark of $4.022.
To zoom out a bit and further recap diesel’s wild ride for anyone who 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 another -3.0% lower still. So with momentum swinging from month to month while 2024 global energy forecasts continue to 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 remains that of a pacesetter. If prices continue to fade lower, then the pace of exits likely continues at the current rate or possibly even 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 toward Y/Y inflationary conditions.
So after a January shrouded by fog, both literally and figuratively, and a February we compared to the 1929 Saint Valentine’s Day massacre, where do we go from here? As with 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? With Q4 Consumption’s revision read hitting the board at a still higher +2.7% Y/Y, we clearly can’t call Q3’s relative GDP and Consumption strength a short-lived anomaly. While Consumers, and the US economy that they power, indeed remained resilient last year despite consensus forecasts otherwise, can they hold up into 2024 as the labor market slowly cools, inflation remains high-ish, and interest rates continue 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 still looks pretty bright as most of our trendlines continue to point decidedly higher, not lower, with another month of data now behind us – despite February’s swoon in Spot TL Linehaul rates.
So what did happen in February? As of yet, we have found no smoking gun. Trendlines underpinning demand coming into the year remained constructive. Retail diesel prices ran higher, not lower. And there is nothing that we can see on the supply side that suggests a slug of new capacity suddenly entered the market. We suspect at least some of the relative slide was a healthy correction after a weather-disrupted January, making it feel maybe a little worse than it actually was. But beyond that, we can only wait for most of the February data points to post later this month for any more clues. And while our Q1 US TL Spot Linehaul Index did revise materially lower to -6.1% vs. last month’s -1.1%, we remain well above Q4’s -9.8% and therefore in line with historic patterns. We also see nothing in the structure of the market that suggests a material change in the competitive behaviors that power the cycle and give it its shape. So unless that changes in the coming months, we continue to expect an inflationary 2024 – it’s just a matter of how much of the year is spent on the inflationary side of the axis.
So what’s going to move the needle one way or the other in the month ahead? 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. We’ve also 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. And after spending two months up on the podium, down come the Houthis. Recall that just when things began to feel downright tranquil in December, here came the Houthis to spice up global supply chains by lobbing missiles, drones, and manned speedboats at cargo ships transiting the Red Sea. And until the situation resolved itself, the potential impact on global supply chains and therefore the US trucking market cannot be ignored. Now yet another month into the conflict, and while the situation is anything but resolved, we have seen no discernable impact on the US trucking market one way or another. So it’s back to the same two market wild cards that we have focused on most consistently over the last two years – the price of diesel fuel and the relative level of durable and nondurable goods consumption:
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 have 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. 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 -15.5% lower to January 2024’s $3.854. We then got a +5.0% move higher in February before giving 50 bps through March MTD where we currently sit at $4.022/gal. If this mostly downward 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 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 the most recent January 2024 CPI print came in materially lower at +3.1% Y/Y which puts us back in line with June 2023 levels. But while the Fed’s tightening monetary policy appears 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 tone, signaling that interest rates may need to stay higher for just a little bit longer until inflation targets are met, and confirmed. That said, perhaps against all odds the US Consumer continues to hang in there, as evidenced in the strong Q3 and Q4 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 slowly cooling labor market, rising household debt (albeit at a rapidly slowing Y/Y rate) and delinquency rates, tight 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 the base case at this point. But in any case, while Consumption moved to the back burner relative to diesel prices back in recent months, 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 (albeit at an uneven pace), we have entered territory that we have not 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 us far lower than those that came before (-31.8% Y/Y vs. last cycle’s -19.0%), the projected eight-quarter duration is so far tracking only one quarter longer than 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 then 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 both supply-siders and demand-siders as we continue to limp down the home stretch of this current cycle, putting the recent Saint Valentine’s Day massacre of a February behind us.
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 few quarters, 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 Q2 2024 as currently projected, that only represents a +5.0% increase from current March 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 who 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 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 up to this point is mostly over, but its lingering impact is almost certainly masking weaknesses and deficiencies that will take a toll later this year 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, February’s ‘one step back’ spot market aside, 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 now expect to break another +1.2% 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 in Q2. We expect contract linehaul rates to run Y/Y deflationary through early Q2 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. 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. But until then, the roller coaster continues. So, just as all looked to be tracking for a Q1 2024 that marked the end of a long and painful (if you’re on the supply side) deflationary freight recession, the supply side somehow found a lower gear and took US Spot TL Linehaul rates all of the way back to their 2023 lows. And while February tends to be a sluggish freight month in even the best of times, this was one was every bit the spot rate massacre reminiscent of that violent Valentine’s Day back in 1929 Chicago. Was this the last gasp of a supply base running increasingly on fumes? When compounded with the +5% rise in diesel prices over the same period, will this unexpected air pocket in spot rates generate the level of capacity capitulation needed to finally tilt the market towards the inevitable recovery ahead? Only time will tell. But what we do know is that we will all have to wait at least another quarter for spot TL linehaul rates to break Y/Y inflationary. And until then, those on the supply side have little choice but to find the will and the resolve to ‘HOLD… HOLD… HOLD’ the line – as has been the theme for the last several months. We’re clearly not there yet, but for those who can make their way to the other side and into the next cycle, the next 18-24 months could look a lot like a mirror image of the last two years – such is the nature of cycles like this one. Now on to March, a month in which 33 years ago on March 17th,1991 the Chicago Blackhawks beat their rival St. Louis Blues 6-4 in a hockey game dubbed the “Saint Patrick’s Day Massacre” for the massive amount of fighting and the resulting penalties charged to both teams. Let’s hope the freight market steers clear of another one this month. One massacre is more than enough.