[Excerpt from The Pickett Line March 2024 Issue]
Tick tock…tick tock…tick tock. No, not that TikTok. That’s the sound of the supply side of the US truckload market that, much like a Timex watch as popularized by an advertising campaign launched in 1956 with former NBC news anchor John Cameron Swayze, “takes a licking and keeps on ticking”. Founded as Waterbury Clock Company in 1854, the watchmaker struggled following the end of World War II as their lucrative military contracts for timepieces, bomb fuses, and gyroscopes mostly dried up forcing them to return to marketing cheap timepieces for civilian use. Several years after changing the company’s name to United States Time Corporation in 1944, they began marketing the Timex wristwatch by highlighting its value and durability. After finding their perfect pitchman in Swayze in 1956, they began releasing a series of live TV commercials where he oversaw various “torture tests”. In each spot, the Timex watch endured some novel attempt to destroy it – from dishwashers, washing machines, and paint mixers to jackhammers, water skiers, and even an 87-foot dive off the La Quebrada Cliffs in Acapulco, Mexico. And after every failed attempt, Swayze closed the ad with the now-famous slogan, “It takes a licking and keeps on ticking.”
With US TL Spot Linehaul rates still grinding along at new cycle lows of $1.62/mi after February’s St. Valentine’s Day massacre while operating costs march steadily higher, the exit rate of over-costed and unprofitable surplus capacity somehow remains stubbornly slow relative to past cycles. Despite rising insurance premiums, $4 diesel, and a still tepid demand environment, the supply side just “keeps on ticking.” Though in keeping with our watch analogy, we believe it is only a matter of time before the ticking unfortunately stops. Unlike the Timex, unprofitable and increasingly insolvent motor carriers will eventually encounter a “torture test” that will prove to be one too many. It might be an expiring lease up for renewal at a materially higher cost. It might be a liability or cargo claim that spikes the cost of an insurance policy. Or it might simply be the relentless march of time in an environment where the spot market rate paid for each incremental mile traveled fails to cover the cost to do so. And as we saw with Nationwide Cargo, Pride Group, and Tony’s Express all filing for bankruptcy protection in recent weeks, larger fleets are in no way immune to these pressures. In fact, perhaps it is the exit of these larger fleets at greater frequency that signals that the pace of the capacity shakeout is indeed picking up, and that we should expect to see at least a few more of these in the months ahead as enough of the supply side finally capitulates, the TL market cycle finally breaks Y/Y inflationary, and spot linehaul rates begin to march higher.
In the meantime, with the case now closed, we believe that it was this “keeps on ticking” cohort of carriers that has taken licking after licking to be partially to blame for February’s Saint Valentine’s Day [Spot TL Market] Massacre. But this was no solo act. The killer had accomplices, namely unusually elevated market rates in January that turned out to be mostly weather-driven and normal February seasonality and the tepid volume demand comes with it. So just as rates looked poised to take off, launching us into the Y/Y inflationary leg of the next rate cycle in Q1, January’s head fake proved to be just that and rates fell off a cliff over a series of “torture tests” for a supply base that appears to have only now found its maximum pain threshold – though even that remains to be seen. So with that now behind us, let’s shift our focus to more recent history and dive into this March 2024 issue of The Pickett Line where we’ll tie a bow on Q1 before shifting our gaze to the road ahead and the new quarter that comes with it. Let’s get on with it.
In last month’s issue, we reported a revised Q1 US TL Spot Linehaul Index read of -6.1% Y/Y vs. January’s -1.1% Y/Y and a revised forecast of -5.0% Y/Y + 5%. You may recall that after January’s hot read, we noted 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 and now March in the rearview mirror, we sit 16 cents lower than the January mark at $1.62/mi and with a final Q1 read of -6.1% Y/Y – dead flat to last month. So we got every bit of that one step back, and then some. We just haven’t gotten the two steps forward that we expected to immediately follow. As a result, last month we shifted our 2024-25 forecast curve forward by one quarter thus 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. As always, you can find the revised 2024-25 forecast chart in the Market Forecast chapter and super-sized in the Appendix.
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 revised Q1 2024 print notched slightly higher to -5.4% Y/Y vs. last month’s -5.5% and a revised forecast of -5.0% Y/Y. The inflationary break has been pushed to Q3 and we still expect the next peak to reach +15.0%. We just don’t get there until Q2 2025 now.
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.
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 for sure. 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 record 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 March 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% and stayed there with the final revision in March.
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 final +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 who had been banging the “recession” drum for the last six or seven quarters. But with the preliminary Q1 2024 print not due out until later this month, we’ll have to wait until the next issue to find out if the current trajectory holds or if we’re going be back on recession watch as we look further ahead to 2025.
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 to find out.
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 and final 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 +5.8% Y/Y (revised up from +5.7%) from +4.9% in Q3 and Nondurables up to +2.0% (revised down from +2.1%) Y/Y from +1.3% Y/Y. This 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 +2.4% Y/Y (revised up from +2.3%) 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. We look forward to seeing where we go from here.
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. Now with our revised Q1 2024 print on the board at a slightly higher -0.3% Y/Y vs. a revised -0.4% last month, we continue to point lower not higher – so no sign of convergence back towards our Consumption line just yet. 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.” But at this point, with January revising lower and February coming in only slightly higher, we would need a really strong March print to see this outcome. If we don’t get one, then the waiting game continues.
So while our dramatic yet corny ‘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 revised reads for 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. But with a preliminary Q1 2024 coming in comparatively hot at 1.39, that signal got a whole lot weaker. This makes the February and March revisions all the more interesting as we continue to anticipate the direction of Industrial Production and US TL capacity demand overall.
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 a downward trajectory reappears 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. But with the January print throwing some cold water on that narrative, we’ll have to wait for another month or two of data to get too excited either way, but up until this month, the trendlines all looked positive. But as we must remind ourselves from time to time, one month hardly makes a quarter. And one quarter hardly makes a trend.
With Consumption, Industrial Production, and relative inventory levels all still conspiring to show some of 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. Through last month, our chart patterns showed quite the opposite with both continuing to post Y/Y deflationary and pointing lower, not higher. However, this month, we got some new signs of life. 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 last month at -9.5% Y/Y, we found that we may not be there yet after all and there could be more room to run lower before eventually mounting a recovery. But with the February Q1 2024 revision coming in at -6.2% Y/Y, materially higher than Q4’s -8.6%, we get our first signal of a local bottom and potential inflection point. Though we’ll have to wait until next month to find out if it holds. And with the ATA Index also revising higher to -4.8% Y/Y for Q1 2024 vs. -6.8% Y/Y last month and Q4’s -4.2%, we see more of the same. If one or both indices reverse course to point higher in the months ahead, that would act as additional support for our current cycle forecast showing US Spot TL Linehaul rates climbing steadily higher over the back half of 2024 and into 2025.
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 final read on Q1 Net Class 8 Tractor Orders coming in at +6.4% Y/Y, materially lower than last month’s +27.8% but 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 indicator remains Y/Y inflationary in Q2, and our US TL Linehaul Spot Index closes inflationary next quarter as projected, it could signal that this particular correlation is back in phase after this most recent cycle that was materially skewed by COVID-related supply chain constraints and disruptions for the OEM truck makers.
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 at -8.6% Y/Y, and now Q1 2024 closing at +6.4% 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 increasingly Y/Y inflationary with TL Spot Linehaul in the quarters ahead.
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 in March. And now a week into April, we are another 3 cents lower and back under $4.00 again albeit barely at $3.996/gal. But with crude oil surging higher in recent weeks, we could be in for yet another swing higher before month’s end.
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 March 2024 coming in at -12.0% from the September 2023 high mark. 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 when 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, we got a March where we mostly treaded water with our Spot TL Linehaul index fading another 4 cents lower and the mixed bag of macro indicators. And now a week into April, the market remains flat and close to a current cycle low at $1.62/mile. So where do we go from here? While Consumption numbers remain promising, Industrial Production and now Relative Inventory levels came in slightly negative. So while Consumers, and the US economy that they power, indeed remained resilient last year (again, looking at Q4 data here) despite consensus forecasts otherwise, can they hold up into 2024 as the labor market slowly cools, inflation remains stubbornly 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 mostly bright as most of our trendlines continue to point decidedly higher, not lower.
So what’s going to move the needle one way or the other in the month ahead? With the Houthis off the podium and labor strikes, bankruptcies, and the resumption of student loan payments well behind us, we don’t have much to point to beyond our reliable standbys: diesel prices and TL-intensive goods consumption. At this point, it appears that the TL market has even absorbed any potential disruption from the closure of the Port of Baltimore without breaking as much as a sweat. And with produce season and the year’s first CVSA Safety Blitz not expected to generate much volatility until we get into May, April is looking downright boring. Although we said the same about February, and we know how that went. In any case, let’s dive into our short list:
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 once again retreating -1.2% through April MTD where we currently sit at $3.996/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 (which recent WTI crude oil price trends could be signaling), 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 have been on a bit of a roller coaster with August bumping slightly higher to +3.7% Y/Y before fading to +3.1% in November. But after notching increasingly higher over the last three months, including March’s +3.5%Y/Y, it is clear that inflation isn’t quite under control yet leaving the Fed with no real option but to keep rates where they are for the time being. So, 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. 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.
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 some version of the beginning of 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 April MTD levels (+8.7% vs. Q2 forecast of +5.0%). And we don’t expect the contract market to break 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 are choosing 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 (and this most recent Q1). 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 +5-6% higher by Q2 2024 close and to run increasingly inflationary through the end of the year as we kick off the next 3-4 yr. US trucking market cycle. We expect contract linehaul rates to run Y/Y deflationary through Q2 2024 before breaking 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 must continue.
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 coming out of January, the supply side somehow found a lower gear and took US Spot TL Linehaul rates all of the way back to their 2023 lows. The St. Valentine’s Day [Spot Market] Massacre came and went, with rates fading still lower through March and into April where we sit today – well below estimated operating costs per mile. In fact, our models show that all-in spot TL rates have been unprofitable for the average US motor carrier since Q2 of last year with current levels at the lowest we’ve seen since the great recession and financial crisis of 2007-09. Yet, through one “torture test” after another, the supply side just “keeps on ticking”. But whether this unexpected resilience can be attributed to the disciplined use of windfall profits earned in 2020-2021 or under-market leases secured over that same period, we don’t consider these as permanent advantages. Eventually, surplus savings are depleted, credit lines are tapped out, and lease terms expire and re-mark to market. And that is what we expect to see playing out in the coming quarters as the pace of market exits continues – especially if diesel prices begin to march higher to follow WTI crude oil. While any structural or seasonal improvements in TL capacity demand, which we believe are coming as well, will only accelerate the inflationary impact on Spot Linehaul rates, we believe this exit of unprofitable supply to be the dominant market force at this point in the cycle. So, Tick tock…tick tock…tick tock. Now on to April and Q2.