[Excerpt from The Pickett Line April 2024 Issue]
“How did you go bankrupt?”, Bill Gorton asks Mike Campbell on page 136 of Ernest Hemingway’s 1926 novel ‘The Sun Also Rises’.
“Two ways,” Mike answers. “Gradually and then suddenly”.
In Mike’s case, it was brought on by acquiring a collection of “false friends” and “probably more creditors than anybody in England.” But for more and more asset-based motor carriers in recent months, it was driven by the brutal combination of rising operating expenses (insurance, truck/trailer lease costs, and just about everything else) and a truckload spot market that so far refuses to break materially higher. Well, that and contract rates that, if they are fortunate enough to have them, are resetting lower not higher in recent bids. And with the Y/Y deflationary leg of this current rate cycle going on nine quarters, compared to the more typical seven or eight, the clock is ticking for many more. ‘Tick tock…tick tock’ went the theme of last month’s issue where we evoked the old Timex watch slogan “It takes a licking and keeps on ticking.” to describe the current state of the US truckload market. And with yet another month of the freight recession behind us, the ticking continues.
Now the only question is how far away we really are from enough of the supply surplus gradually approaching bankruptcy to suddenly throw in the towel and exit the market – either temporarily or permanently. And then for spot truckload linehaul rates, which have been gradually approaching market equilibrium (y = 0% on our cycle charts) since Q1 2023’s Y/Y deflationary inflection point, to suddenly break Y/Y inflationary and catapult us into the next cycle. That said, this isn’t the first time we’ve seen this pattern. So maybe we shouldn’t be so surprised to see the last leg taking this long to resolve itself. We got what appeared to be a bonus quarter of deflationary market conditions in Q4 2016 to close out that cycle, and then another one in Q1 2020 to close out the next one. And in each of those cases, the inflationary moves that lay ahead in subsequent quarters felt both dramatic and absolutely unpredictable at the time. It was as if the market correction in each case played out just like Mike Campbell’s bankruptcy: “gradually and then suddenly”. So is that what awaits us once again? Or will a combination of increasingly tepid demand and an unusually resilient supply side conspire to bend our rate curves enough to break a cycle that has so far weathered every black swan event that the global economy, geopolitics, and the weather have thrown at it? Let’s dig into this April 2024 issue of The Pickett Line to see what signals we can glean from our first glimpse of this new quarter.
Recall that in last month’s issue, we closed Q1 with a final US TL Spot Linehaul Index read of -6.1% Y/Y vs. January’s preliminary mark of -1.1% Y/Y and a revised forecast of -5.0% Y/Y + 5%. So we got every bit of the one step back that we expected as the quarter progressed, and then some. We just never got the two steps forward that we expected to follow. And as a result, 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. But as noted above, perhaps we should have expected this given the patterns observed in the final stage of the last two cycles. We’ll try to do a better job forecasting the next time we’re at this point of the cycle in late 2027 or 2028. But with our preliminary Q2 2024 mark on the board at -5.3% Y/Y, the market’s got some work to do to close the gap and break inflationary for the first time since Q2 2020. That said, despite this slow start to the year and this most recent quarter, we continue to project that spot TL rates will run +30% higher by the end of the year and remain Y/Y inflationary through early 2026. Again, we are assuming that history continues to rhyme here and that despite the market distortions we got through this current cycle – from a pandemic to a wave of unprecedented goods consumption to a recession to Russia’s invasion of Ukraine – the US truckload capacity and rate cycle will march on much as it has since market deregulation. 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, required us to push the Contract forecast curve ahead by a quarter as well. Our final Q1 2024 print faded slightly lower to -5.3% Y/Y vs. last month’s -5.4% and a revised forecast of -5.0% Y/Y – so we came in just 30 bps to the high side but landed roughly on our trendline. And with the inflationary break now pushed a quarter ahead to Q3, we still expect the next peak to reach +15.0%. We just won’t get there until early to mid-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 March and now April), 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 when the time comes to renew. But by late 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 in the quarters ahead. 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 April macro update, again characterized by a mixed bag of ‘two steps forward, one step back’ prints – perhaps none more consequential than the preliminary read on Q1 2024 Consumption. Did the economy continue to march higher from Q4’s +2.7% Y/Y or are Consumers finally starting to show some weakness? 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 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 that would eventually go on to close at +2.7% with its final revision.
Recall that the big news back in October 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 and was only reinforced by Q4’s +2.7%. But would the uptrend stand, we wondered? Or would Q1 2024 tip us in the other direction? With a preliminary Q1 mark now on the board at weaker yet still healthy +2.4% Y/Y, we remain generally 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 year and a half.
But not so fast. How constructive was this recent print, 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? Just as we did last with last quarter’s mark, let’s take a look under the hood to find out. Recall that in Q4 2023 we found that both Durable and Nondurable Goods consumption surged materially higher while Services remained flat, contradicting the prevailing narrative around the reallocation of consumer spending from Goods to Services. In Q1 2024 however, we finally saw signs of a potential reversal in trend with Goods turning over while Services started to show more life. Durables slowed all the way down to +2.0% Y/Y from +5.8% in Q4 and Nondurables to +1.9% Y/Y from +2.0% Y/Y. Services, on the other hand, moved slightly higher to +2.6% Y/Y from +2.4% in Q4 where it has remained range-bound between +2-3% over the last seven quarters. Up to this point, it had appeared that the demise of Goods consumption (relative to Services) remained greatly exaggerated. But if these preliminary marks hold through upcoming revisions, it would make for a pretty strong signal that consumer appetite for durable goods was finally waning in the face of a raft of macroeconomic headwinds including compounding inflation, a cooling labor market, and high interest rates. This tracks with recent headlines suggesting that consumers were increasingly putting off the purchase of big-ticket items like appliances, furniture, and cars but we’ll have to wait to see a couple more months of data before drawing any real conclusions.
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 was little evidence in recent GDP and Consumption data suggesting that’s what was really happening – at least until this most recent Q1 2024 print.
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 final Q1 2024 print on the board -0.3% Y/Y vs. the same -0.3% 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 the quarter now closed at -0.3% Y/Y, we clearly didn’t get there. So the waiting game continues for at least another quarter though, despite the recent weakness in goods consumption, we continue to expect that Industrial Production will turn to break higher in the months ahead.
While our dramatic yet corny ‘Consumption vs. Industrial Production: Which is telling the truth?’ storyline got another jolt this month with Goods turning over, it remains largely unresolved as we look for a little more signal strength in the preliminary reads for Q2 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. Though with our February revision taking us a baby step lower to 1.38, this particular indicator is back to looking more constructive to the recovering Industrial Production narrative and to 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 when our first glimpse of Q1 2024 hit the board 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 and the final March revision taking us to -5.2% Y/Y, materially higher than Q4’s -8.6%, we now have our first signal of a local bottom and potential inflection point. Though we’ll have to wait until Q2 closes to find out if it holds as an inflection point can only be confirmed with the subsequent quarter’s final print. But with the ATA Index now closing lower at -5.2% Y/Y for Q1 2024 vs. -4.8% Y/Y last month and Q4’s -4.2%, we’re back to a state of divergence with these two. If one or both indices maintain a trajectory 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. So we’ll be watching closely, but at this moment in time signals remain mixed.
Now let’s 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 landing 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 +13.6% Y/Y, 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. We commented last month 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”. With our first glimpse at Q2 now on the board at a relatively weak but still inflationary +3.3% Y/Y, we just need our TL Linehaul Spot Index to follow suit.
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, Q1 2024 closing at +13.6% Y/Y, and now Q2 holding at +3.3% Y/Y, the trendline is back roughly to where we would expect it to be given where we are in the US Spot TL Linehaul rate cycle and relative to past cycles. From here, as noted 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 before bouncing 5% higher to $4.044 in February. Since then, we have faded 3.1% lower to $3.921/mi where we sit today in May MTD – and 14.1% lower from September 2023’s $4.563. While certainly not the whole story, this long-term slide in diesel prices has no doubt been one of the factors allowing otherwise unprofitable surplus suppliers to remain active in the spot market.
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 and now an April where we mostly treaded water with our Spot TL Linehaul index now 18 cents lower (-10%) vs. January and a mixed bag of macro indicators. And now a week and a half into May, the market remains flattish and close to a current cycle low at $1.61/mile. So where do we go from here? While Consumption numbers remain mostly constructive, Industrial Production and Relative Inventory levels are flat. So while Consumers, and the US economy that they power, indeed remained resilient through Q1 2024 despite consensus forecasts otherwise, can they hold up going forward as the labor market slowly cools, inflation remains stubbornly above the Fed’s target, 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. But with CVSA Safety Blitz having run its course last week and producing only moderate volatility in the market, the question will be whether the blip higher in spot rates will surge into produce season or fade lower through the rest of May and into June. So with that in mind, we are adding Produce Season to our short list of market wild cards that we expect to shape the relative TL capacity and pricing environment in the month ahead:
1. Diesel Prices: As noted, now that we’re well beyond our Y/Y US TL market cycle bottom, we believe that diesel prices in the months ahead will help set the pace at which spot market rates continue to recover from here. While prices 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 -3.1% through May MTD where we currently sit at $3.921/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 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 April’s +3.4%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. That said, perhaps against all odds the US Consumer continues to hang in there, as evidenced in the strong GDP & Consumption prints over the last few quarters – especially with regard to TL-intensive Goods consumption. However, big questions remain as to how long the Consumer can hold up (especially considering the Q1 2024 durable goods consumption read) 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.
3. Produce Season: As we have noted in the past, during the Y/Y deflationary phases of the TL market cycle seasonal dislocations like produce, Christmas trees, and holiday retail sales tend to have a muted effect on spot rates given the surplus supply that exists in the market that acts as a capacity buffer. But as the market swings to a state of relative supply scarcity, those dislocations can have a very pronounced impact on rates. So as the market continues to approach equilibrium after the last nine quarters of Y/Y deflation, we could see the 2024 produce season drive spot market rates out of the South and Southeast up materially in a way that the market hasn’t experienced since 2021. And with the season well underway, we look for this to remain a wild card through the end of July.
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%), it has also taken us at least two quarters 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 – even considering lower low and the longer duration. 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 May MTD levels (+9.8% 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 2025’s winners will be determined by the actions taken in 2024. So hopefully you didn’t squander the opportunity just because you were crushing your 2023-24 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 +4-5% 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 and May 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” as we have noted in recent issues. 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 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 believe is playing out in the market right now. And just like Mike Campbell in ‘The Sun Also Rises’, who we introduced earlier, supply vs. demand in the US trucking market rebalances in two ways: “Gradually and then suddenly”. And once enough of the surplus capacity in the market goes bankrupt gradually, the balance in supply vs. demand will suddenly shift. And we continue to believe that shift is coming in the months ahead. Now on to May and deeper into Q2.