[Excerpt from The Pickett Line May 2024 Issue]
When the very first issue of The Pickett Line rolled off the press back in December 2020, it began with the following passage (you know how we love our quotes and literary references over here):
“To quote Sir John Templeton, “The four most dangerous words in investing are: this time it’s different.” The same can be said about the US Truckload Freight Market.
To say that 2020 has been a year defined by volatility, uncertainty, and hardship is of course a colossal understatement. Now as we find ourselves in the last month of the last quarter of this roller coaster of a year, we have a basket of both positive and negative catalysts to reconcile to have any sense of what comes next.”
Fast forward three and a half years to our current position, as we prepare to exit the 5th US TL Spot Linehaul Rate Cycle (that we’ve mapped since 2006) and enter the next, the similarities are uncanny. Every single one of those sentiments applies today looking back at this 16-quarter roller coaster of a market cycle, just as it did looking back at a COVID-driven roller coaster of calendar year 2020 and wondering what comes next. Volatility, uncertainty, and hardship…check, check, and check. While the sources of said hardship and uncertainty most recently have been a painfully prolonged freight recession and increasingly challenging financial conditions for consumers vs. an unprecedented global pandemic, the sentiment remains the same for many.
And as we now find ourselves in the last months of the last quarter of this roller coaster of a freight cycle, we have a similar basket of both positive and negative catalysts to once again reconcile. Are recent signals of a potential rebalancing in TL capacity supply vs. demand precursors to the next Y/Y inflationary leg of a new US TL Spot Linehaul Rate Cycle? Or just a seasonality-driven head fake like the one we got back at the beginning of the year just before February’s St. Valentine’s Day (Spot Market) Massacre? Will a combination of stubbornly resilient supply and tepid capacity demand somehow conspire to squash the cycle going forward for the foreseeable future such that history no longer rhymes? Or to paraphrase Sir John Templeton, is it really different this time? That instead of climbing higher over the back half of 2024 as historical patterns suggest, Spot TL rates are dead in the water until mid-2025 at the earliest before industrial activity picks up enough to catalyze a recovery?
Of course it is entirely possible that things really are different this time, and that rates can find a way to skid along at current levels, if not turn lower, for another four quarters. We just can’t point to the fundamental change in market structure that we believe would have to occur to drive that outcome. If anything, the supply side has gotten more fragmented not less while barriers to market entry and exit have only slid lower with the ongoing digital transformation of the spot market. So in the absence of a sufficient enough technology-related or regulatory shock to materially consolidate the supply side thus making it less fragmented, our base case remains: History will continue to rhyme and that this time, it’s really not that different. And if that is indeed what ultimately comes to pass in the months and quarters ahead, that one roller coaster ride of a freight cycle is ending and another is just beginning, then the only real question for everyone is: ‘Ready to go again?’
The TL Spot Linehaul Cycle is dead? Or long live the TL Spot Linehaul Cycle? We’re going deep as we look for signals either way in this very special May 2024 issue of The Pickett Line. Let’s get started.
Recall that after closing 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%, the narrative was that 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. Now with our revised Q2 print coming in at -1.8% Y/Y vs. last month’s -5.3% and a forecast of +5.0% Y/Y + 5%, those two steps forward are slowly starting to materialize. That said, with only a week or two left to go in the quarter, we now expect to close Q2 at -0.5%-1.5% Y/Y rather than break Y/Y inflationary as projected – which means we’ll have to wait one more quarter to confirm the end of the current cycle and the beginning of the next one. So the forecast line is getting pushed forward once again.
Our revised Q3 projection is getting dialed down to +10.0% Y/Y and Q4 to +20.0% – which implies a +20-30% move higher from Q2’s current mark of 1.66/mile. And while we continue to project the peak of the upcoming inflationary leg of the new cycle to come in Q2 2025, we are revising it down to +40.0% Y/Y vs. +50.0%. These revisions are driven mostly by weakening demand signals last month, especially around durable goods consumption. We remain constructive overall on the US economy over the balance of the year, but without a meaningful acceleration in industrial activity, the next move higher in TL spot linehaul rates is likely to move along just a little bit slower than previously modeled.
As we noted last month, perhaps we should have expected this given the patterns observed in the final stage of the last two cycles where the eventual break inflationary seemed to stretch a couple of quarters from the original forecast line. We’ll try to do a better job forecasting the next time we’re at this point of the cycle in late 2027 and early 2028. That said, despite this slow start to the year and this most recent quarter, we continue to project that spot TL linehaul rates could 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 over the last twenty years. 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 and lowering the peak, required us to push the Contract forecast curve ahead by a quarter as well. Recall that 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 our revised Q2 print now on the board at -2.3% Y/Y vs. a forecast of -3.0%, we remain within 70 bps of trendline. And now expect to break Y/Y inflationary next quarter to close at +1.0% on its way to a peak of +10.0% Y/Y by the end of 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 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, it appears that 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 the end of the year, 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 May macro update, once again characterized by a mixed bag of puts and takes – perhaps none more consequential than the revised 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 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 our revised Q1 mark now on the board at +2.3% Y/Y vs. last month’s +2.4%, while slightly lower than Q4 we remain generally pointed up and to the right, much to the chagrin of many economists and market pundits who had been banging the “recession” drum for the last year and a half. That said, given the recent relative weakness in labor markets and retail sales, the US economy is hardly out of the woods. And much still has to go right to stick that soft landing that Jay Powell and the Fed have been doggedly pursuing.
But 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 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 see signs of a potential reversal in trend with Goods turning over sharply while Services started to show more life. Durables slowed all the way down to -1.3% Y/Y vs. +2.0% last month and +5.8% in Q4, and Nondurables to +1.7% Y/Y vs. +1.9% last month and +2.0% in Q4.
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 is 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 the GDP and Consumption data suggesting that’s what was really happening – at least not until this most recent Q1 2024 print. Now the question becomes whether the Q2 data confirms this potential change in trend or shows durable goods consumption returning to a more constructive trajectory. Be sure to tune in next month to find out.
Now with the protagonist of our story, Consumption, continuing to make its case that US Consumers remain mostly resilient and that the recent 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 2023 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 then bouncing slightly higher to +0.1% in Q4 – and then lower again to -0.3% in Q1 2024. But with our revised Q2 2024 print coming in slightly inflationary at +0.1% Y/Y from the strongest M/M move since July 2023 at +0.9%., IP is back to a positive trajectory – at least for the time being. We noted back in February 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 with the quarter going on to close at -0.3% Y/Y, we clearly didn’t get there. So the waiting game continues for at least another quarter to see if this revised inflationary Q2 print holds up. Though despite the recent weakness in goods consumption, we continue to expect that Industrial Production will continue to break higher in the months ahead, which would of course be a bullish trend for US Spot TL Linehaul rates.
While our dramatic yet corny ‘Consumption vs. Industrial Production: Which is telling the truth?’ storyline got another jolt this month with durable goods consumption turning over, it remains largely unresolved as we look for a little more signal strength in the revised 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 stayed there through Q4, we 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. But with the February revision taking us a baby step lower to 1.38 and March closing the quarter at that same 1.37 level we hovered at through the back half of 2023, 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.
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 the end of Q1, our chart patterns showed quite the opposite with both continuing to post Y/Y deflationary and pointing lower, not higher. However, in recent months 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 – which was confirmed with Q1’s -5.2%. And with Q2’s revised print now on the board at -4.7% Y/Y, we see this reversal in trend holding up. And with our first glimpse at the Q2 ATA TL Volume Index now on the board at -4.2% Y/Y vs. Q1’s -5.2%, we see a similar inflection point potentially forming. If one or both indices continue to 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. Suffice it to say, we’ll be watching closely.
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 in recent months 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 a revised Q2 print now on the board a step higher at +32.8% Y/Y while the US TL Linehaul Spot Index sits just south of equilibrium at -1.8% Y/Y, we’ll have to wait at least another quarter for any evidence that this correlation is back on track.
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 OEMs 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 wasn’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 revising higher to +32.8% 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 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 faded another -6.7% lower to our current June MTD levels at $3.706/gal. 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 June 2024 coming in at -18.8% 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 still 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 then an April where we mostly treaded water with our Spot TL Linehaul Index hovering 18 cents lower (-10.3%) vs. January and a mixed bag of macro indicators. Since then, spot linehaul rates have risen 7.0% but still sit -4.0% lower than January levels and here we are with that same mixed bag of macro indicators that make the path ahead for the market difficult to parse. With a week or two left in the quarter, our spot index sits just slightly deflationary at -1.8% Y/Y and points to a long-awaited break to the inflationary side of the x-axis. And while Consumption numbers remain mostly constructive, Industrial Production and Relative Inventory levels are mostly flat. With Consumers, and the US economy that they power, indeed remaining resilient through Q1 2024 despite consensus forecasts otherwise, the question this quarter has been whether they could 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. With weakness showing in recent economic indicators – from retail spending to durable goods consumption – it would appear that some of those long-expected cracks are finally forming. That said, unless they begin to widen materially, we can only rely on the data we have in front of us and the historical patterns that tend to repeat themselves time and time again. And from that perspective, the back half of 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, in addition to our reliable standbys of diesel prices and TL-intensive goods consumption, we’ve got one more month of Produce Season to contend with as well as the official start of the 2024 Atlantic Hurricane Season. Looking forward, along with produce season, the May CVSA Safety Blitz followed by the Memorial Day holiday took our US TL Spot Linehaul Index 11 cents (+7.0%) higher – and the gains have held through most of June. What is not clear is how much of the gain can be attributed simply to (produce) seasonality or whether the underlying balance in TL market supply vs. demand shifting further toward equilibrium is also playing a role. We’ll get our first signal in the week following the July 4th holiday as the market digests that short-term dislocation and resets at whatever the new short-term rate basis proves to be. If the market corrects materially lower to April/May levels, the signal for market equilibrium will be decidedly weaker. If rates hold or correct only moderately lower, we’ll read that as a constructive signal that the next inflationary leg of a new rate cycle we are currently forecasting for the back half of this year remains on schedule. So with all of that said, let’s break down our shortlist of freight market wild cards for the month ahead:
1. Diesel Prices: As noted, now that we’re well beyond our Y/Y US TL market cycle bottom, we believe that diesel prices in the months ahead will help set the pace at which spot market rates continue to recover from here. While prices 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 and again over the last nine months 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 -18.8% lower to June 2024’s MTD $3.706. If this mostly downward trend is sustained and we continue to head materially lower, we should expect the pace of carrier exits to stall even 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 reads through March (+3.5%) before retreating to the most recent May print at +3.3%, it is hard to be confident that inflation is under control just 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 much slower than expected. That said, perhaps against all odds the US Consumer continues to hang in there up to this point, as evidenced by the strong GDP & Consumption prints over the last few quarters. However, big questions remain as to how long the Consumer can hold up (especially considering the Q1 2024 durable goods consumption read and weak Q2 retail numbers) 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, and tight credit conditions. 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 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. With the 2024 produce season just about wrapped up, the June Spot TL Linehaul Index is up +7.0% vs. April – representing the biggest jump over that same period since 2020’s +14.0% move. For further comparison, 2021 saw a +3.3% rise while rates fell -8.8% in 2022 and then rose +4.1% in 2023. So rates clearly rose at the fastest clip since the 2022-24 Freight Recession started, but whether that proves to be a meaningful signal for the future direction of the market remains to be seen.
4. 2024 Atlantic Hurricane Season (June-November): And returning to the podium after an extended hiatus with other market forces running the show, we welcome back the Atlantic Hurricane Season as a potentially market-moving wild card in the months ahead. As enter this year’s season, NOAA forecasters are predicting an 85% chance of above-normal activity this year (vs. last year’s near-normal forecast), a 10% chance of near-normal conditions, and a 5% chance of a below-normal season – which means 17-25 named storms (winds > 39 mph), 8-13 hurricanes (winds > 74 mph), and 4-7 major hurricanes (Category 3,4,or 5 with winds > 111 mph). Forecasters report a 70% confidence in these ranges.
The last market-moving storm we got while in the deflationary leg of the cycle was Hurricane Matthew in Q3 2016 along the SE US Atlantic coast, which accelerated the recovery in spot linehaul rates into Q4 that year but then set up a relative stall in the trend line in Q1 2017 before breaking Y/Y inflationary a quarter later. So that inflationary catalyst is what we’ll be looking for should we get a storm(s) of sufficient magnitude, duration and geography (think Gulf Coast not Florida) to distort the balance of US truckload supply vs. demand enough to move spot rates higher for an extended period of time. Though regardless of what may ultimately come to pass on this one, just keep in mind that in a rising spot market, rates are much more vulnerable to short-term dislocations like major storms. So the risk level this year is logically going to be much higher than in 2022 when the spot market was in a virtual free fall or in 2023 as the market struggled to bounce off of its Y/Y deflationary bottom.
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 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 of a new cycle 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 clearly 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 Q3 2024 at +10.0% Y/Y as now projected, that only represents a +6.8% increase from current June MTD levels. 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 prepare for the second half of 2024 and 2025, the months ahead represent a welcome opportunity to refine your commercial strategy and carefully consider the shippers that you want to partner with going forward into the next cycle. So 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 penalty cost for shipping 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 don’t squander the opportunity just because you were crushing your 2023-24 freight budget, service levels were at an all-time high, and the team is 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 30 bps higher to close Q2 2024 somewhere close to -1.5% Y/Y 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 before bouncing back in May and June 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. 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, these are not permanent advantages. Eventually, surplus savings are depleted, credit lines are tapped out, and leases expire and mark to market. And that is what we believe is playing out in the market right now – “gradually and then suddenly” as we quoted Mike Campbell from Hemingway’s The Sun Also Rises’ in last month’s issue.
But while we believe that, at this point in the cycle, the attrition of unprofitable capacity will be enough to tip the market to a state of relative supply scarcity and therefore a Y/Y inflationary spot linehaul rate environment in the quarters ahead, that alone won’t likely surge rates to the levels seen in past peaks. We will need a material recovery in TL capacity demand and therefore US industrial activity for that to happen – which we do believe is coming, just not as soon as we expected coming into 2024. As a result, we are shifting the forward rate curves ahead by a quarter and revising the peaks by 5-10 percentage points lower. So while the next roller coaster ride may not be as stomach-churning as the one we’re wrapping up this quarter, there is plenty that could happen along the way to change that. So back to the question we started with: ‘Ready to go again?’