[Excerpt from The Pickett Line June 2024 Issue]
Over the years, the staff at Pickett Research has taken literary inspiration from a wide range of artists, scientists, and other iconic figures to describe the dynamics in play within the US Truckload freight market: from The Rolling Stones and Tom Petty to Santa Claus to Chris Farley’s El Niño (…it’s Spanish for “The Niño”) sketch from Saturday Night Live season 23, episode 4. And this month is no different. This month, we look to the late great Jim Morrison and The Doors and the opening track of their 1967 debut album: Break on Through (To the Other Side). As for the first time since Q1 2022, and after nine long quarters of Y/Y market deflation, the US TL Linehaul Spot Index has finally broken inflationary with a QTD Q3 read of +3.0% Y/Y. Or in other words, after a number of failed attempts in recent quarters, we have finally broken on through to the other side of the x-axis to kick off a new TL market cycle. That is, assuming our preliminary Q3 print holds up through subsequent revisions before closing the quarter in September.
And if it does, that means we will have finally exited the longest observed market cycle on record at 16 quarters (Q3 2020 – Q2 2024) vs. the typical 13-14 quarter cycles that came before. What was different this time around that extended the ride for the 2-3 bonus quarters? Winter Storm Uri in Q1 2021 was a factor for sure, but we suspect the global COVID-19 pandemic and the unprovoked Russian invasion of Ukraine had a little more to do with it given how often we’ve seen major storms kink the cycle curve throughout history. So in that way, this time was indeed different. Though as we’ve noted in the past, while both the duration (time) and amplitude (peak & trough) were clearly extended as we got both a higher high and a lower low compared to past cycles, the shape of the curve held – a signal that history continues to rhyme (hat tip to Mark Twain), therefore it is reasonable to expect more of the same going forward.
That said, as we stated last month: “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 [as a number of other forecasts guiding for mid-2025 before TL spot rates recover meaningfully higher suggest]. 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?’” But not so fast. What about the rest of the story? What did the macro and market indicators tell us last month? Do supply and demand conditions support the recovery narrative? Or is this all just wishful thinking (if you’re on the supply side)? Let’s cut to the chase and dive into this June 2024 issue of The Pickett Line to find out.
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, 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. The market made a run towards a Y/Y inflationary breakout but failed. 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. Then with our final Q2 print coming in at -1.8% Y/Y vs. a forecast of +5.0% Y/Y + 5%, at least one of those two steps forward finally materialized. Though the second failure to finally break Y/Y inflationary forced another forecast revision, pushing the forward cycle curve ahead by one more quarter with a Q3 projection to +10% and Q4 to +20.0% Y/Y. So with our preliminary Q3 print now on the board at +3.0% Y/Y, we’re a third of the way there with two months left to go. And for this forecast line to hold, it implies that TL spot linehaul rates would have to rise +6.4% from our current position to close the quarter and +25-30% by the end of the year. Yes, that sounds super aggressive given all of the market headwinds dominating the media at the moment: a slowing economy and labor market, a wild political landscape with an election coming up in November, and two wars still going on. But for history to continue to rhyme and the TL market cycle to repeat itself, some version of this would need to unfold – even if it ultimately takes a quarter or two longer to get there, as we observed in the last cycle.
Unfortunately, we’ve got to wait until the next issue before we have our first glimpse at the Q3 2024 contract index. But there, we have trended much closer to the forecast line with last month’s Q2 revision posting -2.3% Y/Y vs. a forecast of -3.0% – a mere 70 bps off forecast. And with our final print now on the board at -2.7% Y/Y we find ourselves even closer. From here, we still expect to break Y/Y inflationary in Q3 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 June macro update, where a couple of our primary indicators showed marked improvement vs. last month – perhaps none more consequential than the preliminary read on Q2 2024 Consumption and the final Q2 revision to Industrial Production. Did the economy continue to fade lower from Q1’s +2.3% and Q4 2023’s +2.7% Y/Y or did Consumption mount a comeback of sorts? Just 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 Q1 closing at +2.3% Y/Y, while slightly lower than Q4 we remained generally pointed up and to the right. Though, given the recent relative weakness in labor markets and retail sales, the US economy was hardly out of the woods. And much still had to go right to stick that soft landing that Jay Powell and the Fed have been doggedly pursuing. But now with the preliminary read for Q2 2024 on the board at a slightly higher +2.5% Y/Y, in fact the second strongest Y/Y read in over two years, we see the case for that soft landing strengthening.
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 saw 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 +1.2% Y/Y and Nondurables to +1.6% Y/Y. Services, on the other hand, moved slightly higher to +2.5% Y/Y where it has remained range-bound between +2-3% over the last seven quarters.
Up to that point, it had appeared that the demise of Goods consumption (relative to Services) had been greatly exaggerated. But if these more recent trends held 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 automobiles but we would have to wait to see a couple more months of data before drawing any real conclusions. With preliminary Q2 data now in, the wait is over. Rather than break still lower, Durable Goods consumption bounced materially higher to +2.4% Y/Y vs. +1.2% in Q1 with Nondurable Goods up slightly to +1.7% Y/Y vs. +1.6% and Services up to +2.8% Y/Y vs. +2.5% and its highest mark in over two years.
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 just about 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 or global logistics services, there was little evidence in the GDP and Consumption data suggesting that’s what was really happening – at least not until that Q1 2024 print. But with Q2 reversing some of that relative weakness in Durable Goods consumption, the question remains whether Q1 represents a change in trend or will trendlines return to a more constructive trajectory in the months and quarters ahead as the economy stabilizes and Federal Reserve monetary policy transitions to expansionary. Be sure to tune in next month to find out where our Q2 marks are revised from here.
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. While our dramatic yet corny ‘Consumption vs. Industrial Production: Which is telling the truth?’ storyline got another jolt last month with durable goods consumption turning over, it remained largely unresolved as we hoped for a little more signal strength in the revised reads for Q2 2024 Industrial Production – which we now have. With the June revision now on the board, while Q1 revised slightly lower to -0.6% Y/Y Q2 closed decidedly higher and pointing up and to the right at +0.4% Y/Y and the strongest read in six quarters. And the Manufacturing component, which is probably a little more indicative of industrial activity, closed just barely inflationary for the first time in six quarters at +0.1% Y/Y – another constructive sign for the economy. So with Q2 Consumption and Industrial Production both pointing higher compared to the previous quarter, we score this one for Consumption in the ‘Which is telling the truth?’ contest. So stay tuned for next month’s issue to see where our first glimpse at Q3 Industrial Production takes us as the saga continues.
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. And now with the first revision for Q2 2024 coming in flat at 1.37 for the fourth month in a row, there we sit.
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 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 most of 2023 and into Q1 2024, 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%. Though with Q2 now closing roughly flat at -5.3% Y/Y, that inflection point is no longer confirmed and we’ll now have to wait for the next signal in Q3 to get any sense as to where we go from here. But with our first revision of the Q2 ATA TL Volume Index now on the board at -2.9% Y/Y vs. last month’s -4.2% Y/Y vs. Q1’s -5.2%, we got a stronger signal that TL capacity demand may have found a floor and is poised to improve in the months and quarters ahead. At this point, 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 that point) at a final -23.0% Y/Y for Q3 2023. And with the 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 then got 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 final Q2 print now on the board a slight step higher at +22.8% Y/Y while the US TL Linehaul Spot Index sits just north of equilibrium at +3.0% Y/Y, we indeed find these two back in phase for the first time since early 2021. But to stay in phase, we would need to see Net Class 8 Orders posting higher than +22.8% Y/Y in Q3 and for the US TL Linehaul Spot Index to continue marching higher through the end of the year.
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 two-to-three 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 to +22.8% 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 – which is what we see so far.
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 -6.3% lower to close June and Q2 at $3.722/gal before once again reversing the trend to move +2.7% higher to our current July MTD levels at $3.821/gal. While certainly not the whole story, this long-term slide in diesel prices over most of the past year has no doubt been one of the factors allowing otherwise unprofitable surplus suppliers to remain active in the spot market – that and some combination of surplus profits generated in 2020-22 and SBA loans granted under COVID stimulus programs with incredibly favorable terms.
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 -18.4% from the September 2023 high mark and now July posting +2.7% higher to $3.821/gal. 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 here we sit with a preliminary Q3 TL Spot Linehaul Index at +3.0% Y/Y and inflationary for the first time since Q1 2022 and Consumption, Industrial Production, and Relative Inventory levels all mostly constructive. 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 produce season, labor strikes, and major bankruptcies well behind us, in addition to our reliable standbys of diesel prices and TL-intensive goods consumption, we’re left only with what remains of the 2024 Atlantic Hurricane Season. Looking back over the last two months and the steady march higher in US Spot TL Linehaul rates, 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 noted last month that we would get our first signal in the weeks 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. Now a few weeks post-July 4th, we are seeing more of the latter with all-in DAT spot Van rates falling back to late June levels but not all of the way back to pre-DOT April/May. If this sticks and we see a local floor set in before making another run higher next month, that will serve as another signal that we are indeed entering into a new US TL freight cycle. 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 -18.4% lower to June 2024’s $3.722. 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, which they have started to do in July bouncing +2.7% higher to $3.821/gal, 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 CPI bouncing along within a channel between +3.1% and +3.7%. But with June 2024 on the board at that same +3.0% Y/Y we’ve come full circle. And with the Price Index for Personal Consumption Expenditures, the Fed’s preferred inflation metric, also fading steadily lower in recent months, we are seeing mounting evidence that perhaps this time that +3.0% will stick and finally break below that level for the first time since early 2021. Over this time, and perhaps against all odds, the US Consumer continues to hang in there, as evidenced by the mostly strong GDP & Consumption prints over the last few quarters. However, big questions remain as to just how long the Consumer can hold up (especially considering the weaker Q1-Q2 2024 durable goods consumption reads) 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 still 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. 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. 2024 Atlantic Hurricane Season (June-November): And returning to the podium last month 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 we enter this year’s season, with a Category 1 storm (Berly) having already made landfall, 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 the 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, 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 +6.4% increase from current July MTD levels. And we don’t expect the contract market to break materially higher for another quarter 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. While the recent Y/Y deflationary leg of the cycle has technically just ended, the weeks and months ahead represent a tremendous opportunity to recalibrate your transportation strategy for the Y/Y inflationary leg that has just begun. 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 ~6% higher to close Q3 2024 somewhere close to +10.0% 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 close slightly Y/Y inflationary in Q3 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 and now July 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 or sweetheart SBA loans granted under COVID stimulus programs, these are not permanent advantages. Eventually, surplus savings are depleted, credit lines are tapped out, lease terms expire and mark to market, and loans must be paid back. 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 the April 2024 issue. And with this preliminary Q3 print finally flashing Y/Y inflationary, although perhaps just slightly, at +3.0%, perhaps this is the first real signal that the period of “suddenly” is finally now upon us.
And 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, last month we shifted the forward rate curves ahead by a quarter and revised 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. But whatever happens though, we can virtually guarantee that it won’t be boring and it won’t unfold exactly as we predicted. But with this month’s +3.0% Y/Y print making it official, we are now off and running. So with the opening guitar riff of Break on Through (To the Other Side) echoing in the background, onward we go.