[Excerpt from The Pickett Line October 2024 Issue]
Well, we’ve got some bad news and some good news this month. And we’re not talking about the US truckload freight market or the broader economy – at least not yet. The bad news is, as many of you are no doubt aware as you stew in anxious anticipation of this October issue, our publication schedule is running a week behind due to the Thanksgiving holiday. The good news, however, is this now pushes us well into December and makes this the last issue before Christmas, which means we’ve got to release our annual “’Twas the night before Christmas…”-inspired holiday poem a little early this year. So we’ll need to combine it with our regularly scheduled theme for this issue. That’s right, two themes for the price of one – our first Christmas BOGO and the writers here at Pickett Research sure hope to prove that they’re up to the task.
So given how much we have to cover this month, let’s skip the long-winded preamble and get right to it. We are proud to present the 2024 Pickett Line holiday poem: ‘Twas the Dawn of a New Cycle
‘Twas the dawn of a new cycle, and in each and every state,
Is the freight recession over? was the market’s favorite debate.
Is the worst of it behind us? Are there better days ahead?
Or does the market still need a catalyst to bring it back from the dead?
If so, we can’t see it!, lamented the crowd.
Where will it come from?, they wondered out loud.
But wait, there’s more. That’s hardly the only topic at hand.
We’ve got other burning questions going viral across LinkedIn land.
Does “Co-“ equal “Double-“?, argued the mids.
As they all fielded DAT call-ins to consider their bids.
And what about those tariffs? Is it best for POTUS not to meddle?
How about a town hall debate with our favorite freight bros to settle?
Oh yeah, and why this new push for the transparency of each rate?
Hard to foresee any real impact on the negotiations to move freight.
So as we ponder the calendar preparing to turn the next page,
We have no shortage of freight market content with which to engage.
But let’s not forget the greatest question of all,
It’s the one that we started with, as you might recall.
Will rates soon climb? Or is it really different this time?
Yes, the cycle will do what it does because it’s the same as it was,
And history continues to rhyme.
Cheers to a happy, healthy, prosperous…and +30% Y/Y inflationary…2025!
Buckle up.
So there we have it, Ladies and Gentlemen. But as is yet another Pickett Line tradition, we must also take a walk down memory lane to revisit the holiday poems of years past – to once again experience the pain and the anguish of a Freight Recession Christmas. Here’s last year’s (2023, year 2 of the downturn):
‘Twas the late stage of the cycle, and all through the land,
Rate increases were scarce, Suppliers all told to pound sand.
But how can this be? The market’s been brutal all year.
As spot and contract rates drift lower, profits soon disappear.
Then as more carriers and more brokers all take it on the chin,
RIFs are splashed across Freightwaves and celebrated by the trolls on LinkedIn.
Though like it or not, these are normal forces at play.
What the market cycle shall giveth, it shall taketh away.
But do not despair, brighter skies lie ahead.
For those still in the market and hanging, even if only by a thread.
So how long must we wait, for these dark clouds to part?
As we unpack November, we’ll assess chart by chart.
Then using data as our map, and history as our guide,
We’ll see that there’s reason for cheer in the new year,
As markets finally recover and begin to hit stride.
And now let’s go all the way back to 2022, a mere 2-3 quarters into the recession when we had no real idea what might lay ahead. I mean, how bad could it be? The market’s been through deflationary legs of the rate cycle before.
‘Twas the eve of inflection, and all through the market
Not a Carrier felt optimistic. Thought they might as well park it.
Costs remain high, while rates remain low.
Cheaper diesel sure helps, but only softens the blow.
How long must we wait, before this market finds a floor?
This feels strangely familiar, like it’s happened before.
So let’s look backward in time, to see where we’ve been.
And use that as context to assess the position we’re in.
Then into the future, we’ll peer once more.
To consider just what does the next year have in store.
Will the cycle repeat? Is there reason for doubt?
The December issue is here, so let’s unpack and find out.
You can almost feel the market pushing through the five stages of grief – from Denial to Anger to Bargaining to Depression then finally to Acceptance. And you as a reader can also no doubt feel these poems getting longer and longer, not unlike the issues of The Pickett Line themselves over this same period. What can we say, we’ve got a lot to say. And speaking of “a lot to say”, we did mention a regularly scheduled market theme we had planned as inspiration for this month’s issue. In searching the Pickett Research archives we were surprised to find that this particular song lyric hadn’t come up yet given how often our writers find it running through their heads as they consider the seemingly inevitable trajectory of the US TL Linehaul Spot Rate Cycle from quarter to quarter and season to season.
So this month, as the freight recession status debate rages, we thought it only fitting to shine a light on the Talking Heads tune ‘Once in a Lifetime’ and its refrain “Same as it ever was.” Released in January 1981 as the lead single from the band’s fourth album ‘Remain in Light’, it opens with the following lyrics:
And you may find yourself living in a shotgun shack
And you may find yourself in another part of the world
And you may find yourself behind the wheel of a large automobile
And you may find yourself in a beautiful house, with a beautiful wife
And you may ask yourself, “Well, how did I get here?”
Letting the days go by, let the water hold me down
Letting the days go by, water flowing underground
Into the blue again, after the money’s gone
Once in a lifetime, water flowing underground
And you may ask yourself, “How do I work this?”
And you may ask yourself, “Where is that large automobile?”
And you may tell yourself, “This is not my beautiful house”
And you may tell yourself, “This is not my beautiful wife”
Letting the days go by, let the water hold me down
Letting the days go by, water flowing underground
Into the blue again, after the money’s gone
Once in a lifetime, water flowing underground
Same as it ever was, same as it ever was
Same as it ever was, same as it ever was
Same as it ever was, same as it ever was
Same as it ever was, same as it ever was
While some have suggested that this song was intended to be an indictment of yuppy greed and the ultimate emptiness of conspicuous consumption for consumption’s sake, Talking Heads’ founder, primary songwriter and lead singer David Byrne said that the song was about the unconscious and that “we operate half-awake or on autopilot and end up, whatever, with a house and family and job and everything else, and we haven’t really stopped to ask ourselves, ‘How did I get here?’” What does that have to do with the US trucking market? We don’t know that it does. We just can’t help but go back to the catchy ‘Same as it ever was…” refrain every time we find ourselves questioning the durability of the cycle in the face of myriad market forces and wondering whether anything driving the base supply vs. demand dynamics has fundamentally changed. “Same as it ever was” we eventually come back to again and again as the cycle remains undefeated over at least the last 18 years.
Alright, so after the longest Current Market Conditions setup ever, let’s get on with it. After breaking on through (to the other side) in the June issue with a very preliminary Q3 read of +3.0% Y/Y before eventually closing the quarter at a weaker but still inflationary +0.6% Y/Y, we finally got the closure we were waiting for thus completing Cycle Five on the Pickett Research freight cycle timeline and setting up Cycle Six. Though at the time we noted that “it remains possible that we could fall back all of the way below the x-axis negating our “Break on Through…” theme altogether in the coming quarters. To avoid that outcome, we would just need spot linehaul rates to hold at current levels through Q4 close and notch at least 10 cents higher (from current levels) in Q1 2025. And if they do, 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 believe 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, therefore it is reasonable to expect more of the same going forward.” And now over two-thirds of the way through Q4, our first official glimpse of the US TL Linehaul Spot Index shows us indeed holding trend at +3.6% Y/Y vs. a forecast of +7.5% + 5%. So as David Bryne and the Talking Heads would say, “Same as it ever was.” So if this 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 remains: “Ready to go again?” We’ll unpack it all as we dive into this special Christmas BOGO edition and October 2024 issue of The Pickett Line.
Recall that after closing Q1 2024 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 +3.0% and Q4 to +10.0% Y/Y.
But after the preliminary Q3 print of +3.0% Y/Y hit the board, we gave over half of the inflationary move back with July’s revised mark of +1.2% Y/Y. And then again with last month’s final Q3 mark of +0.6% Y/Y. We noted in the August issue that to land on forecast from our preliminary mark, TL spot linehaul rates would have to rise +6.4% to close the quarter and +25-30% by the end of the year. At the time, we acknowledged that it sounded super aggressive given all the market headwinds dominating the media: a slowing economy and labor market, a wild political landscape with an election coming up in November, and two major wars raging. 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. And now with Q3 and most of Q4 behind us at this point, it appears that we are indeed going to get the slower version. After revising the forecast curve slightly lower last month with Q3 now officially closed at a weaker but still inflationary +0.6% Y/Y, we got a preliminary Q4 print of +3.0% Y/Y followed by this month’s upward revision to +3.6% vs. a revised forecast of +7.5% Y/Y. And after breaching trendline in Q3 with a final read of -3.3% Y/Y vs. Q2’s -2.7% and a forecast of -1.0%, our preliminary Q4 print on the US TL Linehaul Contract (Cass) Index hit the board at -2.1% Y/Y vs. a forecast of +1.0%. So still lagging a but back to pointing up and to the right. Again, “not so fast!” says the market.
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 mid to late 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 entirely 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 continue to see what used to be shorter-term quarterly or six-month bids increasingly transform into one- or even two-year commitments when the time comes to renew. But by early to mid-next year, we should also look for many of them 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 October macro update, where most of our primary indicators again managed to show marked improvement vs. prior period – including the first revision to Q3 Consumption. Did the relative strength signaled in the preliminary print hold up or did we get another head fake only to be given back in subsequent revisions to ultimately fade lower from Q2’s +2.7% and Q1 2024’s +2.2% Y/Y? 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 way back in October last year was a preliminary Q3 2023 Consumption read of +2.2% 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 signal that a recession in 2024 was unlikely – at least according to patterns observed over the last fifty years. That didn’t mean it couldn’t happen, just that historical precedence suggests otherwise. Then with the final revision closing the quarter at +2.4% Y/Y, it became official and was only reinforced by Q4 2023’s +3.0%. But would the uptrend stand, we wondered? Or would Q1 2024 tip us in the other direction? With Q1 closing at +2.2% Y/Y, while slightly lower than Q4 we remained mostly pointed up and to the right. Though, given the recent relative weakness in labor markets and retail sales at the time, 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 had been doggedly pursuing. But with the final read for Q2 2024 hitting the board at a materially higher +2.7% Y/Y and a revised Q3 2024 print taking us still higher to +2.9% Y/Y, we see the case for that soft landing looking pretty good.
But how constructive are these recent Consumption 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 had remained mostly range-bound between +2-3% over the prior 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 revised Q3 2024 data now in, the strength signaled in last quarter’s read remains – with all three components marching up and to the right. Durable Goods consumption moved higher to +3.5% Y/Y vs. +2.6% last quarter and +1.2% in Q1 with Nondurable Goods also up noticeably to +2.2% Y/Y vs. +1.9% last quarter and +1.6% in Q1 and Services up to +3.1% Y/Y vs. +2.9% last quarter and +2.5% in Q1 and its highest mark in over a year.
Given the relatively higher freight intensity required to satisfy the demand for physical 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 through Q4 2023, the consumption of Services had 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 and now Q3 reversing some of that relative weakness in Durable Goods consumption, the question remains whether Q1 2024 represented a change in trend or will data points stay on a more constructive trajectory in the months and quarters ahead as the economy stabilizes and Federal Reserve monetary policy transitions to expansionary.
Now with the protagonist of our story, Consumption, continuing to make its case that US Consumers remain mostly resilient and that ongoing 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 this month with the first revision of Q3 Consumption hitting the board at +2.9% Y/Y and up 20 bps vs. Q2, it remains largely unresolved as we hoped for a little more signal strength in the Q2-Q3 2024 reads on Industrial Production. Coming off a final Q3 2024 read of -0.4% Y/Y, our first glimpse at Q4 came in dead flat at the same -0.4% Y/Y. So no sign of a meaningful recovery in industrial activity just yet, at least nothing that shows up in the IP data. And with Q3 Consumption pointing higher and Industrial Production now pointing flat to lower compared to the previous quarter, we score this one as a draw in the ‘Which is telling the truth?’ contest. Stay tuned for next month’s issue to see where the first revision of Q4 Industrial Production and the final revision on Q3 Consumption takes us as the saga continues.
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 and then Q1 2024 and still again in Q2, 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 revised Q3 2024 now closing at a slightly higher 1.38, the signal remains just got a little bit weaker. Though we’ll have to see where future prints take us before getting too excited one way or another. But the lack of any real directional action on this indicator does make sense given what we’ve seen from Industrial Production over the same period. We only hope that when IP does break, it breaks to the upside as opposed to the other direction.
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 recent Consumption, Industrial Production, and relative inventory levels currently showing mostly mixed signals, 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 continued to post mostly Y/Y deflationary and pointing lower. 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 2024’s -5.2%, Q2’s -5.3% Y/Y and
Q3’s -2.8% Y/Y. And with that inflection point remaining confirmed, we got a still higher preliminary read for Q4 of -1.1% Y/Y – so up and to the right we go.
Our ATA TL Volume Index has followed a similar pattern as it tries to navigate its own cycle inflection. When our final revision for Q2 hit the board at -2.9% Y/Y vs. Q1’s -5.2%, we got strong signal that TL capacity demand may have found a floor and was poised to improve in the months and quarters ahead. But with the final Q3 print on the board at a slightly lower -3.3% Y/Y, that signal got a whole lot weaker. But with our first glimpse at Q4 hitting the board all the way above the x-axis at +0.7% Y/Y, we’re back on track with this TL capacity demand indicator as well. Should the current trajectory for both hold up through subsequent revisions, we’ll get a chart pattern that supports increasingly higher US TL spot linehaul rates going into 2025.
Now let’s shift our attention to the supply side and Net Class 8 US Tractor Orders where we got another negative signal with our first glimpse at Q3 2024 coming in at -43.6% Y/Y before revising only slightly higher last month to -36.8% – the weakest print since Q2 2022 and once again entirely out of sync with what we would expect at this stage of the US Spot Linehaul TL Rate Cycle. But with September showing the highest rate of order activity this year, our final Q3 2024 read revised all of the way up to -11.1% Y/Y – still deflationary but less conspicuously out of phase with the US Spot TL Linehaul Index curve as compared to past cycles. And with the preliminary Q4 print now on the board at -7.7% Y/Y, we remain at least directionally 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 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 Q2 at +22.8% Y/Y, the trendline was 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 there, as noted in recent months, we expected the reversion to historic patterns to continue which meant 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. For that expectation to materialize, however, the September mark would have to come in materially higher than the surprisingly weak initial July and August reads. As outlined above, it did exactly that. But it wasn’t enough to take the quarter all the way to Y/Y inflationary territory as projected. And with Q4’s preliminary read taking us still higher but not quite Y/Y inflationary either, we’ll be watching especially closely to see if our next revision gets us there or not.
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 +2.4% higher in July to $3.810/gal. But with October and now November behind us as well, the market has faded another 29 cents lower and now sits at $3.522/gal – the lowest that diesel has been priced since September 2021. 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 possibly a surge in 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 November 2024 coming in at -22.8% from the September 2023 high mark despite brief turns higher in July and October. 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 revised Q4 2024 mark of +3.6% and decisively inflationary for the first time since Q1 2022 with Consumption flashing positive signals while Industrial Production and Relative Inventory levels remain flat to slightly negative. From that perspective, what’s left of 2024 still looks mostly bright though with maybe a little less conviction than we had in recent months. So what’s going to move the needle on Spot TL rates one way or the other in the month ahead? Last month we pointed to our old standbys of diesel prices and TL-intensive goods consumption, as well as the result of the 2024 US Presidential Election. Now with the election settled, and generally well received by both the freight market and the stock market, we’re once again left only with our two mainstays – at least until mid-January when the specter of another US and Gulf Coast port strike rears its head once again. So while the balance of the month could be relatively quiet, we don’t expect the tranquility to last.
Looking back over the last few months and the steady march higher in US Spot TL Linehaul rates through the first week of July, the rapid pullback in rates post-July 4th and through September before bending higher again in October implied that surplus market capacity remained. We had noted in recent months 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 corrected materially lower to April/May levels, the signal for market equilibrium would be decidedly weaker. If rates held or corrected only moderately lower, we would 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. We noted a few issues ago that we were 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 week April/May. Through late September however, that’s exactly what happened as the market retraced all the way back to where it started in early May. And given this level of weakness, we were back to debating the timing around both the most recent cycle and the one ahead of us. While we ultimately closed Q3 just a hair above equilibrium at +0.6% Y/Y, our second glimpse at Q4 with November shows further progress higher to +3.6% Y/Y on the back of two major hurricanes and a short-lived port strike. But whether Q4 takes us higher into a new cycle or ultimately retreats back below our x-axis still remains a question. So with all of that said, let’s break down our now shorter list 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 2023 before reversing again to fade -22.8% lower to November 2024’s $3.522/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 even further, which would continue to delay the ultimate recovery in spot rates. Though with November closing six cents lower than October which closed three cents higher than September’s $3.558/gal, the path forward is anyone’s guess though certainly feels more deflationary than not.
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 October 2024 on the board at +2.6% Y/Y we have 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 (+2.3% in October 2024), we are seeing mounting evidence that perhaps this time a < 3.0% CPI environment will stick around. That is certainly what the Fed now believes with the long-awaited change in policy direction for the Fed Funds Rate announced at the September FOMC meeting as they took rates down by 50 basis points, followed by another 25 bps in November.
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, even with interest rates headed lower, 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.
With this cycle’s deflationary inflection point still 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 early 2020 as one cycle came to an end, thus setting up the one that we’re currently in the process of leaving behind. 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 already in motion, 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 in Q4 2024 at +7.5% Y/Y as now projected, that only represents a +3.6% increase from current December levels. The current Q1 2025 forecast of +15.0% Y/Y represents a +13.0% increase from current 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 final months 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 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. 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 close Q4 2024 up to +3.6% higher to reach +7.5% Y/Y and to run increasingly inflationary as we kick off the next three-to-four-year US trucking market cycle. We continue to project contract linehaul rates to close increasingly Y/Y inflationary in Q4 2024 before breaking higher over 2025 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. Though it’s possible that Q3’s Contract Index weakness (-3.3% Y/Y vs. our -1.0% forecast) will prove to be a signal that we’ll need to push that first inflationary print forward by yet another quarter, we’ll need to see where Q4 moves from its preliminary -2-2% Y/Y next month before making that call. Regardless, we hope that 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 – 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 last quarter’s levels at the lowest we’ve seen since the great recession and financial crisis of 2007-09 – with only moderate improvement in Q4 so far. And after marching steadily higher through the July 4th holiday, what started as a decidedly Y/Y inflationary Q3 print of +6.0% became +3.0% at the end of July and went on to close at an anemic +0.6%. And while Q4 shows a more constructive +3.6% Y/Y, we can’t rule out yet another such head fake indicating further softness ahead.
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 while it looked an awful lot like “suddenly” was upon us last month, recent weakness in spot TL linehaul rates suggests that we may still be in the “gradually” phase. Again, “not so fast!”
And while we continue to 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 an increasingly 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 (further reinforced with the strong revised Q3 consumption print and positive trajectory in our twin demand indicators), just not as soon as we expected coming into 2024. As a result, over the last few months, we shifted the forward rate curves ahead by two quarters and revised the peaks by 5-10 percentage points lower. But while the next roller coaster ride may not be as stomach-churning as the one we still appear to have wrapped up in Q2, there is plenty that could happen along the way to change that – from port strikes to trade wars to geopolitics. Though whatever may come to pass, we don’t expect the overall shape of the cycle to change much. Again, it’s the same as it ever was. Onward we go down the home stretch to close out Q4 and 2024.