[Excerpt from The Pickett Line December 2024 Issue]
And we’re off. After an unusually inflationary January where spot market rates shrugged off typical seasonality and ran materially hotter than December, we’re now into the first week of February where conditions have since cooled in line with the season. And given we really don’t know how much of January’s rate action was driven by the cycle market recovery in progress vs. a series of disruptive winter storms, the next couple of weeks should be telling. At this point, we have gotten every bit of the 10-15 cent per mile retreat in spot linehaual van and reefer rates we typically see when capacity returns to the market after the holidays – it just came three weeks later this year. If the market finds a local bottom here before making a slow turn to run higher in March to close the quarter, then we believe the current Q1 forecast spot linehaul rates to reach as high as +15.0% Y/Y remains within reach. But if we somehow get a repeat of last year’s St. Valentine’s Day market massacre where spot rates ran steadily lower through the end of April before making finally making a turn higher then the forecast curve likely gets pushed forward by another quarter or two thus further delaying the next cycle peak to mid-2026.
But before we get into unpacking all of the signals for what might lay ahead, given this is technically the December 2024 issue where we tie a final bow on the year we just wrapped up, we thought it only fair to look all of way back to our January 2024 forecast and compare that to what actually happened. So “let’s go to video tape.” The chart below shows that dashed line forecast, which partially based on Q4 2023 and January 2024 QTD strength, showed Spot rates breaking Y/Y inflationary in Q1 and marching to +40-50% Y/Y by Q1 2025 – or now. As we all know, that isn’t what ultimately played out.
Instead, we got the aforementioned February 2024 St. Valentine’s Day (Market) Massacre where rates drifted lower through April before mounting any kind of a recovery over the balance of the year. As a result, we shifted the forecast line ahead by a quarter in Q1 then again in Q3, which remains our current guidance. And rather than breaking Y/Y inflationary in Q1 2024, the spot market didn’t get there until Q3 – with contract rates following by the two to three quarters as usual. So that January 2024 forecast was directionally correct as the shape of the cycle remained intact, but wrong on pace and timing – as we see in the chart.
So what happened? Supply and demand, same as always. On the demand side, our ‘No recession’ forecast as Y/Y Consumption levels held up as expected – despite a raft of economic headwinds for US consumers. Consumers continued to consume and there was no recession. What didn’t materialize is the recovery in Industrial Production that tends to accompany accelerated consumption. IP remained dead flat throughout all of 2024, where it sits today at -0.2% Y/Y. The expectation is that we’ll start to see those lines finally start to converge higher this year, but with new tariff uncertainty and decreased government spending ahead of us, progress is likely to be uneven at best – despite strength in the December print. And on the supply side, the pace of capacity exit was slower than anticipated as carriers found a way to operate through a spot market rate environment that by our estimate continues to be unprofitable to the tune of ($0.10) per mile – partially propped up by a +20% drop in diesel prices. As a result, while we got the Y/Y recovery in spot and contract TL linehaul rates we expected, but at a much more gradual slope as compared to past cycles – at least so far.
So where do we go from here? And what does the most recent month of market and macro data signal about the journey ahead? Let’s dive into this December 2024 issue of The Pickett Line and find out. Recall that after breaking on through (to the other side) in the June issue with a very preliminary Q3 read of +3.0% Y/Y, we went on to close the quarter at a weaker but still inflationary +0.6% Y/Y, thus finally getting the closure we had been waiting and completing Cycle Five on the Pickett Research freight cycle timeline and setting up our now current Cycle Six. That meant we finally exited the longest observed market cycle on record (albeit a relatively short record at 18 years) at 16 quarters (Q3 2020 – Q2 2024) vs. the typical 13-14 quarter cycles that came before. From there, our final Q4 print on the US TL Linehaul Spot Index showed us indeed holding trend at +5.5% vs. a forecast of +7.5% + 5%. And now one third of the way through Q1 2025, we’ve got a preliminary January mark of +8.9% Y/Y vs. a forecast +15.0% + 5% to continue to the move higher. While the short-term trend is sequentially deflationary in line with typical seasonality, we do expect to close the quarter higher from current levels. Should that be the case and the current cycle forecast remains intact, the only real question for everyone will continue to be: “Ready to go again?”
So for the Shippers and Brokers on the buy-side of the market as we noted last month, while the specter of the inevitable inflationary leg of the next freight rate cycle over recent quarters was often characterized as ‘Winter is Coming’, the motto of House Stark in Game of Thrones, that is clearly no longer the case. Winter has arrived. It’s here. And just like House Stark, where the motto was often used as a reminder of their responsibility to prepare for the challenges ahead, the Shippers that did just that will be positioned to outperform those that didn’t in the year ahead. But for the Cycle-deniers, it’s about to get cold outside. And with winter now here, the freight rate recession in the rearview mirror, and the new US Spot TL Linehaul Rate Cycle (6) well underway, that can only mean one thing for the supply-siders still standing: ‘It’s time to make some hay’. However, with seasonality back and some of the early January froth now blown off the spot market, the harvest season will no doubt be volatile.
Recall that after the preliminary Q3 2024 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 a 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 Q4 behind us, it appears that we are indeed going to get the slower version. After revising the forecast curve slightly lower as Q3 officially closed at a weaker but still inflationary +0.6% Y/Y, we got a final Q4 print of +5.5% Y/Y vs. a revised forecast of +7.5% + 5.0% Y/Y. And after breaking trendline in Q3 with a final read of -3.3% Y/Y vs. Q2’s -2.7% and a forecast of -1.0%, our revised Q4 print on the US TL Linehaul Contract (Cass) Index has snapped back to -1.3% Y/Y vs. a forecast of +1.0%. So still lagging a bit but back to pointing up and to the right.
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? Who is preparing for winter and what does that even mean? 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 mid-year if not sooner, 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 December macro update, where most of our primary indicators again managed to show steady improvement vs. prior period – including the preliminary read on Q4 Consumption. Did the relative strength signaled in recent prints hold up or did we get another head fake? 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 2023 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 Q2 2024 hitting the board at a materially higher +2.7% Y/Y, Q3 at +3.0% Y/Y, and now a preliminary Q4 flashing a still higher +3.2% 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 initial Q4 2024 data now in, the strength signaled in last quarter’s read remains though was focused mostly in Durables. Durable Goods consumption surged higher to +5.7% Y/Y vs. +3.5% last quarter and +2.6% in Q2 with Nondurable Goods also up slightly to +2.3% Y/Y vs. +2.2% last quarter and +1.9% in Q2 and Services down slightly to +3.0% Y/Y vs. +3.1% last quarter and +2.9% in Q2.
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 subsequent prints reversing some of that relative weakness in Durable Goods consumption, the question remains whether Q1 2024 represented any version of a change in trend or will data points stay on a more constructive trajectory in the months and quarters ahead as the economy further stabilizes, a new administration takes root in Washington, 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 final Q4 print came in at a slightly stronger but still weak -0.2% 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 Q4 Consumption pointing still higher and Industrial Production still mostly flat to the previous quarter, we score this one as a draw in the ‘Which is telling the truth?’ contest. So the tension only builds as we are forced to remain perched on the edge of our seats for yet another month. Stay tuned for next month’s issue to see where we get the first peek at Q1 2025 Industrial Production and the first revision of Q4 2024 Consumption takes us as the saga continues. Believe us, we’re just as anxious to get to the end of this saga as you are.
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 closing last month at a slightly higher 1.38, the signal got a little bit weaker. We noted then that we’d 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. Recall that we got two somewhat constructive signals in the October print. Not only did preliminary Q4 hit the board at a slightly lower 1.37, the September revision took Q3 back down to 1.37 as well – making this the 6th consecutive quarter at that level. Geez, talk about stagnation. And with November now on the board and Q4 holding flat at 1.37, here we stand. We only hope that when IP does finally break, it breaks to the upside as opposed to the other direction – and the opposite for Inventory-to-Sales.
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 while Q4 2024 closed sequentially lower at -3.2% Y/Y, we remain well over Q4 2023’s -8.6% Y/Y inflection point – so the recovery continues.
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 final revision of Q4 hitting the board all the way up at -1.4% 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 the further we get 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 much less conspicuously out of phase with the US Spot TL Linehaul Index curve as compared to past cycles. However, with the final Q4 print now on the board at +3.4% Y/Y and a preliminary Q1 2025 mark of +4.9% Y/Y we’re back above the x-axis and arguably back on track. Though we’ll have to wait to see how Q1 develops before getting too excited one way or another.
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. Though with recent prints taking us back to Y/Y inflationary land, it’s possible that this historical correlation could finally be on track to warranting more consideration in the year ahead.
While Net Class 8 Tractor Orders have bounced around over the last two years, the roller coaster in US retail diesel prices over the same period has been arguably even more impactful to US TL market dynamics. After running -19.3% lower over the first half of 2023 ($4.714 to $3.802), we marched +20.0% higher in Q3 ($3.802 to $4.563), then reversed course yet again to fade -13.0% lower in Q4 ($4.563 to $3.972). From there, we faded another -6.3% 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 Q4 and January now behind us, the market has faded another 18 cents lower and now sits at $3.634/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 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 January 2025 coming in at -20.4% from the September 2023 high mark despite brief turns higher in July, October, and this most recent month. So with momentum swinging from month to month while 2025 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, disruptions in the Red Sea, and the demand outlooks for both the US and China given new concerns around tariffs and trade policy.
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 towards its next Y/Y inflationary peak.
So here we sit with a final Q4 2024 mark of +5.5% and decisively inflationary for the first time since Q1 2022 (and even more so with a revised Q1 2025 mark of +8.9% Y/Y) with Consumption flashing positive signals while Industrial Production and Relative Inventory levels remain flat to slightly negative. So what’s going to move the needle on Spot TL rates one way or the other in the month ahead? Recall that last month we pointed to our old standbys of diesel prices and TL-intensive goods consumption in addition to the return of the threat of another east and gulf coast port strike should the International Longshoreman’s Association (ILA) and the United States Maritime Alliance (USMX) not come to agreement on amended contract terms by January 15th when the current tentative contract signed back in October expires. But with the risk of a major port strike now off the table after a successful negotiation between the ILA and the USMX, we’re back to our mainstays. While we do expect any major changes in US tariff policy, which have already started to rear their head, to be potentially market-moving if anything sticks we don’t expect that to be a factor in the month ahead.
Looking back over the last few quarters 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 and then move once again higher in October implied that surplus market capacity remained. We had noted in past months that we would get our first signal in the weeks following the July 4th holiday as the market digested that short-term dislocation and reset at whatever the new short-term rate basis proved 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 2024 remained 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 at that time ahead of us. While we ultimately closed Q3 just a hair above equilibrium at +0.6% Y/Y, our final print for Q4 took us decidedly inflationary to +5.5% Y/Y. So with Q4 and now a revised Q1 2025 mark of +8.9% Y/Y taking us higher into a new cycle, we can start to build more conviction that’s exactly where we are headed. And that the US TL Spot Linehaul Rate Cycle indeed stays undefeated. With all of that said, let’s break down our slightly 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, January 2025 notwithstanding, 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 -20.4% lower to January 2025’s $3.634/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 throttle the ultimate recovery in spot rates. Though with the up and down action over the last six months combined with an array of geopolitical catalysts currently in play, 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 December 2024 on the board at +2.9% 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 (+2.6% in December 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 both November and December.
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 and other market forces 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 Q1 2025 at +15.0% Y/Y as projected, that only represents a +5.3% 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 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. Remember, winter is here! And in this case, that means it’s time to make some hay – whether the sun is shining or not. 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, the ‘one step back’ spot market slide over the last two weeks 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 now – especially if you were one of the cycle-deniers who failed last year to prepare as all signs pointed to an approaching winter. 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 Q1 2025 up to +5.3% higher to reach +15.0% 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 through 2025 and into 2026 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. 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 a year ago 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%. But with Q4 showing a more decisive +5.5% Y/Y and Q1 now signaling the momentum to run higher ahead, we can’t rule out yet another such head fake indicating further softness ahead. We think the probability for that to unfold is pretty low, but certainly not zero. And the odds certainly increased in recent weeks as seasonality finally returned and spot rates faded 10-15 cents lower from early January highs.
But whether this unexpected supply-side 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.
So 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 (which appears to be already happening), that alone won’t likely surge rates to the levels seen in last cycle’s Q2 2021 +56% Y/Y peak.
To get there, we will need a material recovery in TL capacity demand and therefore US industrial activity – which we do believe is coming (further reinforced by the strong preliminary Q4 consumption print and positive trajectory in our twin demand indicators), just not as quickly as we expected coming into 2025. But while the next roller coaster ride may not be as stomach-churning as the last one, there is plenty that could happen along the way to change that – from tariffs and trade wars to geopolitics. Though whatever may come to pass, we don’t expect the overall shape of the cycle to change much. And now that the inevitable buy-side freight market winter is upon us, even if conditions have eased in recent weeks with seasonality, market conditions should finally support at least some version of a supply-side rate recovery in the quarters ahead – at least for the supply-siders still standing. Onward we go.