Odds of a US recession are now at 96% as the economy transitions to slower growth and grapples with inflation (over 8%) and rate hikes (Fed rates at ~4.71%). Even if we avoid an economy-wide recession, we believe that a freight recession (meaning negative trucking shipment volumes for two or more consecutive quarters) is highly likely.

If a freight recession is coming, it will be due to the following reasons:

 

1) 3Q22 Shipment volume still shows growth over 2021, but the rate of growth is falling quickly

• Spot market rates are falling by double digits, with contract rates expected to follow suit in 4Q22 and 1Q23 bidding negotiations. In our previous posting we showed that overall truck miles are up, so how can total miles be up 5% but rates drop like a stone? Supply. The belief is that companies ramped up supply chain capacity over last two years and only now are disruptions (generally) settling down. Load to truck ratios have plummeted. For example, rates were dropping before Hurricane Ian. For a couple weeks, rates jumped due to the disruption. Normally, rate elevation would have lingered; however, rates were back on a downward trajectory within a couple weeks.

2) Two negative GDP quarters in a row (up until 3Q22!)

• With GDP being negative for two quarters (Q1 and Q2 2022), this activity means that overall economic activity in the US decreased YoY. In addition, the goods component (i.e., things that move on a truck) has shown less strength than the overall economy generally since Q3 2021. While you may take solace in the fact that the economy showed a 2.6% increase in 3Q22, the reasons for the increase are not unambiguously good. First, government spending boosted GDP. We all know that the government is borrowing heavily to support spending, and that borrowing ultimately leads to inflation and higher interest rates. However, the biggest boost to GDP came from a smaller trade deficit – meaning that the US imported fewer goods and exported more. The strong dollar (caused in part by the Fed’s increase in interest rates) will serve as a brake on exports in the future as US goods and services (priced in strong dollars) cost relatively more than competing goods and services.

3) Many economists are calling for a recession starting in 4Q22 (despite 3Q22 earnings looking robust)

• The Conference Board predicts a 96% likelihood of a recession in the next 12 months, caused by the Fed’s interest hikes in response to excess liquidity in the US economy. S&P Global Market Intelligence calls for a mild recession beginning 4Q22 and ending 2Q or 3Q23 with a contraction of ~1% expected.

4) Record inventory levels – $732 billion as of July 2022

• Because of expected peak retail season, inventories are high and were still growing as of 3Q22. When inventories are high, businesses order fewer products, meaning less freight moves by truck. Inventories grew in August 2022, but the rate of growth (which is seasonally adjusted) is below historic trends (2.9% vs 3.4%). If demand dries up (i.e., rate hikes causing higher debt service for consumers), significant inventory needs to be worked down to get back to the mean.

5) Dow Jones Transportation Index down more than S&P 500 or DJIA

• The DJ Transportation Index is down 9.6% YTD versus 7.7% for the S&P 500 and 0.2% for the Dow Jones. The market anticipates that the rate “rot” that’s happening in the spot market will spill over to the contract rate market for truckload carriers. At the same time, LTL stocks are providing support as the market is not yet calling for LTL stocks to suffer the same pain as the Truckload sector.

6) Fed rate tightening continues to raise costs in economy, reducing overall demand, and taking money out of consumption while applying it to interest expense

• After keeping Fed Funds rate near 0% during the pandemic, the Feds have increased rates 6 times beginning in March 2022. Fed Funds rate is now between 4.50 – 4.75% vs 0.08% last year. The long-term average rate has been 4.60%. The highest rate ever was 22.36% in 1981. The impact of monetary policy tends to act with a 9 – 12 month lag, meaning the impact of recent rate increases will not be fully felt until 2023.

7) Housing market cooling down

• With the housing market softening, a negative impact has been felt across many industries. Real estate accounts for 17% of US GDP, and the National Association of Realtors estimates that each home sale at the median price generated $113,000 of economic impact in 2021. Mortgage rates are hovering around 7% with new single-family home sales dropping by nearly 11% from the prior month of September and prices reporting the 2nd straight month of decline. New single-family homes sold reached its lowest level in July since March of 2016. This decrease will impact everything from lumber and concrete to furniture and appliances.

8) Consumer spending cooling down

• Consumer spending drives 70% of US GDP. Inflation is built into consumer spending – consumers are getting less for each dollar of spending due to inflation. Even though consumer spending has remained strong, the goods received for every dollar are falling. As consumer spending / the goods purchased decrease, businesses ramp down production and hiring, leading to further reductions in consumer spending and, ultimately, less need for trucking.

9) Class 8 truck orders hit historic highs

• Fleets are adding new capacity and upgrading what they have. In 2021, chip shortages led to depressed truck deliveries. Manufacturers are making up for lost time regarding filling out their order pipelines. The majority of the time that a fleet takes a new truck, it sells the replaced truck on the secondary market. Secondary market buyers are small fleets and owner operators, who have much higher spot market exposure. This new capacity hitting the spot market while demand is moderating means oversupply of truck capacity, which has led to spot market rate declines.

While we are navigating uncertain economic times, our full-service managed transportation clients are benefiting from recent declining spot market pricing through our transparent model. Please contact customerservice@synchrogistics.com today to learn about a managed transportation partnership, the Synchro Way.