On August 6th, after 99 years in business, Yellow, one of America’s most prominent trucking firms, declared bankruptcy due to falling sales and significant debt, laying off its 30,000 staff.

The American logistics industry witnessed a surge in demand between 2020 and mid-2022, with revenues growing by approximately a third, driven by stimulus checks and the lockdown-induced focus on goods, leading to the industry hiring a million workers and constructing 1.8 billion square feet of new storage space.

A shift is occurring as consumers prefer experiential over material goods, resulting in stagnated goods spending; the logistics sector saw three consecutive quarter-on-quarter declines in revenues, with the volume of goods in American ports in July 2023 dropping 14% compared to the previous year.

The industry’s downturn has caused a drop in dry van shipping costs by 21% since early 2022, and approximately 20,000 truck operators (nearly 3% of the total) have halted operations since mid-2022; the sector has also seen significant layoffs, with parcel delivery and warehouse operators shedding almost 100,000 jobs combined.

While investments have decreased with a 40% reduction in warehouses under construction compared to a year ago, analysts remain hopeful for a rebound in the latter half of the year, anticipating growth for major players like UPS and FedEx, provided the American economy maintains its strength.

New home construction rates are often viewed as a leading indicator of flatbed truck demand. Now that the country is in the midst of a housing market correction, we foresee potentially far-reaching implications for those in the freight industry who support housing.

New housing dropped once again last month; it is now at the lowest point in over two years. In addition, heightened mortgage rates are discouraging builders-reducing the possibility of a recovery. Further, due to COVID, problems in the supply chain have also affected the housing industry.

The Federal Reserve’s decision to increase interest rates has lessened the demand for new mortgages. According to Forbes, these rate hikes have led to an average increase of $800 for monthly mortgage payments. Demand has been greatly reduced, with the sales of new homes dropping by almost 30% in 2022.

The chart below, from Freddie Mac (a government agency), demonstrates the recent spike in mortgage rates. The chart illustrates that in the last ten years mortgage rates have not risen to above 6%-until now.

What does the housing market recession mean for those in the freight industry? If a company brokers or handles directly loads that transport housing materials, and if there is less of a demand for these materials, less revenue will be generated from these products.

As seen in the chart above from DAT analytics, the flatbed load to truck ratio has fallen to its lowest level since the beginning of the pandemic. In fact, the ratio of 12 loads per truck in October 2022 is 1/4th of what it was in October 2021 – 48 loads per truck. This softening of demand means that spot rates are falling, as can be seen in the chart below.

The lack of demand for new housing shows no signs of stopping any time soon. On November 18th, the National Association of Realtors revealed that home sales have dropped for nine months straight. Sales have dropped 5.9% since September and over 28% from last November. The median sales price for a home increased to $379,100, a rate that is 6.6% higher than last year’s.

Without a robust housing market, the demand for industries connected to housing will be profoundly affected. Only time will tell when the housing market rebounds.

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.

We’ve heard from people that the trucking industry is currently in a freight recession or even that one began earlier this year. A freight recession typically combines falling shipment volumes with flat to negative pricing trends. What some industry participants (particularly brokers) are likely feeling right now is the pain from a collapse in spot market pricing as a greater supply of trucks chases a more slowly growing shipment market. 

While the US economy is in transition to a lower growth rate, we wouldn’t use the term “freight recession” yet for the following reasons:

1) Shipment Volume ⇑ September 2022 vs 2021

• The Cass Freight Index reports September 2022 shipments 4.8% above the same time in 2021: Cass Transportation Index Report.
• At the same time, the Federal Reserve industrial production index shows that manufactured goods are still expanding… for now.
• If we weren’t in a freight recession a year ago, it seems unlikely that we are be in one now with higher freight volumes and expanding manufacturing.

2) ATA Truck Tonnage Index ⇑ Highest Level Since 2019

• The American Trucking Association reports September 2022 for-hire truck tonnage at 5.5% above the same time in 2021. ATA September Report
• The fact that two independent measurements of truck tonnage (ATA and Cass) show expansion during 3Q22 gives us confidence that the overall number of shipments moved during 3Q22 was indeed higher than a year ago. That’s evidence that the market was still expanding in 3Q22, not contracting.

3) 3Q22 Asset Carrier Earnings Releases ⇑

• From JB Hunt (intermodal) to Knight Swift (TL) to Old Dominion (LTL), 3Q22 earnings releases from the largest asset carriers had EPS within or above guidance with companies reporting overall volume and price growth in 3Q22.
• Old Dominion did show negative volumes of 2.6% vs last year, but Old Dominion has a strong focus on yield (i.e., higher prices) with a 17.4% increase in revenue per hundredweight YoY.
• The BLS Producer Price Index for general freight trucking, long distance was also up 22% in 3Q22. Traditionally large asset carriers have more contracted lanes, and those lanes don’t usually reset until 4Q of a year.
• Publicly traded companies may be seeing slowing volume growth, but their combined volumes are still above where they were last year. Pricing (especially contract pricing) continues to show strength, both anecdotally (in Old Dominion’s yield growth) and on a macro level (BLS PPI for trucking).

4) High Inventory Levels Saw Growth in 3Q22

• Across the US economy, inventory levels are at historic highs. Even given that, net business inventories grew during 3Q22 albeit at a slower pace than earlier in the year. Manufacturing inventories levelled off in 3Q22, but retail inventories continued to grow.
• Trucks are needed to move inventory, so growing inventories across the country means trucks were moving in 3Q22 to supply the goods. While the growth is slowing, the inventory portion of the freight market continued to grow in 3Q22. 

5) Institute for Supply Management’s Manufacturing Survey Still Reading Growth

• ISM in August reported 52.8 followed by September’s reading of 50.9. While the survey still showed expansion, this is the lowest figure in over 28 months.
• And look at that downward trend…more on that in our next post.

6) While spot market rates have submarined, contract rates continue to show year over year growth…

• As we mentioned at the top, people may mistake the drop in spot market rates for a freight recession. The below table from DAT (dat.com) certainly makes a convincing case that truckload dry van linehaul spot market rates are falling fast.
• However, based on carrier earnings reports, contract rates in 3Q22 stayed stable and even increased in some cases.
• This divergence cannot be sustained for long – spot market rates have their own economic gravity, and contract rates are bound to reflect the drop.

Nobody is arguing that we were in a freight recession in September 2021, so if the things that drive the trucking sector – shipments, inventory levels and manufacturing – are above the same period in 2021 then you’d have to argue that we weren’t in a freight recession as of September 30, 2022. That’s not to say that we don’t have pain and dislocation in certain sectors, just that it hasn’t coalesced into a full-blown hurricane of bad news just yet. However….

Next Week: How can shipments increase but rates decrease? Check back next week for 8 Reasons Why a Freight Recession May Be Right Around the Corner