Trucking Swerves Erratically Across the US Economy

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If the freight market was the ocean, red flags would be flying on the beaches to warn of all headwinds and rapids, making it dangerous to predict the near-term future of freight and its impact on the wider economy.

The freight industry in general is slowing, but not so much falling off a cliff as it is returning to earth from a surge in the hot freight market that peaked in the fourth quarter of last year. Having a crystal ball is paramount now, as how freight demand holds up in the coming months will determine the levers shippers will have to push to lower freight rates when negotiating freight contracts for 2023.

Consumer spending is cooling, while some weakness, such as housing, is weighing on freight volumes. UPS’s average daily package volume in the U.S. fell 1.5% year over year in the third quarter, and the decline is likely to be even greater in the fourth quarter. Sources say there won’t be a holiday season for trucking companies this year because warehouses are crammed with inventory and the shipments aren’t coming off shelves quickly. Rates in the spot market are plummeting, down 40% from a year earlier, according to Cowen & Co.

This is where crossflow comes into play. Rates are still rising in the contract market, which is locked in through shipper agreements that typically last a year. Freight tonnage in the market rose 5.5% year-over-year in September to the highest level since August 2019, according to the American Trucking Association. Cowan said contract rates were up 15 percent from a year earlier.

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Infrastructure projects, increased domestic oil drilling, heavily backlogged industries such as aerospace and a pickup in auto shipments are all boosting cargo strength. Cleanup and rebuilding from Hurricane Ian in Florida created trucking demand, while a drought that left barges stranded on the Mississippi River also drove some bulk demand for trucks.

Signals from the big trucking companies that have reported earnings so far have also been mixed. JB Hunt Transport Services Inc. and Landstar System Inc. beat estimates, and more importantly, analysts raised their fourth-quarter earnings estimates for JB Hunt, while Landstar was little changed. Knight-Swift Transportation Holdings Inc. reported earnings that missed analysts’ expectations and cut its full-year guidance. As a result, analysts cut their fourth-quarter EPS estimates by 15 cents to $1.16.

Still, larger operators are better able to weather a market downturn than their smaller counterparts, which operate 10 or fewer trucks, and they make up about 97% of companies in the $875 billion trucking market. Large operators have more buffers against rising driver, truck, maintenance, financing and insurance costs that weigh on profits as spot prices fall.

As usual, the restructuring will hit smaller companies first, as they rely more on the volatile spot market. The consequences could be huge, as many of the new carriers that jumped into the hot freight market are now feeling the pinch. Since the beginning of 2021, an unprecedented 265,000 new companies have acquired rights to operate in the United States. Many are paying exorbitant prices for used large rigs, which nearly doubled earlier this year to about $100,000, still up 64% in August from the same month in 2019.

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“We’ve never seen capacity come out of the cycle as we see it coming out of the cycle,” Knight-Swift CEO David Jackson said on an Oct. 19 conference call with analysts.

Semiconductor shortages and supply chain hurdles keep truck makers from producing the new big rigs the market wants to buy, helping to limit new capacity. The convenience of adding trucks when freight demand is high is one reason the trucking industry often experiences boom-bust cycles.

The same lack of new truck capacity that has pushed up freight prices since last year will help cushion the blow from weaker demand. JB Hunt still couldn’t buy all the new trucks it wanted and was forced to keep old trucks on the road, driving up maintenance costs. The company had planned to spend $1.5 billion this year, mostly on equipment, but it will be $500 million less. JB Hunt CEO John Roberts said on a conference call last week.

The timing of the cargo weakness couldn’t be worse for the carriers, as they begin negotiations with shippers to renew their contracts for next year. For two years, freight companies have had the upper hand in these contract negotiations, and shippers will be keen to reverse the trend. The surge in freight demand in the fourth quarter of last year spilled over into the beginning of the year, and the spot rate finally peaked in February and started to fall. Landstar only provided guidance for the fourth quarter, not trying to predict how 2023 will unfold, given the uncertainty in demand.

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“Based on comparisons and the direction of the economy alone, the first half of next year is going to be extremely tough,” Landstar Chief Executive Jim Gartoni said on a conference call last week.

Freight companies will argue that contract rates have not risen as much as the spot market and therefore should not have fallen as much. Price hikes for everything from driver wages to tires will continue into next year, even as demand for freight falls.

“You’re starting to see pressure on contract rates, but that’s very different from what’s happening with spot rates,” Jackson said. “As we go through this process, I don’t think there is room for a significant reduction in contract rates right now.”

What this means for the wider economy will depend on how these mixed signals play out in freight markets in the coming months.

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This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he was in charge of U.S. industrial and transportation companies and Mexico’s industry, economy, and government.

More stories like this can be found at bloomberg.com/opinion

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