FTR’s current forecast for truck loads is essentially flat. That could be revised down to small negative numbers.
Source: FTR
While there is still a high degree of uncertainty about what 2023 will bring for the truck business, analysts at FTR think a major recession is unlikely.
FTR’s “State of Freight” webinar on January 12 examined the economic indicators most influencing the freight market, as well as trucker-specific numbers, and provided FTR’s outlook for the year.
Key statements on the condition of the cargo:
How is the health of the economy?
Avery Vise, VP, Trucking, said the webinar’s theme was uncertainty, “and that’s all about the economy.”
Inflation is a big factor on everyone’s lips. The good news is that the latest inflation numbers showed that inflation was cooling, decelerating for the sixth straight month in December.
The Consumer Price Index, a measure of what consumers are paying for goods and services, jumped to 9.1% in June but has since fallen as the federal government hiked interest rates to cool the overheated economy. December figures show that CPI rose 6.5% yoy in December, down from 7.1% in November. If you exclude volatile energy and food prices, core CPI rose 5.7% year over year in December, after a 6% rise in November.
Despite inflation, Vise said real consumer spending is holding up, although spending on goods is fairly flat.
Imports mean more cargo for trucks, so the drop in inbound intermodal containers is worrying.
Source: FTR
In addition, he said: “We are seeing slowed but still solid payroll growth. In this high-inflation environment, this is a positive sign” because it is believed that rapid job growth can contribute to inflation.
When asked about the likelihood of a recession, Vise explained that pinpointing a recession isn’t as simple as the commonly cited metric of two consecutive quarters of negative GDP growth.
“We kind of have to redefine what a recession is,” he said. Many of the negative GDP numbers earlier this year related to imports rather than the overall economy.
“And we’re still seeing solid job growth,” he said. “I would say we are in a slow growth environment. We are unlikely to be in a recession for the next few quarters, and even then it is unlikely to be anything more than mild.”
How economic indicators affect the demand for freight transport
Looking at some key economic indicators that affect how much cargo is expected to be transported, Vise said there are still concerns about high inventories. When retailers have a large inventory, they don’t need as many trucks to move goods for sale.
Businesses have had to build up lots of inventories to meet the surge in demand for goods caused by the pandemic. With inventories still above the pre-pandemic trendline, “this is a concern as we expect consumption to fall over the next two or three quarters.”
A reassuring sign, however, comes from the general merchandise sector, which began to rapidly adjust inventories downward in the fourth quarter.
Manufacturing growth has flattened out, although there is still some pent-up demand for manufactured goods due to supply chain bottlenecks caused by the pandemic.
The industrial production outlook for 2023 is essentially flat.
Looking at GDP, Vise said the FTR expects Q4 numbers to be “pretty strong compared to Q2 and Q3 and maybe compared to what people are expecting.” However, FTR’s forecast calls for a significant slowdown in 2023.
“FTR does not forecast negative GDP” for 2023, Vise said, although that could change in its next forecast.
FTR’s GDP freight transport sector deals with the parts of GDP related to freight transport.
Source: FTR
The FTR has its own version of GDP, which it calls the GDP freight transport sector, and adjusts GDP for factors specific to freight. It takes out services and adds imports as a positive, while counting imports as a negative in federal GDP calculations. The outlook for the freight transport economy is weaker than GDP overall, he said, with some negative quarters expected this year.
“This is not good news for cargo transportation and volume, as this metric appears to outperform actual loads to some extent,” Vise said. “That will probably lead to a negative environment.”
A factor in this is a weak import environment, as imports drive much of the consumer side of the economy.
freight rates and capacity
With that in mind, FTR’s forecast for demand (truck loads) in the coming year is “essentially flat,” Vise said, although that’s likely to be revised downward, possible to slightly negative.
So what about the capacity side of the supply-demand equation?
Although the total truckload rate is fairly similar to what it was in 2002, Vise pointed out that the cost of running a trucking company is much higher today.
Source: FTR
That question is clouded by the way record spot prices have propelled so many new entrant auto carriers in recent years.
“What’s really stood out is what’s changed in the base of the carrier population,” Vise said. “We’ve had a long and strong period of adding more airlines than we’ve lost, but that’s over. From October we started losing quite a significant number.” Preliminary figures for last month show the industry lost more airlines in December than in any other month on record except December 2005, he said.
When spot prices were high, many new small car transporters entered the industry.
Source: FTR
However, this does not necessarily correspond to what happens with the capacity. The reason for the huge increase in new motor transporters was primarily that owner-operators were given their own authority and drove at record prices. When spot prices weakened and fuel prices soared last spring, many of these companies couldn’t make it.
“Clearly many of these drivers were taken on by larger carriers and we saw a shift in capacity from the spot market to the contract market,” Vise said.
While the number of new airlines remains well above “normal,” he said, the trendline is that by the middle of this year we’ll likely be close to where we were before the pandemic.
But with truck payrolls appearing to be peaking, many of these drivers are unlikely to be included in the employee-driver population.
FTR utilization figures, an indication of capacity, are declining. There were months of near-full utilization in 2021 and 2022, but it started falling in 2022 and likely bottomed out in the third quarter, Vise said.
FTR’s truck utilization number shows that we are no longer seeing the tight capacity that has been keeping rates high.
Source: FTR
Lower utilization means more capacity and lower truck loading rates. “Spot prices are probably about to bottom,” Vise said. “We’re in an environment where total freight volume isn’t likely to change significantly over the course of the year.”
When asked why there is still talk of driver shortages given this shift in capacity, Vise said: “I think what a lot of people call driver shortages is honestly just the constant churn. There are significant [driver] sales, even during a downturn.”
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