Comment on this story
comment
If the trucking market were the ocean, red flags would be fluttering along the beach to warn of all the cross currents and currents that make it treacherous to predict the near-term future of trucking and its impact on the economy at large.
The freight industry is generally slowing, but it’s not falling off a cliff so much as it’s coming down from the heights of a hot freight market that peaked in the fourth quarter of last year. Having a crystal ball is most important now, as how freight demand holds up over the next few months will determine the leverage that will require shippers to push for lower rates when negotiating 2023 freight contracts.
Consumer spending is cooling and there are vulnerabilities such as housing construction that are weighing on freight volumes. United Parcel Service Inc.’s average daily package volume in the U.S. declined 1.5% year over year in the third quarter and is expected to decline even more in the fourth quarter. Word is there will be no peak holiday season for trucking companies this year as warehouses are already stocked with inventory and those goods aren’t being cleared off shelves quickly. According to Cowen & Co., spot market rates are down 40% year-on-year.
This is where countercurrents come into play. Freight in the contract market, where rates are set by shipper contracts that typically last a year, is still increasing. Cargo tonnage in that market rose 5.5% year over year in September, hitting the highest level since August 2019, according to the American Trucking Associations. Contract rates were up 15% year over year, Cowen said.
Cargo strength is bolstered by infrastructure projects, increased domestic oil drilling, big-backlogged industries like aerospace and recovering auto shipments. The cleanup and recovery efforts from Hurricane Ian in Florida created a demand for trucks, and the drought that has caused barges to get stuck on the Mississippi River is also driving mass demand for trucks.
The signals from the large trucking companies, which have reported profits so far, are also mixed. JB Hunt Transport Services Inc. and Landstar System Inc. beat expectations and, more importantly, analysts revised their fourth-quarter earnings estimate for JB Hunt, while Landstar was little changed. Knight-Swift Transportation Holdings Inc. reported earnings that were below analysts’ expectations and lowered its full-year guidance. Accordingly, analysts revised their earnings estimates for the fourth quarter down by 15 cents to $1.16.
Still, large truckers are better positioned to weather a market downturn than their smaller peers, which operate 10 or fewer trucks, which accounts for about 97% of companies in the $875 billion truck market. The big operators have more buffers to deal with rising costs for drivers, trucks, maintenance, financing and insurance, which eat into profits when spot prices fall.
As usual, the market shakeout will hit the smaller companies first because they are more dependent on this volatile cash market. The impact could be massive as many of the new carriers who entered the hot freight market are now feeling the pressure. Since the beginning of 2021, an unprecedented 265,000 new companies have been licensed to operate in the United States. Many paid exorbitant prices for used big rigs, which nearly doubled in price to about $100,000 earlier this year and in August were still up 64% over the same month in 2019.
“We’ve never seen capacity come out as early as this cycle,” Knight-Swift chief executive officer David Jackson said on an Oct. 19 conference call with analysts.
The semiconductor shortages and supply chain problems that have kept truck manufacturers from producing as many new big rigs as the market wanted to buy have helped keep new capacity under control. The ease of adding trucks during periods of heavy freight demand is one of the reasons the trucking industry has regular boom-and-bust cycles.
The same lack of new truck capacity that has pushed up freight prices since last year will help cushion the blow now that demand is easing. JB Hunt still can’t buy all the new trucks they want and is forced to keep older trucks on the road, driving up maintenance costs. The company had planned to spend $1.5 billion this year, mostly on equipment, and will fall short by $500 million. JB Hunt CEO John Roberts said on a conference call last week.
The timing of the cargo weakness couldn’t be worse for shippers as they begin negotiations with shippers to extend contracts for next year. Truckers have had the upper hand in these contract talks for the past two years, and shippers will be keen to reverse that trend. Last year’s fourth-quarter freight demand surge continued earlier this year, and spot rates eventually peaked and began falling in February. Given the uncertainty about demand, Landstar only provided guidance for the fourth quarter and didn’t attempt to forecast 2023 performance.
“It’s going to be an extremely difficult first half of next year based on just the comparisons and the direction of the economy,” Landstar CEO Jim Gattoni said on a conference call last week.
Haulage companies will argue that contract rates have not risen as much as those in the spot market and should therefore not fall as much. Even with lower freight demand, price increases for everything from driver wages to tires will continue into next year.
“You’re starting to see the pressure on contract rates, but it was a very different story than what happened with spot rates,” Jackson said. “I don’t expect that now, as we go through this process, there is enough wiggle room to severely limit contracted rates.”
What this means for the broader economy will depend on how these mixed signals play out in the truck market over the next few months.
More from the Bloomberg Opinion:
• $200 diesel puts Biden in an ugly corner: Javier Blas
• Mighty Mississippi Loses to Climate Change: Adam Minter
• Brad Jacobs is on the hunt. Investors should watch out: Thomas Black
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he was responsible for US industrial and transportation companies and Mexico’s industry, economy and government.
For more stories like this, visit bloomberg.com/opinion
Comments are closed.