The Freight Economy Might Be Stumbling, But Is Not Falling Over
While freight volumes stagnating and freight rates seeking a floor is a cause for concern, gaining broader perspective would douse any fears of an all-out freight recession.
A hearty welcome to the 74th edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.
After a two-year freight frenzy, things are seemingly settling down in terms of volume and rates. The Cass Freight Index for shipment volumes in Feb '23 saw a modest 0.3% fall, both year-over-year and seasonally adjusted month-over-month. While this reflects plateauing demand, quite a few factors impact where the market might head next.
To start with, it's essential to understand retail sales figures over the last month. The extent of inventory drawdowns (and in which verticals) will dictate import volumes, which have stayed low through the peak season and to date. Low maritime demand saw shipping lines increase blank sailings to N.America before the Chinese New Year — something that was unthinkable last year, when demand was overwhelming available capacity.
Industrial activity is another critical factor. Robust housing and manufacturing activity over the second half of '22 helped offset the decline in retail volume — something that might come into question this year as interest rates climb and inflation stays high. While freight volumes have not fallen to the extent that could trigger a freight recession, the increase in capacity is a cause for concern as it has outpaced the growth of freight volumes.
While freight volumes have not fallen to the extent that could trigger a freight recession, the increase in capacity is a cause for concern as it has outpaced the growth of freight volumes.
Although real disposable income continues to climb in the US, people are expected to increase their discretionary spending on services this year, inevitably impacting the freight industry. "The overall economy is doing better than the freight economy," observed Anne Reinke, the president and CEO of the Transportation Intermediaries Association (TIA). "The freight market has declined greater than the overall economy. We have more capacity than demand today."
Considering it is still uncertain times, observing the less-than-truckload (LTL) market might make sense. Highly sensitive to changes in the overall economy, the LTL segment is the proverbial canary in the coal mine, providing early indicators of broader market trends. Reinke pointed out that LTL outperformed every other segment until the last quarter, after which it cascaded for the first time since Q1 '22.
"This decline is a concerning harbinger, as full truckload did not decline as sharply as LTL," she said. This aligns with what Cass estimates, where it saw a considerable increase in the proportion of full truckload over the past several months as LTL declined. This is due to excess trucking capacity and the fact that LTL rates, albeit falling, are sliding slower than full truckload rates. This leads shippers to consolidate their shipments, pushing them on full truckload instead of LTL.
Reinke contended that while the market is more subdued than the previous year highs, it is still on par with the pre-pandemic years and operates in a much better environment compared to the bear market of '15.
"The significant increase in volumes since the pandemic saw companies hire additional labor, which has kept the labor market so tight to date. We've seen that most of TIA's members have continued to keep their staff employed, even if there's less work at the moment, as they believe the market will recover in due course."
“We've seen that most of TIA's members have continued to keep their staff employed, even if there's less work at the moment, as they believe the market will recover in due course.”
Labor has indeed been hard to come by, as reflected on US Bureau of Labor Statistics data, with roughly two jobs for every person seeking one in the market. This is especially true of the OTR trucking market, which has seen a lot of hardship in recruiting and retaining drivers. With the need for last-mile fulfillment increasing due to robust e-commerce growth, OTR drivers might find it comfortable transitioning to the last mile — guaranteeing better quality of life and comparable pay.
For small trucking companies that got their authorities at the height of the freight season, current conditions might be too hard to reconcile with, as their operations run on bloated fundamentals. "And as these trucking companies fail or leave the business altogether, it creates space for fraudulent activity in the market," said Reinke.
"Too many carriers are chasing less freight, leading to double brokering. This is when you broker your load to a carrier, but then someone else, unbeknownst to you, brokers it to another carrier that may not be a legitimate operation. This can result in a total loss of chain of custody, causing fraud."
Too many carriers are chasing less freight, leading to double brokering.
TIA runs a watchdog service that tracks such cases of fraud, which Reinke mentioned has seen a significant increase in activity over the last three months. "We went from reporting around 1,000 cases to 3,000 cases during that time," she said. "While this is a small sample set of what's happening in the industry, it can certainly point to an escalation in fraud."
That said, this is a situation that would sort itself out when the market heads in the right direction. "My interaction with brokerages tells me the industry is optimistic. While not a direct metric, this stat could make for a good correlation — we had 1,500 attendees to our annual conference last year when the market was doing great. We assumed we'd receive fewer registrations this year, but we are already close to hitting 1,500, and it's still six weeks out from the conference."
In the end, the US economy is holding strong and does not have severe deterrents to growth, argued Reinke. "The market will pick back up because Americans still need their goods, and they won't stop shopping altogether. Overall, the industry understands it is not recession-proof, but there's definitely optimism about the future."
The Weekly Roundup
The biggest rail merger in two decades is set to take place. Canadian Pacific will be acquiring Kansas City Southern in a $28 billion dollar deal. The merger will create the first rail network to link Canada, the United States, and Mexico. The merger deal was approved by the Surface Transportation board.
Electric Vehicles (EVs) are about to become a lot more viable. The US Department of Transportation has announced a $2.5 billion grant for building EV charging stations. The “Charging and Fueling Infrastructure” program is targeted at underserved areas and will take place over the next five years.
The US postal service is continuing its shift from air transportation and focusing on the ground instead. Postmaster General Louis Dejoy, says the Postal Service is “paying more than he’s comfortable with” and that middle-mile trucking capacity is underutilized. USPS shifts to ground are expected to help the agency cut costs with a minimum impact on delivery times.
Trade between the United States and China has been in a slow decline since the trade war began during the Trump administration. China has begun shifting exports away from the US in an attempt to diversify its supply chain. Both countries are operating under the same fear of the other weaponizing trade, cutting off imports or exports for the sake of security.
…said who?
“It’s not happening enough. If you talk to purchasing guys they have one thing to do: to get the best deal. And they get paid for less spend.”
- Tim Scharwath, chief executive of DHL Global Forwarding, while commenting on the lack of incentive to push sustainability into freight operations
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