Thank you for reading the August edition of the Monthly Truckload Market Update. This is a monthly subscription, published within the first 10 business days of each month, so be sure to subscribe to receive future editions. This newsletter reports on macroeconomic data that directly impacts freight markets, and reviews full truckload rates each month.
Thankfully I am writing this report after several important data releases, with enough time to catch the most recent economic commentary as well. From an economics standpoint, the dominating topics this month will be manufacturing weakness, weakening labor markets, and interest rate cuts. And, the R word (recession) has made it's return to some commentary as Goldman Sachs raised it's probability of a recession to 25% from 15%. I'd like to head that off by saying that very few economists see a potential for a 2024 recession, however depending on how interest rate cuts and inflation are handled moving forward we may need to leave the door open to revisit recession conversations in 2025, however I suspect we will have a clearer picture of that come Q1 2025.
For now, it's business as usual. The truckload freight market is following normal seasonal trends, and is seeing very little movement in either direction. I wrote several months ago that we would have to wait to see how the market reacted after the Fourth Of July holiday, weather or not tender rejections would remain elevated or start to normalize again to what has been our floor. And we now have our answer, we normalized. There is enough supply in the market and not a strong enough sustained demand to sustain the seasonal bumps that June and early July often provide. That said, I expect August to be fairly predictable, to follow normal seasonal trends, and to be a month of waiting for September's Fed meeting.
The July ISM PMI release was a pretty big miss. I have been covering manufacturing weakness the last few months, but July’s reading seems to really highlight the slow down in US manufacturing that is taking place. New orders and backlogs both decreased, while over ⅔ of surveyed participants believe that inventories are “just right” at this time. Meaning barring increased demand, we may be settling into a weaker manufacturing period. The release said:
“ISM®’s New Orders Index contracted in July for the fourth consecutive month, registering 47.4 percent, a decrease of 1.9 percentage points compared to June’s figure of 49.3 percent. The New Orders Index hasn’t indicated consistent growth since a 24-month streak of expansion ended in May 2022.”
Machinery Manufacturing is a huge part of our domestic manufacturing activity, and it has specifically been experiencing weakened demand and activity. Jason Miller, writing for Supply Chain Management Review, said:
“What is worth emphasizing is that data for the most recent months show weakening sales, coupled with rising inventories relative to sales. Given how bloated inventories are relative to sales, it will take at least two quarters (and realistically a year or more) for wholesalers of machinery to bring inventories in line with sales unless there is a sudden spike in machinery demand (which seems unlikely until the Federal Reserve begins reducing interest rates).”
Across many freight producing manufacturing sectors we can see decreasing new orders and increasing inventories relative to sales, two signs that we are not likely to experience demand strength in the next several months.
A recent article by the Wall Street Journal seems to corroborate my thinking, opening with:
“More U.S. manufacturers are rethinking their plans as they brace for an extended slump in demand Higher interest rates, rising operating costs, a strengthening U.S. dollar and lower selling prices for commodities are dampening activity at factories across the country. Executives for the makers of long-lasting items such as cars, crop-harvesting combines and washing machines are projecting challenging business conditions for the remainder of the year.”
Higher interest rates were always intended to control inflation, cool the labor market, and naturally the economy with it. While we have so far avoided a recession, it was to be expected that the higher for longer Fed policy would start to slow down the overall economy, the question has always been can that be done without going too far? The Fed has to find the perfect timing for reversing their rate increases, so they can keep inflation tamed while at the same time not overly damaging the US labor market and economy. Premature interest rate cuts will result in another run up of inflation, delayed cuts could result in difficult to reverse labor market and manufacturing weaknesses.
The challenge with interest rate increases and cuts is that they can act with lags. So even if the Fed cuts interest rates in September, we may not see the full impacts of that decision for several more months. It may already be too little too late, or it may be too much too soon. The Fed is navigating previously uncharted territory when comparing many of our current economic conditions to years past, I for one do not envy their current job. Here is what others are saying about the recent jobs data and Fed decision to hold rates.
Positive Inflation data for the third month in a row seems to have brought with it the opportunity for rate cuts starting in September. Sarah Foster wrote for Bankrate:
“Fed Chair Jerome Powell also revealed that officials debated cutting interest rates at their July 30-31 gathering but “a strong majority” favored continuing to keep interest rates steady. The decision to leave rates alone was unanimous. Rate cuts could be “on the table as soon as the next meeting in September,” Powell said. “We’re getting closer to the point at which it’ll be appropriate to reduce our policy rate, but we’re not quite at that point.””
There was a thought that the FED might make emergency rate cuts after their recent decision to hold off on cuts due to the jump in unemployment rates from June to July. But it’s going to take more than that to scare the Fed away from holding their strong line. A September rate cut seems likely at this point, but as the labor market continues to cool and perhaps even feel some strain, we should expect this to have a positive effect on inflationary data points that the Fed watches closely. However, the question with interest rate cuts now is are we behind the curve? SImilar to how the Fed reacted too slowly to rising inflation by waiting to raise rates, are we now waiting too long to cut those rates to avoid unnecessary labor market pains? A recent article published by Reuters said:
“The U.S. unemployment rate jumped to near a three-year high of 4.3% in July amid a significant slowdown in hiring, heightening fears the labor market was deteriorating and potentially making the economy vulnerable to a recession. The increase in the unemployment rate from 4.1% in June marked the fourth straight monthly increase, the Labor Department reported on Friday. Its rise from a five-decade low of 3.4% in April 2023 to now the highest level since September 2021 all but guarantees a September interest rate cut from the Federal Reserve, with economists calling for a 50 basis point reduction in borrowing costs. They argue that the U.S. central bank is most likely behind the curve in easing monetary policy.”
Inflation has been the primary factor being considered in the Fed’s decision to hold their interest rates. However, now that we have several months of attractive inflation data, the primary decision factor may be changing to the labor market. After all, the Fed is also tasked with “maximum employment”. Angelo Kourkafas wrote for Edward Jones that:
“Since June, inflation has fallen below the Fed's 2.8% year-end projection, and the unemployment rate has now jumped above its 4.0% forecast1.The key takeaway, in our view, is that the labor data may play as big a role in shaping what comes next from the Fed as the inflation data, or bigger.”
He went on to caution against putting too much emphasis on one month of data (July’s). He listed several reasons that employment conditions are still healthy:
Another more optimistic voice covering the July jobs data was Matthew Klein writing for his economic outlet, The Overshoot. According to Matthew, we don’t need to be as concerned by the jobs data as some economists and most general observers seem to be. As always with Matthew’s research, he digs deeper into data contributing to the jobs data and presents some compelling arguments for why the labor market is still stronger than it appears in his latest article. For example, he provides a breakdown of the most recent July unemployment data and highlights that a majority of the July increase in unemployment came from temporary layoffs and new job market entrants, not permanent job losers. He wrote
“New entrants to the labor force and re-entrants to the labor force explained almost the entire increase in the headline unemployment rate until this month, while the pop in July is largely attributable to a bump in temporary layoffs.”
It’s then possible that when you dig deeper we have not seen strong evidence that wage dynamics have been negatively impacted enough to influence the Fed’s decision making or their inflationary target goals. The concern is if they hold tightly to a 2% target, and hold off longer on cuts, we may start to see changes in jobs data that is not so temporary or easy to reverse. Matthew summarizes his thoughts by posing the question that perhaps the current inflationary trend is actually the new normal, meaning we are currently at what the Fed could consider their goal. Now we have to decide, can we stay here without rate cuts, and for how long?
“That is not particularly appealing for anyone, which may be why markets are now pricing in the prospect of aggressive interest rate declines. After all, if inflation is stable and growth is in a good place, does it really matter if the inflationary trend is still 1-1.5pp faster than pre-pandemic—which was arguably too slow in any case? The question is whether rate cuts are actually necessary to sustain current conditions. Overreacting to the weak points in the data could lead to a different sort of policy mistake.”
The jobs data also brought with it plenty of whispers of the R word again (recession). There is now ample debate available on whether or not we will run into a risk of a recession in the near future. Reuters mentioned in the same article:
“"This doesn't look like the start of a recession, where demand drops away from supply," said Tara Sinclair, director of the GW Center for Economic Research. "But it's still weakness. The Fed has medicine to treat this weakness."”
And Gad Levanon, the Chief Economist at the Burning Glass Institute wrote on LinkedIn:
“A recession in 2024 seems unlikely I believe it is highly unlikely that the U.S. economy will enter a recession in 2024. Recessions don't occur out of nowhere; they are typically triggered by a significant shock. Currently, I don't see any such shock on the horizon. Moreover, there are no indications of substantial weaknesses in key areas such as consumer spending, business investment, international trade or government spending.”
A cooling macroeconomy does not bode well for truckload demand. As such, volumes and rates have been steady, predictable, and in line with pre-pandemic seasonality and trends.
The Cass Freight Index - Shipments is expecting the July trucking volume data to show a 4% YOY decline and a 5% YOY decline for the full year.
We saw rates follow normal seasonal trends in June and July, and after the 4th of July Holiday they began to normalize again. It’s safe to say we will find the floor again for some time. While supply is still exiting the market, we are not yet at equilibrium. With the market still well supplied we are less susceptible to disruption and it would likely take some major disruption to move rates higher than normal end of year seasonality.
Jason’s dry van spot market cycle indicator showed little signs of a freight market that is ready to turn this year. Jason wrote:
I’ve calculated the "dry van spot market cycle “indicator as broker buy contract rates less dry van TL spot rates divided by the average of the two series. One chart below. Thoughts: Historically, when this ratio falls below 10%, we tend to see a bull market pricing cycle begin, which is picked up well by the Bureau of Labor Statistics primary service producer price index for general freight trucking, long-distance, truckload. Conversely, anytime we see the series move above 15%, we enter a bear market pricing cycle. Key dates for bull cycles labeled in black, bear cycles in red. These dates mirror swings in observed contract & spot rates picked up by BLS. The bad news for carriers is that July’s reading of 15.
DAT has provided a more detailed breakdown of dry van and reefer spot and contract rates through July. The pictures are pretty similar. Spot rates in both modes are starting to reach a 0% YOY difference, and contract rates are a little ways behind but also trending to neutral.
What is still clearly notable is the size of the gap between spot and contract rates. With this gap, cooling economic conditions, and still elevated levels of supply (carriers) in the market, I would expect to see a holding pattern with normal seasonality for the remainder of 2024.
Episode 39 with Kary Joblonski, CEO - TruckerTools
A fun and energetic conversation with Kary regarding the insights she is gleaning from their thousands of brokerage customers. Also, how are brokerages and carriers making technology investment decisions right now.
Episode 40 with Paul Poziumschi, Chief Economist - Transfix
A very timely conversation around the state of the macroeconomy and its impact on the freight markets. He spoke to the risks of a recession, and painted a couple of possible scenarios, one of which includes a recession.
Meet Me For Coffee with Samantha Jones seeks to correlate macro-economics to freight markets (just like this Newsletter does) and offers a chance to hear various industry and non-industry experts explain their thoughts on economics and freight markets.
We are also grateful to be sponsored by TAI, an industry leader in TMS technology, but also in bringing educational insights and materials forward for the market. Their recent E-book was created collaboratively with brokers for brokers. It’s this spirit of constant education, curiosity, and information sharing with the goal of helping others improve that make TAI and Meet Me For Coffee a great match.
You can download their free E-book by clicking the image below!
This Newsletter will continue to provide timely market updates each month for the remainder of the year, evaluating economic data points and freight market news and rates. Also, be sure to follow along the Meet Me For Coffee podcast for additional market insights, trends and advice from industry experts. In January we will host another expert panel to discuss the end of 2024 and the predictions for the 2025 freight market!
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