Happy Independence Day! 🎆
As you take some time to rest and enjoy the fireworks, we wanted to provide some reading material for your long weekend! This month’s market update is a summary of the recent Mid Year Freight Market Update panel that the Meet Me For Coffee podcast hosted.
In this Newsletter we will summarize the speaker's thoughts on:
The guest speakers and Newsletter contributors are:
Jason Miller Eli Broad Professor of Supply Chain Management at Michigan State University.
David Spencer, the Vice President of Market Intelligence at Arrive Logistics.
Ken Adamo, Chief of Analytics at DAT.
Cody Thacker. Senior Director of Fleet Operations for Refrigerated Food Express.
If you are not a reader, you can certainly listen to the full live event on the podcast platforms as well.
Listen on: Spotify, Apple Podcasts, LinkedIn
In January, Jason predicted that he “thinks it’s a demand story, and unfortunately I’m not projecting to see any noticeable changes in the first six months of 2024 when it comes to freight demand”
This newsletter has been echoing that for several months, failing to find evidence of a likely demand resurgence in the economic data points. Jason confirmed he was correct about the first half of 2024 and explained why he believes we are still in the same situation we were in January.
JASON: “I still think it is a demand story right now. We just got the industrial production index data for may and some sectors are looking like they're doing a little bit better, like plastic products, motor vehicles is still really strong, but in general it still seems that freight demand is certainly not where it was in 2022. Capacity is still not leaving at the type of exit that we would need to really flip the market, it seems like we have maybe a little bit more of a return to seasonality. If you look at Freightwaves where their outbound tender rejection rates are, it's perfectly tracking 2019 That was a very soft year, if you look at spot rates, looking at DATs data That just was updated today We've had, I believe a six cent per mile increase including fuel surcharge on the dry van side since The April low, but we're still down three cents YOY right now. So we're not seeing anything meaningfully change, and June is a peak freight month and so July is substantially less the auto plants will produce 15 % fewer motor vehicles, peak beverage season is this month right now so it's, it doesn't seem the demand has returned in the manner that I think a lot of folks expected."
In January Ken said that broker margins were low and compressed, and that brokers had been stressed on those margins. He also mentioned that brokers had gained a much larger portion of contract freight volumes in the last few years and that they would be working harder to retain those under pressure.
KEN: "I think it's a little too early to tell. I mean, we just revised our long -term projection. We think that share growth probably is going to steady out at one to two percentage points over the next several years. Keep in mind, brokers gained in some sectors up to 5-6% points of share in the routing guides during COVID. So that's certainly normalized back to reality. From a margin pressure standpoint, this is the absolute worst time in the cycle for brokerage gross margins, especially as rates started to climb a bit seasonally. We're seeing that short -term pinch. You had your late winter, early spring bid season. Those rates went into the routing guide, either flat or at a slight discount. You're covering them a little bit higher in the spot market right now, which are pinching margins. I think you're going to start to see carrier exits slow, but there is still some damage to be done in terms of brokerage exits.”
How has the 2024 truckload market been so far for the first six months of the year? What are some key takeaways? What are some things we're noticing?
DAVID: “Markets have been relatively stable out there. I think Jason alluded to tender rejection rates trending a little bit closer to 2019 levels. So on a year -over -year basis, higher and a little bit more of a spike in line with normal seasonal demand surges. We haven't exactly seen that equate to meaningful rate movements, et cetera, right? So to me, that's probably a sign of where contract rates have come down to overall, and that competitiveness of contract rates and spot rates today being a little bit tighter than we were a year ago, right? So you're causing a little bit more shipper challenges when it comes to contract compliance around some of these seasonal demand surges, but that's really it, right? Not seeing a whole lot of other signs of life in the market today.”
CODY: "These guys have been spot on with what we're experiencing on the carrier side. It's been very challenging, as expected, the market's been flat for a long time. What I will say operationally, we've seen a high premium on incumbency from direct shippers. So just being an asset, it hasn't necessarily opened up the doors that maybe it historically has. So the sales cycle has been extremely drawn out. We've seen kind of a shift in customer pricing where historically speaking, we see a lot of maybe six month to 12 month cycles. We're seeing shorter, maybe three to six month cycles where shippers are more able to capture real time pricing. And then we're also seeing some challenges on our routing guide customers where if we were positioned a little bit further down the waterfall we're not seeing volumes that maybe we anticipated seeing. So it's really, I think from a planning perspective on our side, it's been extremely challenging and has forced us to really look at what we're doing and make some, you know, plan B decisions."
KEN: “This is the time in the cycle where a lot of bad decisions are made. On all sides of the coin, you're going to have brokers and carriers pricing out of desperation to win freight they won't be able to cover in three to four months and then you're going to have shippers with really really really bad short-term memories and long-term memories even that are going to chase the dollar down and then get burned when all that freight gets turned back. I think one wrinkle in this cycle that I would watch out for is that brokerages could afford to float these losses while the market corrected before when money was free, but given the stretching of payment terms and the cost of money right now, I don't think they're going to be as willing to float kind of idiosyncratic pricing very long. So you might see the turnbacks happen faster because they're not willing to float that loss. But again, bad decision making abounds in a market trough.”
DAVID: “From our perspective, the brokerage side, it depends on the shipper, largely to what you're saying, Ken, right? I think there's still shippers out there that value high levels of service, and they're going to pay the appropriate price for that. I think to kind of keep things short here, for those of you in the shipper community that are wondering, what is the sustainable level of pricing? Look at your rate APIs as a good indicator of where that pricing is today and where that floor is and where that's been over the second quarter here because we've seen rates here along the floor for a while, right? So I wouldn't go too much lower than what you guys are seeing day to day or week to week, especially slower times here in your APIs and use that as a good benchmark for really what is sustainable pricing. But at this point in the cycle, you're an incumbent for a reason. That's because you provided an elite level of service. So generally speaking, we're still seeing preferential treatment for customers we provided high levels of service to, but certainly there are those shippers out there that, like Ken said, have very short memories.”
CODY: “I think it's interesting too, the floor on brokerage pricing versus the floor on asset pricing are slightly different, and I think that like we have reached the floor on asset pricing with the cost to run equipment. If we if we know there's a segment of our business that we're covering via brokerages, and say an opportunity to cover those with the direct shipper opens, albeit it may be a slightly undesirable rate or a rate equal to what we maybe charge a brokerage, but to get it direct, we may make that decision, specifically if the characteristics around the freight are advantageous. I think that you're gonna see carriers be a little more disciplined. I would hope with regards to the rates we're putting on the page, 'cause most of us have fixed costs and we know what those are.”
JASON: “This is what a market does. I think you're always going to get players that are going to be short-sighted, and I think the one challenge that I always have with this idea that rates are going to be driven so unsustainable, it's going to force exit on a widespread, is that for the most part, somebody's headhaul is somebody else's backhaul and you can price accordingly with that. What will turn the market is a change in demand, not necessarily too much supply exiting. There's not one recorded instance in modern freight history of that happening.”
What will be the outcome of the second half of 2024, what changes or patterns do you expect to see happening in the freight market or the macro economy for the remainder of the year?
KEN: “Where we sit today, literally today, it's the first time we've been flat to maybe like a half a penny above YOY from a dry van spot rate perspective in 26 months. So now there's gonna be some noise there. We're gonna see some thrash in that number over the next several weeks as we get to the fourth of July. So my guess is it's going to be at a higher level, something that closely mirrors a year like 2016. Where we saw a return to seasonality a bit and then volume building into the fall leading up to Christmas, but the thing that I think is continuing to perplex a lot of folks is what's going to happen with interest rates. We went from a year ago thinking there's going to be four cuts this year, to then three, and then two, and then are we even going to, depending on who you ask and what Wall Street analysts you talk to, some of them think the market's pricing in one increase and decrease and some think it's pricing in two. That, I think, continues to be the wild card as inflation continues to be a bit sticky.”
JASON: “I think we missed our window because of home building season. Housing starts peak in May and June, and so if we would have had a rate cut in March, that would have changed the picture substantially because you would have seen a substantial surge in housing activity because every time mortgage rates step down, there's a surge of home buying. And houses that go on the market sell really fast right now. So to me, you've got a very consequential presidential election coming up from an economic standpoint. I don't see anything really happening this year. I think we continue along the bottom of this trough where we're at, and we have to wait and see what 25 brings. And there could be competing forces because we may see interest rate cuts, but if we get a 10 % global tariff and 60 % tariff on products from China, there may be a surge of imports while we wait till that kicks effect but then we will have a nasty freight recession on the other side of that because domestic manufacturing will get hammered and the ag sector will get just annihilated with retaliatory tariffs.”
DAVID: “If you just look at what we've seen through this summer peak season. I'd say pretty muted. Yes, we're getting into a little bit of a pickup here this week, certainly seeing some tightening, especially yesterday and today. We'd expect to see that in the lead -up to end of month quarter and fourth of July holiday anyway, but nothing that screams, "Hey, we're seeing something abnormal happening," right? And we alluded to rejection rate levels, the gap between spot and contract rates being still, depending on which index as you're looking at, historically, very high. And so there's just not a lot of vulnerability in the market, right? Yes, we're looking at a potentially active storm season, and Ken mentioned interest rate improvements. I tend to lean towards it's going to take several rate cuts before that really kicks in fully for us, and so I kind of lean towards that middle of next year being kind of that that target area of when we'd expect to see really true vulnerability to any kind of normal disruptive event out there or demand changes as Jason's alluded to it as.”
CODY: "I would just say we're predominantly refrigerated, and outside of the seasonal impacts that Jason hit on, and then what David just hit on potentially an active weather season, I think it's going to be business as usual. We're not anticipating being able to get any type of significant rate increases, whether it be on new shippers or incumbent accounts. We focus a little bit more predominantly on like pre -packaged year -round freight with our trucks, but we do land in some seasonal markets, say South Georgia, Central Florida with consistency. And we have seen some premiums there. It's been extremely easy to move our equipment. You know, and again, just speaking to kind of those seasonal peaks a couple of days. It's very short, it's a very short window where we are able to capitalize on that, but it's not, I wouldn't say that we're getting an overwhelming abundance of inbound phone calls or connections from brokers desperate for capacity. I would say the rates are fair, somewhat negotiable, but it's not maybe what we've seen in the past in terms of how do I say variance on rates from normal to like a peak season rate."
On the topic of interest rate cuts, what would a rate cut in 2024 do? Will there be a lag in the impacts it has on the freight market?
JASON: “All the data shows there is still a lag and it can be some of the original estimates. Now these dated from 1980s, looking at all the data back to that time, but it was up to 20 months to receive the full impact. By that argument, we haven't fully absorbed the Fed raising rates yet. We still may have a few more months. Probably the most comparative cycle that we all have to look back to was 1994, when the Fed had really hammered interest rates down in response to the 1991 recession, and then they had to really start raising them rapidly because the economy started overheating really badly. And we didn't go into any type of recession, but it took a while. Freight activity slowed substantially in '95 and '96. And it didn't start rising again until '97. It had a great three year run before the great offshoring recession began and things fell apart.”
DAVID: “The only thing I'd add is, if you listen to the Fed, they're being very patient with coming back with a cut. I think a quarter point might not do something, but it could do something more if the general public perceives that as being the end of the peak. But I will say one of the cautions we're advising is that if they do start to cut rates, it might not necessarily be a good thing because that's probably based upon some pretty bad economic data that might be existing about what's happening with the economy. So what you might see from a gain in the inflationary aspect of declining rates, you may see pullbacks in other areas as a result of what might be happening in the economy. So, we're not solely focused on that as being a driver of positive momentum in the freight market although it very well could be.”
KEN: “We're seeing five year highs of consumer debt on credit cards and revolvers, and we're seeing delinquency rates on credit cards at a five year high. The pressure is rising for the American consumer as it pertains to the short-term debt vehicles, and let's not let Jerome Powell off the hook here. I have not read a real positive commentary outside of partisan politics positive review of his handling of the current inflationary crisis, if you will. For the first year and a half of it, the Fed refused to admit that inflation was anything but transitory. Color me a little bit pessimistic if I don’t have too much faith in the current Fed administration to be able to navigate us through digging out of the mess that's essentially been created.”
David, what do you anticipate being a primary area focus for brokers for the rest of the year? And what are some things that brokers need to be thinking about and doing to position for 2025.
DAVID: “First and foremost, RFP season is coming up here as we get into the fourth quarter, that's gonna be extremely important for everyone to focus on. It's going to be a challenging time, right? We're at the point in the cycle where we're experiencing a lot of pressure from shippers. We talked about it earlier around, you know, assets. Cody just mentioned it, trying to go in and get direct with shippers and work around the brokers, right? So everything you can do to remain really sticky with your shippers right now, that's quality service, you know, meeting with them on how they want to be worked with and focusing on being a partner of choice. That's certainly everything you can do right now to put yourself in the best position possible. To go into those conversations around our PCs and understand what is it going to take to maintain business or even grow your share with that shipper. And then likewise, in terms of preparing for the inflationary cycle, you want to still be in the market with these shippers, right? Because a lot of times access to spot boards, that comes with being part of a contract relationship with them.
So staying involved with them contractually is very important. And then on the carrier side of things, eventually it's not going to be easy to pick up the phone and get a hold of these carriers and get them to talk to you about their network when the market flips. So take advantage of the time right now to continue to prospect and build those relationships with carriers out there, especially in a network that matches where your shippers move freight, right? Now's the time to be building capacity for what might be coming, you know, nine to 12 months from now in terms of a market flip. So from a brokerage standpoint, outside of executing every day, like we try to, you know, that's the best advice I can give on a forward -looking basis."
What do you anticipate being the primary area of focus for asset carriers and fleets for the rest of 2024 to navigate this market and then to better prepare for 2025 as well.
CODY: “I'm always hesitant to give other motor carriers advice on how they should run their business because I think what I've seen is on the asset side, everybody's business is different. Brokerages tend to, you know, you pick up freight, you deliver freight and you have some value add services. On our side, it's slightly different. So I think like my message would be, control what we control and really focus on the efficiency gains within our fleets.
So what I mean by that is, we're gonna be really scrutinizing the commitments that we make. We're gonna have a very keen eye on the next wave of pricing the RFP season that David mentioned. Really wanna put a premium on the velocity of our equipment not getting stuck at extended dwell times. There's also a very strong push on driver retention, new driver acquisition. And then I would also say that something that this market has done for us is it's also kind of reset the equipment market. So peak COVID, I mean, there were trucking companies buying other trucking companies just for the power units and the trailers because you couldn't find a trailer within 400 miles of Atlanta. So looking at your equipment cost, recognizing if there's opportunities to get into better leased equipment or maybe newer owned equipment, looking at your trailer deals. Something else that we're doing is, and it's kind of contradictory, we're refrigerated food express, but modal diversification. When you get into a like this, you know, I have a few dry vans. I've got some flat beds. I've got reefers. There's a different rate floor for each piece of equipment. And in doing so, it's enabled us to, I guess in theory, raise that bottom line on our rate per mile for miles driven. And that's definitely helped us. So if that's an opportunity for you as an asset, I would definitely recommend that. Outside of that, it's minimizing the deadhead, It's the dwell.
It's even stuff as simple as your paperwork process. How you get your signed bill of lading from your driver into your TMS to work in invoice without having to be touched by half a dozen people or the load planner. So again, for me, I've learned over time to kind of, Again, focus on the things that we can control, not the things that we can't, and that's definitely where we're at right now."
We received a question on the show in relation to wage growth, inflation and consumer spending.
JASON: “If you look at retail sales data today adjusted for inflation, for the CPI for all commodities, it's basically flat. We've trended up a little bit from the low point in 2023, which is the most recent low point. Again, I agree with Ken on this. I think you're going to see more caution with consumers. It does appear the delinquency rate on credit card debts is probably starting to get near a plateau, but it certainly is higher in what it was in 2018 or 2019 and far above where it was in 2021. I keep going back and looking at what I'm going to call freight -centric sectors of trucking that we tend not to think about, and it's paper manufacturing still down 10 % from where it was in 2022 or non -metallic mineral products so making things like cement and concrete blocks and gypsum and clay refractories that sector has been is down 8 % year over year right now you know and so I always look and say trucking demand is much more industrial than we tend to think and the industrial side of the economy is still not doing well So, even if consumer spending is okay, it's not going to bring us out of this. And the last couple freight cycles, we've had sectors like fracking. We've literally dug our way out of poor economic conditions. We certainly did in 2011 through 2014. We're not fracking like we used to and we never are going to again. The economics have changed. And so, when you start taking a look at a lot of the headwinds right now, farmers are going to be making much less profit this year than what they have the past couple years. That's less ag equipment. We're already seeing John Deere laying folks off. So it's just hard to get excited when you look at this industrial economy, it feels a lot like 2015 or 2016. And it's going to take a substantial amount of time for us to get out of that. We're talking a 12 month cycle at least, even if things start looking better today."
Addressing consumer spending,
KEN: “I think the problem is it could be a wall type effect, right? We were spending just fine heading into the 2008 Great Recession, right? I think it's just you get to a point where how are you financing that spending? Are you paying in cash? Are you putting it on a card or are you paying your credit cards down? Are you floating the interest and also like you might be like I think a lot of this stuff You need to think about at the individual level your spending might be totally normal until you get called into HR's office on a Friday And you lose your job and you're spending on Monday is going to be a lot different right, so I think these things are like the velocity of the economy, I don't know what the right term is. The velocity of the consumer, I think, is faster. But I also think there's speed bumps that lay out there that we can't see right now. And we may or may not hit them. We tend to use the word resilient. Economists love to talk about the consumer is extremely resilient. I think that what it means is maybe we're just foolhardy a bit right now. We're all spending because all the words we learned in business school have no meaning anymore. What's a recession? Certainly what I learned twice in business school doesn't hold any matter. We're redefining what a recession is.”
What DAT data points should brokers and carriers be paying attention to to understand how the market is moving and /or not moving?
KEN: “You've got the classics, right? I'm looking at a three five approach or a three seven approach to long-term, short-term rates. As you get in to bid season as David said now's the time to start leveraging some rate forecasting tools. There's no one answer here. If anyone selling you freight products tells you that their solution is the answer and you don't have to do anything with it I promise you they're wrong I'm not saying they're lying to you because they just might not know any better. There is no silver bullet in this space. You have to blend your experience, your own data, and external data sources to create your best view of the market. Because David's view of the market could be completely different than his counterpart at Coyote or Echo or CH or brokerage XYZ. So I think having a pretty good forward looking view of the market is going to be solid. I think this is a point in the market where a lot of these capacity indicators, whether it's our MCI or load-to-truck, or Freightwaves’' indicators, all kind of fail you. Because they're at a level where it's, like, What is routing guide compliance right now? Near 100%. The outbound tender rejection index effectively rounds to zero right now. I don't know that you're gonna glean much between 4 .9 and 5 .1. Like, what does that actually tell you? It's not picking at their data, it's just I think once that starts to go up and approaches maybe 10%, 12%, 13%, or once our load to truck ratio starts to really reach up, that's when I think you start to extract meaningful signals there. But I think right now, it's easy to find a truck. That's kind of all you really need to know.”
DAVID: “We look at the rate of change of these metrics, right? So a 9 % rejection rate, that's something very different than if a week ago it was three. So you got to be paying attention to these data points and how they're changing. We like to look at how load to truck ratios change, and the gap between spot and contract rates at a national level, I think historically has been really important. So that would be the DAT data point that we pay most attention to in understanding market vulnerability.”
What areas of the macro economy should we be paying attention to in order to understand better what the chances of a demand stimulus are?
JASON: “Really the one sector of manufacturing that's still been doing very very well is motor vehicle production. I mean we've been at record levels consistently over the last year other than the auto strike last fall. If we start to see signs that production in that sector is slowing, and we know that sector is very responsive to where downstream demand is at, that would be, for me, the trigger that consumer spending is indeed really going to pull back. If people are not buying vehicles like they were, that has always been a very pro-cyclical sector. That's one I'm really looking at. And thinking about just the overall health of the US trucking freight economy, is do we start to see things like the normal seasonal production and food manufacturing? We are producing 3 % less food today than we were two years ago. That may not seem like much, but when food production produces 20 million truckloads a year, you take 2 % out of that. That is a whole lot of truckloads. So watching that, seeing if we are indeed on the containerized import side, seeing a little bit of an early peak season. My hunch is we are. I think that 2024 will finally rewrite the year where folks realize that containerized imports are not what drives most trucking volumes. I think we've had a major industry misunderstanding of the role of containerized freight. And this year is finally gonna break that 'cause you've got double digit year over year gains but flat, if not down freight volumes. So that's kind of where I'm at. I don't see housing changing substantially. I think 2024 is going to be 2016 essentially all over again. It's just a flat year. And then the question is what does 2025 look like?”
Before we wrap up this edition, we also wanted to provide an updated view at our rate charts, provided by DAT Freight and Analytics:
June's seasonality impact was seen in the spot market rates for dry van:
From a YOY% Change viewpoint, both spot and contract rates are moving towards 0%, an important inflection point when surpassed.
Reefer spot market rates also saw impacts from June's seasonality, although not at the level some people had anticipated.
From a YOY% Change viewpoint, both spot and contract rates are moving towards 0%, an important inflection point when surpassed.
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!
Thank you so much for reading and supporting the Truckload Market Update Report, produced by Samantha Jones Consulting LLC. Samantha Jones Consulting focuses on helping logistics providers better brand and sell their services to create sustainable revenue growth and support their company growth goals!
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