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October was full of new optimism around the US economy from economists and business professionals alike. However, that optimism seemed to be met with strong pushback from many freight market participants who for good reason have felt less than optimistic about the current state of the full truckload freight market.
US GDP has seen growth for the last 3 quarters, and of that growth quite a bit is tied to consumption. While the freight markets have certainly felt the decline in consumer spending on goods that drive more trucking ton miles, the overall economy has been receiving praise for it’s resilient consumer spending, which seems to have taken a major shift away from goods to services. Even though services do not contribute as heavily to freight market activity, they do contribute to GDP, which can help to explain some of the attention GDP has received. And while there are many factors that go into GDP, this visual will help to note that consumer spending is still in fact a strong contributor:
James Bohnaker, the senior economist from Cushman and Wakefield shared these slides on the Meet Me For Coffee podcast; they can be found on Cushman and Wakefield's website. These clearly illustrate the shift from goods to services, and also highlighted here is the re-normalization of ecommerce spending as well back to the expected trend line.
To paint this picture even clearer you can see the breakdown of spending by sectors. Restaurants and bars came back in a big way, sporting goods and hobbies, home improvement, furniture, and electronics have all taken hits as consumers shifted that goods spending to experiences.
While spending is not at levels seen during the pandemic, it does remain strong. This article by Lori Ann LaRocco, highlights the effects of the consumer pullback on goods spending that many of the publicly traded logistics companies highlighted in their earnings calls recently. All signs do point to cautious new ordering from retailers as they try to match demand closer in order to avoid carrying excess inventories like many retailers were left with after 2021.
“The U.S. economy is “approaching an inflection point in consumer spending,” according to C.H. Robinson, and across thousands of U.S. retailers, it says inventory decisions are being made with caution.”
However, the article also calls out that The CFO of JPMorgan, Jeremy Barnum was quoted saying he sees no softness in consumer credit right now, and took a pretty optimistic stance on consumer health as well.
“During earnings, major U.S. banks have presented a picture of the consumer that is more resilient. “Where am I seeing softness in [consumer] credit?” said JPMorgan chief financial officer Jeremy Barnum, repeating an analyst’s question on the bank’s earnings call. “I think the answer to that is actually nowhere.”
The rhetoric has largely been that consumers were pulling back on spending as they battled inflation. There is some truth to that, but it seems that it was initially overstated. The labor market has remained strong, and wage growth contributed to a lot of the continuance in consumer spending over the last 2 years. Similarly to the cash reserves that carriers and brokers likely stock piled during 2020-2021, consumers built up “excess savings” and also saw increases in wages through 2020 and 2021. And while growth in wages has been cooling, many consumers are still sitting in a better financial position today than they were 3 years ago.
Gad Levanon, the Chief Economist at The Burning Glass Institute also covered wage growth on the most recent Meet Me For Coffee Podcast Episode and highlighted the record wage growth in blue collar workers over the last few years which has been cooling (and thankfully so to help battle inflation).
We touched on excess savings last month, but I want to focus on a bigger picture here. There has been much conversation around the labor market as one of the primary culprits for driving inflation over recent years. If you have followed my work for some time now you will know that I have been keeping up with labor market trends as they will be critical to enabling the US economy to tame inflation, but also in avoiding a recession. Joseph Politano, as US economist recently shared this graph that shows exactly the type of progress we have been wanting to see. A deceleration in wage growth without major increases in unemployment rates, and without wages decelerating past normal levels.
As the labor market remains strong even though it is cooling, inflation will continue to maintain current levels if not be at risk for increasing again, which will keep interest rates raised, the end result here becomes a longer period of what I would call an uncomfortable economy and freight market. Where consumers are “healthyish” and GDP shows some strength, inflation stays above target and interest rates stay high which keep consumers conservative and cautious which keeps spending on goods suppressed and a cautious economy could also keep real estate, construction and manufacturing industries suppressed as well. James and Gad, two economists who recently joined me on Meet Me For Coffee have both outlined paths similar to the one I just described as likely options. You can listen to their outlooks in more depth, linked at the end of this report. This is obviously a graph from the NYT but I actually snagged it from my friends at Arrive Logistics and their market update headed up by David Spencer, so shoutout to the work they also do every month, be sure to subscribe!
Chief economist at the burning Glass Institute, Gad Levanon, also shared this graph that measured labor force participation:
He highlighted that the labor force participation rates are already at an all-time high for many groups, and that we should be able to expect slower growth in the labor force moving forward. With less growth in the workforce this will also help to alleviate too strong of pressures that could help drive up unemployment rates as job openings have been cooling, it is timely to see the labor force participation also starting to cool.
We cannot really wrap up a conversation on inflation without a nod the the FED’s battle against it. The FED chose not to hike interest rates for the second time in a row in their most recent meeting. However, there is no guarantee that there will not be an additional rate hike in the future. Sarah Foster, Senior Economist at Bankrate, makes the point that they may simply be entering a holding pattern to allow for the “lag” that is often discussed in monetary policy has time to catch up. Sarah writes:
“Monetary policy has always been known to act with a lag, but the ultimate fear is that officials might not know they’ve done enough to slow price pressures until it’s too late. A tough journey lies ahead for Fed officials, who are hoping higher interest rates don’t have to come at the economy’s expense.”
The Fed has an obligation to keep inflation at a 2% increase, which got wildly out of control in 2022 with inflation spiking sharply. The FED reacted with record tight monetary policy decisions and rapid interest rate increases. I talked at length with Gad Levanon on the most recent Meet Me For Coffee podcast about the Fed’s stance on inflation and if they will lighten up on the 2% target. For several reasons, he feels that is unlikely. However, it will likely take us more than a year to get to target as the Fed is now trying to balance inflation with economic strength and an election year. Sarah wrote,
“Fed officials see inflation hitting 2.6 percent by the end of 2024, a year when they’re only currently expecting to cut their benchmark borrowing rate by 50 basis points — likely keeping yields high.”
This supports Gad’s opinion that we will see inflation turn into a long term battle lasting into 2025 and affecting policy makers decisions for quite some time still. Prolonging the “uncomfortable” economy and definitely not boosting the freight markets notably.
Matthew Klein, author of The Over Shoot, also weighed in on the Fed's efforts to tame inflation, and at the same time recognized the continued consumer spending strength:
“The available evidence from both the real and financial sides of the economy suggests that policymakers should be thinking harder about how they will respond if spending continues to grow substantially faster than they believe is sustainable. Even if they refrain from raising short-term interest rates much more, these pressures may make them equally unwilling to lower interest rates any time soon.”
If this is the case, then a rebound in demand in 2024 looks increasingly less likely. Which turns our attention to the supply side of the equation. But even in the supply side we have seen unusual signs of resilience in the face of weakened demand.
My monthly collaboration with Jason Miller focused on research he did recently for the Journal Of Commerce around why trucking capacity has seemed so flow to exit. Multiple large trucking companies cited the slow exit of capacity from the market in their recent earnings reports. So, here is what Jason has found as data driven reasons for this:
Jason also visualized trucking companies revenue, to help emphasize point 2 above. All three series set such that 100 = Q1 2018. U.S. Bank's Q3 2023 data (which is seasonally adjusted) places revenue at 20% above the average level for 2019:
With waning hope of demand surging anytime soon, and supply taking its sweet time to rebalance, but nevertheless still seeing steady progress, let’s see what that means for rates.
The following graphs are dry van rates, Reefer rates which I won’t show today, have actually seen some more signs of positivity recently. While still early, we have started to observe some trends with both contracted and spot rates in recent weeks. As always, I will show these updated graphs at the beginning of each month. One looking at YOY% Change and our other measuring the Monthly average change month to month. Data and graphs are provided by DAT. Here we have the YOY % change, and while the changes are still negative, they have been moving in the right direction recently.
Looking at monthly average spot and contract rates:
Now, I want to also add to the rate discussion with an idea that is less data driven and more feeling driven. I work with brokers, I keep up with shippers, there is something going on. Recently the pressure has been building on rates even as we are maybe just starting to see that show up in the data. And now we have what could be a called more of a psychological factor at play, where shippers are seeing companies close their doors and fail, and they are becoming more leery of the “cheaper options'' in their bids and are less inclined to award to providers if they have any concerns around their financial stability. This was actually reported on by Bill Cassidy in this article here.
“The market is beginning to show signs of sensitivity when supply leaves suddenly, or a provider cannot perform with freight lanes that were awarded by offering the cheapest price,” David Jackson, president, and CEO of Knight-Swift Transportation Holdings, said during an earnings call Thursday. Jackson said he is looking toward 2024 for more significant pricing gains. “It does appear the stage has been set for positive rate pressure in the next bid season,” which would begin in early 2024, he said. “If bid season began today, we’d have a tough time seeing it be positive.”
Brokers also are feeling the pressure and starting to consider their own strategies around pricing. The low rates in spot are what have been driving a lot of the reduction in contract rates as brokers bid to take freight at cheaper rates considering their low spot market buy rates, but as supply continues to exit the market even at a slower pace, they will have a steadily decreasing capacity pool and they will feel the pressure on their margins and they know that. Risk aversion is going to start factoring into decision making on all sides, especially in the face of 12 month RFPs, and that may help the recent uptick in rates continue or hold steady. Even small upticks in demand can give a different feel, even if short term. I suspect we will feel a little Holiday bump this month and next even if it is a weak one.
Extra Content:
A Glimpse into International Logistics
WSJ’s Paul Berger quoted Chief Executive Officer of French container line CMA CGM in this recent article that looks into ocean carriers earnings and outlooks for demand and revenue:
“Saadé said he expects the second half of 2023 will be weaker than the first half of the year and that the company faces headwinds through 2024 as ocean carriers deploy a record number of new containerships at a time of geopolitical instability and flagging freight demand.”
A glimpse into Intermodal:
Ari Ashe, a Senior Editor at the JOC and one of our industry voices in the intermodal space recently studied the available data for the whole domestic intermodal industry and came up with some interesting takeaways:
“It tells me railroads are moving containers and making seamless handoffs to companies like J.B. Hunt Transport Services, Inc., Schneider, Hub Group, STG Logistics, Knight-Swift Transportation, and other IMCs, and receivers are unloading containers quickly. The whole process is going without disruptions, so the only reason the box turns are down is weak demand (an imbalance between supply and demand).”
Intermodal services seem to have regained their reliability and are becoming an option again for shippers and BCOs where it makes sense economically. See his post and follow Ari here.
Meet Me For Coffee Recent Podcast Episodes:
Ep 23 with James Bohnaker, Senior Economist at Cushman & Wakefield
High Level Takeaways:
Ep 24 with Gad Levanon, Chief Economist at The Burning Glass Institute
High Level Takeaways:
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