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.
In October 2023, I had the opportunity to speak with Gad Levanon, Chief Economist of the Burning Glass Institute, on the Meet Me For Coffee podcast. During our conversation, I asked him, "Why are we so hyperfocused on 2% inflation?" His response was insightful: "I think where the FED is coming from is they want to maintain credibility… a lot of what determines inflation is inflation expectations, so to anchor those expectations, the FED has to protect that 2% target."
Looking at how 2024 has unfolded, it seems that protecting credibility and managing expectations has indeed been the priority.
Why do I say this? Economically speaking, we are in nearly the same position now as we were at the end of 2023. If rates weren’t cut then, there doesn’t seem to be a strong reason to cut them now—except for one key factor: public expectations and perceptions are shifting.
Last October, Gad accurately predicted a "no landing" scenario for 2024, with inflation closer to 3% than 2% (worth revisiting that episode, number 24). While inflation has cooled, it remains above the FED's 2% target. However, after maintaining tight monetary policy, we’re starting to see some softening in the labor market (though not significantly), and shifting national expectations seem to be setting the stage for the FED to cut rates on September 18th.
Angelo Kourkafas, one of my favorite writers for Edward Jones said,
Arguably the biggest macroeconomic development in August was the Fed's message at the annual Jackson Hole symposium that "the time has come for policy to adjust." After 16 months of rate increases and 13 months of holding rates in restrictive territory, policymakers are now prepping the ground for the first rate cut of this cycle in a couple of weeks when the Fed meets on September 18
But this graph by Matthew Klein at the Overshoot caught my attention. He says
if inflation is now slow enough to justify policy recalibration, then policy recalibration would also have been justified by the end of last year. And if prices were rising too fast then, they are still rising too fast now. I do not know what would be gained by squeezing the last percentage point or so of inflation out of the economy, especially if that came at the cost of impoverishing consumers and reducing business investment.
He wraps up his criticism of the Fed by saying,
Typically, Fed officials would be comfortable experimenting, potentially lowering rates more than necessary because they knew that they could reverse course quickly if it turned out that they had misjudged the situation. Unfortunately, officials seem to have rejected this approach, instead preferring to wait as long as possible before lowering rates, because they are afraid of appearing to have made a mistake. That needlessly raises the stakes of each meeting—and, ironically, increases the risk of actually making a mistake.
Given that by many metrics we are still in the same position as we were in late 2023, what has happened in 2024? Businesses have continued to make money, the economy has grown, consumers have kept spending, inflation has stayed at 2.6%, and the labor market has even added jobs. Yet, the freight market remains sluggish. Let's unpack that.
Regarding corporate profits in the S&P 500, Edward Jones noted
The upshot is that corporate profits remain on solid ground, providing ongoing support to the bull market despite periodic shifts in investor sentiment.
Recent second-quarter GDP revisions show that the economy has been growing faster than previously anticipated. Last month in the newsletter, I discussed the risk of a potential recession in 2024-2025, as recession concerns resurfaced following the August jobs data. However, just as quickly as the "R-word" reappeared, it seems to have faded again. Now, many economists and investors are placing their bets on the likelihood of a soft landing being achieved within the next 6-12 months. While we extensively discussed the possibility of a soft landing throughout 2023, it seems this outcome may simply be arriving later than most expected, with the current economic stalling lasting longer than anticipated. A soft landing refers to managing inflation without triggering a recession or harming the labor market.
A key factor supporting economic growth has been strong consumer spending. Real consumer spending is largely in line with expectations—slightly below on services but above expectations on goods. While spending on goods has slowed from pandemic highs, it hasn’t dropped below where it should be in a normalized economy.
In the freight industry, we often interpret volume declines as a sign of economic weakness. In reality, what we are seeing is a return to pre-pandemic norms—something many of us expected. Inflation has also contributed to the volume of goods moved, as the prices of those goods have increased. Additionally, the low personal savings rate suggests Americans are spending a larger share of their income rather than saving it.
Stronger consumer spending, coupled with updated personal income data, has resulted in an unusually low personal savings rate. The portion of personal income not spent has fallen to 2.9%, the lowest level since 2008, aside from June 2022. Consumers appear to be spending more of their income to keep up with inflation, which has increased 2.7% year over year.
All this consumer spending has helped inventories stabilize, and we’re now seeing lean inventory-to-sales ratios. Retail inventories to sales are currently around 1.32, while a typical healthy balance is about 1.5 or just below. Interestingly, global economies that are struggling and not experiencing growth right now tend to have higher personal savings rates. In these countries, saving more and spending less has led to reduced economic stimulation. After the pandemic stimulus, U.S. consumers had over $2 trillion in excess savings, and the personal savings rate has yet to return to pre-pandemic norms.
However, it seems consumers are beginning to feel the strain. Inflation persists, savings rates remain low, and the labor market is cooling just enough to allow for slower economic growth. Looking ahead, we face two potential outcomes:
Joyce Huang, Senior Client Portfolio Manager at American Century Investments said in their recent investment outlook webinar that
We expect to see a slow down in the US economy, we expect consumer spending to slow, that is going to cause overall US GDP growth to come down, and even if inflation comes down we think that we are starting to see signs of unemployment ticking up, jobs becoming harder to find, less job switching, and real wages are falling, all of this to us are signs that a slow down is the most likely scenario. Recession is one of the outcomes that is included with a slow down, but we assign a pretty small probability to actual recession… the more likely case is that we will get what we call a soft landing… It will feel almost recession like because we are coming off of pretty rapid growth.. So be prepared for that slow down feeling, we do expect inflation to moderate back to 2% but it’s going to be a rocky path, and we would not be surprised if headline inflation does not creep up a little bit over the course of the second half of the year…
So what does this mean for freight? A couple things. One, we have to pay attention to the continued weakness in domestic manufacturing. With ISM's index for new orders in August falling to 44.6, things continue to look bleak for the dry van TL market from a demand standpoint as we head towards Q4 2024. This is visualized in the below chart by Jason Miller.
Outside of manufacturing, consumer demand is expected to weaken in the coming months as part of the engineered soft landing. The idea is that consumers will spend less, manufacturing will continue to experience weakness, and seasonal imports have already largely arrived, with increased West Coast intermodal volumes handling much of that movement.
But I’m not seeing it. The demand-side stimulus we need to pull the freight market out of its recession within the next six months just isn’t materializing—unless the second scenario occurs, where interest rate cuts have a greater and faster impact than we anticipate.
Supporting my concerns are the recent dry van and reefer spot and contract rates provided by DAT. The data shows that August brought no new improvements in spot or contract rates for either mode, and the gap between spot and contract rates remains much too wide to be nearing the next market cycle.
Episode 41 with Matthew Muenster, Chief Economist, Breakthrough
Join Samantha and Matthew as they discuss the current state of the macroeconomy and the freight markets. The conversation covers topics like when the market will turn, the diesel market and the impact of the turmoil in the Middle East, alternative energy, the elections and monetary policy impacts, and where sustainability is at (just a buzzword or taking on more applicable meaning?).
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!
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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