Rebalancing. That’s the word being tossed around by trucking industry analysts and economists when discussing the current freight market. The term applies to the cyclical dance between the shippers who provide the freight and the trucking industry that hauls it. ’Round and ’round it goes as the industry tries to adjust to the available freight by adding or subtracting trucks.
At this juncture, we’re at the contraction phase: There are too many trucks for the available freight. The competition for loads is very high and freight rates suffer for it. Good for the shipper, but not so much for trucking.
The Cass Freight Index for Shipments for March reported a 4% decline in shipment numbers from March 2022. On top of that, the Cass Freight Index for Expenditures shows a 12% drop in payment for those shipments. Cass uses both statistics to compile its “Inferred Freight Rates.” This month’s report indicates inferred rates dropped 0.5% from February and are down 8.3% from March 2022.
Fuel cost is included in the freight rates used.
“Fuel prices are transitioning from an inflationary factor to a deflationary one as we pass the anniversary of the fuel price spikes that followed Russia’s invasion of Ukraine, and even allowing for modest increases to follow recent OPEC production cuts, we estimate lower fuel prices will knock about 5% off freight rates y/y starting mid-Q2,” the Cass release explained.
The release cautions, however, that market pressures are still pushing freight rates downwards: “Soft real retail sales trends and ongoing destocking remain the primary headwinds to freight volumes, and sharp import declines suggest this type of environment will persist for some time. Normal seasonality from the March level suggests 1% to 3% y/y declines for the next few months.”
Destocking is the process retailers use to match inventory levels to current sales rates. If a retailer is selling less of a product, it needs a smaller inventory to support sales. When consumers aren’t buying, retailers don’t order replacements — and shipment numbers drop.
Cass uses billing information from its clients to compile the Indexes, and the shipments counted come from multiple modes of transportation including truck, rail, pipeline, ship, air and more. Trucking makes up the largest segment of the data used.
For trucking-specific data, Cass compiles a Truckload Linehaul Index that more accurately shows what’s happening in the trucking industry than the Inferred freight rates. The Cass index, which includes both spot and contract freight shipments, fell by 9.6% in March from March 2022.
“With spot rates already down significantly, the larger contract market is likely to continue adjusting down, if more gradually, but in the same direction,” the release said.
The American Trucking Associations (ATA) Truck Tonnage Index fell 5.4% in March after a 0.9% increase in February. The ATA Index for March was 111.6, indicating that shipment levels reported by ATA members were 11.6% higher than the baseline year of 2015. If that number seems good, remember that the index topped 120 in August of 2019 and then fell to about 106 during the pandemic.
“After increasing a total of 2.6% during the three previous months, March’s sequential decline was the largest monthly drop since April 2020 during the start of the pandemic,” said Bob Costello, chief economist for ATA. “Falling home construction, decreasing factory output and soft retail sales all hurt contract freight tonnage — which dominates ATA’s tonnage index — during the month.”
While contract rates are falling, they haven’t yet fallen to spot rate levels, as truckers who depend on brokered freight can readily attest.
The Motive Monthly Economic Report for March 2023 pointed to more of the same with its Retail Visits Index, which is compiled from in-truck devices that measure miles and locations. The index showed truck visits to retail locations like warehouses and distribution centers declined by 10% compared to March 2022 levels. Fewer visits, of course, mean fewer shipments.
The Motive release also blamed inventory destocking as retailers reduce inventories due to softness in consumer demand.
The solution to lower rates is in the “rebalancing” mentioned at the beginning of this article. For rates to rise, shipment numbers must come up, truck numbers must go down or a combination of both must occur.
“The pendulum of pricing power has been firmly with shippers for some time, and the cudgel of lower rates is starting to impact capacity. Though new equipment production remains elevated, hiring and fleet exit trends tell us capacity is slowing at the margin,” said Tim Denoyer, vice president and senior analyst for ACT Research, in an April 18 release titled The Rebalancing of Capacity Begins.
The release noted that spot rates are now about 17% below truckload fleet operating costs for the upcoming quarter and pointed to the number of authority revocations from the U.S. Department of Transportation. Truckers who are going out of business don’t need operating authority, especially since payment of expensive insurance premiums are necessary to keep it.
“With marginal fleets scrambling for miles with busted budgets, spot rates have gone far below costs, but this can only go on so long,” Denoyer concluded.
DAT Freight and Analytics reported that average dry van spot rates on its load board have fallen 28.1% in the past year and are currently at an average of $2.09 per mile. Refrigerated spot rates fared slightly better but still fell by 26.3% in the past year. The average spot rate per mile for refrigerated loads in mid-April was $2.44. Flatbed spot rates were down 19.6% from a year ago and were at a $2.69 average at mid-month.
As freight rates bottom out and shipment numbers remain suppressed, the trucking industry will reduce truck numbers. That’s good news for the used truck market, which will eventually see more trucks and lower prices, but lower truck numbers won’t help a lot until shipment numbers come up. Most of the experts are looking to the third quarter for the freight recession to end. However, as we all know, the “experts” don’t always get it right.
Cliff Abbott is an experienced commercial vehicle driver and owner-operator who still holds a CDL in his home state of Alabama. In nearly 40 years in trucking, he’s been an instructor and trainer and has managed safety and recruiting operations for several carriers. Having never lost his love of the road, Cliff has written a book and hundreds of songs and has been writing for The Trucker for more than a decade.