April market conditions that were favorable to freight brokerages — loosening truck capacity and declining spot rates — reversed themselves in May, and in June, gross margins progressively narrowed on higher volumes and lower revenues.

 

Contrary to the guidance offered by 3PL management teams on Q1 earnings calls, we believe that gross margins narrowed year-over-year, perhaps especially for brokerages that bid aggressively for contract freight at the end of 2019 and lowered rates.

 

It’s unclear to us how far tight capacity and higher rates extend beyond the July Fourth holiday. There are arguments and data points on each side of the debate (widespread softening and stabilizing markets versus further capacity constraints and inflationary spot markets). Much depends, too, on the shape of the ongoing economic recovery, the federal government’s appetite for another round of fiscal stimulus, and the ability of local governments to bring secondary COVID-19 outbreaks under control.

 

In other words, the midterm outlook is highly uncertain. We’re continuing to monitor our high-frequency fundamental data sets for insights into supply, demand and price. 

 

For us, a key indicator will be how capacity reacts relative to volume after the holiday. If tender rejections decline only slightly on a severe volume decline,  for example, that would indicate to us an underlying capacity issue that could come back to haunt shippers in Q4.

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