In 2020, consumers found themselves with an excess of time and funds, thanks to both stay-at-home and stimulus measures introduced after the pandemic began. This simple combination led to astounding growth in freight demand, driven mainly by the flow of consumer goods. At the same time, previously established supply chains were thrown into disarray — for instance, farmers were tasked with redirecting a large portion of their produce from restaurants (which had been closed or otherwise bridled) to grocery stores. 2020 thus became a year in which logistics received its due attention.
In 2021, truckload markets saw continued growth as freight demand outstripped capacity, catapulting spot rates into the stratosphere. Carriers were spoiled for choice in rejecting contracted freight, which had been priced at rates that lagged far behind volatile market conditions, in favor of higher-paying loads in the spot market. As a result, tender rejections climbed to unheard-of levels.
In one sense, it should not be too disappointing that 2022 failed to match the historic growth of years prior, given the unusual convergence of circumstances that enabled such growth in the first place. Despite an impressive start to the year, freight volume quickly receded in March and continued to fall throughout the remaining months. This lack of overall volume, coupled with contract rates that finally met (and then surpassed) market expectations, led carriers to cling to their contracted freight. As tender rejections lowered, fewer loads fell to the spot market, driving down spot rates. Contract rates, the pricing of which had been limited to yearly bid cycles, became more nimble and reactive as shippers shortened bid cycles to quarterly or even monthly bases.
On the other hand, the trucking industry is suffering from a recession during a time in which the global economy faces its own downturn. While 2019 was the year of the trucking industry’s last recession — the business cycle for truckload markets usually lasts three or four years — it did not face additional pressure from a weakened economy. Rather, tender volumes rose in 2017 and 2018, spurring a host of new drivers to enter the marketplace. 2019’s recession was therefore less caused by a drastic reduction in freight demand and more about carriers’ oversupply of capacity.
2022 is a different story: The aforementioned growth in consumer spending on goods worsened inflationary pressures that had been developing since mid-2021. The war between Russia and Ukraine entered full-scale operations in late February, which rocked commodity markets at home and abroad. China proved to be a mercurial business partner, as its government’s “zero-COVID” policies halted its manufacturing and export activity on a frequent but erratic basis.
To make matters worse, 2022 was marked by rising fuel costs, continued congestion at the ports and the bullwhip effect. This latter influence occurs when temporary surges in retail demand — especially for durable goods such as furniture and home appliances, which are bulky and thus devour warehouses’ capacity if not moved quickly — are grossly magnified by upstream manufacturers. When consumer demand slows, as it did in 2022, retailers are burdened by a glut of costly inventory. This inventory is costly because warehousing space remains at a premium, but also because the velocity of containers moving out of their ports slowed dramatically, increasing dwell times and worsening congestion.
Congestion at the heavyweight West Coast ports, such as those of Los Angeles and Long Beach, has been mostly resolved by the time of writing. While some of this clearance was made possible by declining shipper activity, a more substantial factor was the widespread relocation to smaller ports on the East Coast, like Savannah, Georgia. Since the infrastructure at such ports is not scaled to accommodate such activity, congestion was simply transported elsewhere. Even so, the overall volume of ocean imports did decline in the third and fourth quarters of 2022.
Consumers have continued their spending patterns throughout 2022, despite the lack of stimulus measures that expired at the end of 2021. The result has been consumers taking on more debt at higher interest rates. There has been a shift in spending in recent months, shifting from goods spending that spurred freight demand in the past two years back to services spending. The higher costs of debt, increased outstanding revolving credit and slowing job openings are setting up for a rocky road for the consumer in 2023.
In light of these market conditions, we believe that spot rates will continue to decline throughout 2023 by high-single-digit to low-double-digit percentages. One source of potential upward pressure on fuel-inclusive spot rates is the price of diesel, the inventory of which is threatened by tight refinery capacities and stockpiles depleted by the cold season. Yet diesel prices are also linked to the price of crude oil, which (at the time of writing) has plummeted in response to a fear of weakened Chinese demand. But many financial institutions anticipate 2023 to bring either new highs or at least a return to the elevation seen during most of 2022.
Contract rates, meanwhile, should see more considerable declines clustered around the start-of-quarter seasons in 2023. In 2019, dry van contract rates (which exclude fuel costs) averaged $2.01 per mile. At the end of 2020, when contract rates were concluding a six-month surge, rates averaged $2.48 per mile. As of late November, contract rates are now averaging $2.62 per mile, setting themselves back to levels last seen in early September 2021. Needless to say, contract rates have quite a bit of room to fall. We predict that contract rates will decline by 13% to 17% during 2023. Q1 2023 will likely give rise to the largest of these declines as monthly, quarterly and yearly bid cycles align with one another.
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