By Adam Robinson, Founder & CEO, The Robinson Agency
Putting oneself in the spotlight with a freight market forecast must be similar to how a naked John Cena might have felt on the Oscars stage – exposed and subject to ridicule (or, in Cena’s case, awe).
Of course, you’re not as likely to feel naked and afraid if everyone agrees with you. As the first quarter comes to a close, let’s pull back the covers and look at whether 2024 is playing out as expected.
‘The Freight Market Has Not Fully Broken Out of Its Recession’
The Logistics Managers’ Index (LMI) reading in February was a healthy 56.5, marking “the sixth time in the last seven months that the LMI has shown expansion. This growth is driven by continued progress in transportation and the buildup of inventories upstream at the manufacturing and wholesale levels. The overall index is up, but still below the all-time average of 62.4 – which in many ways epitomizes the current slow but positive and steady state of the economy.”
Zac Rogers, an associate professor of supply chain management at Colorado State University, produces the monthly LMI report. Researchers at Arizona State, Florida Atlantic, and Rutgers universities, as well as the University of Nevada, Reno, contribute to the report, as do members of the Council of Supply Chain Management Professionals (CSCMP) and subscribers of DC Velocity and Supply Chain Quarterly.
The LMI is calculated using a diffusion index; a reading above 50 indicates that the logistics industry is expanding, while one below 50 indicates a shrinking industry.
“The resilience of the U.S. economy is apparent in Transportation Price movements,” the LMI report said. “After moving from contraction to expansion for the first time in 20 months in January, Transportation Price growth increased again (+1.8) to 57.6 in February. This is a function of demand and not cost, as increasing Transportation Prices came despite U.S. diesel costs being down to $4.058 per gallon in the last week of February, which is $0.236 down from the same time a year ago.”
Still, caution was expressed in the LMI report.
“Despite this welcome increase in price and utilization, the freight market has not fully broken out of its recession and moved back to what we consider a boom period. This is in part due to the continued surplus of capacity in the market,” Rogers wrote.
Looking at the “big picture,” he continued, shows there have not been multiple consecutive readings in which prices exceeded capacity, “meaning we are not yet ready to call an end to the freight recession (although our respondents are predicting that will come sometime this year).”
The ‘Next Bull Market’ Is Still a Ways Away
Another academic, Jason Miller, a professor of supply chain management at Michigan State University, made a similar statement about the big picture in a LinkedIn post.
“Given freight demand is still tepid, even with capacity leaving, we are still a ways away from the next bull market from a pricing standpoint,” Miller wrote.
Miller said “a meaningful exit of capacity from the market” is needed in order to bring supply and demand more into balance. He said Bureau of Labor Statistics (BLS) data shows that is starting to happen.
“The data point to seasonally adjusted capacity [in January] having dropped about 9,000 from the high in late 2022, with a steady downward trend,” he said.
Miller said BLS data “suggests that over-the-road dry van payrolls have started the slow process of coming down from their Q4 2022 highs. However, we aren’t [seeing] a ‘flood’ of capacity leave; rather, this is a slow, steady trickle.”
In mid-March, he told The Robinson Agency (TRA) that producer price indexes for February provided further “evidence that the over-the-road dry van truckload sector saw a deterioration of rates in Q1, with rates as of February 2024 being down about 11% year-over-year, including fuel.”
“Spot market data, especially the spread of broker buy contract prices and dry van spot prices from DAT Freight & Analytics, showed a substantial deterioration in February, suggesting that the pricing environment is not ready to turn just yet,” Miller said.
“Looking further out into 2024, if we continue to see over-the-road dry van capacity exit and we see demand start to strengthen, we should enter the next bull market pricing cycle,” he told TRA. “However, I expect any rate increases this time will be much more gradual than the prior two bull market cycles, which I would say started around June 2017 to December 2018 and June 2020 till March 2022, respectively.”
Miller said the implication for shippers is that “it appears we are at the bottom of the pricing cycle in the over-the-road truckload sector, whereas we passed the nadir in the LTL sector. As there is more chance of rates increasing in 2024 than decreasing, budget accordingly.”
‘The Good Times’ Are Returning
Noted truckload analyst Dean Croke of DAT Freight & Analytics also sees a rebalancing act taking place.
“We start 2024 with the market capacity rebalancing and carriers exiting the market, albeit slower than a year ago. Surprisingly, carriers continue to join the industry, fulfilling the American Dream of starting their own businesses. If they can survive the first quarter of this year – when rates are sure to drop along with freight demand – they will thrive when the market turns, hopefully in the Spring,” Croke wrote in a blog on the DAT website in January.
“One thing is for sure: fewer trucks will be available to move a higher freight volume when the freight market does turn. And that means higher freight rates and improved profit margins.”
Croke expects “the good times” in trucking to return this year. But instead of the 2021 pandemic-fueled freight boom, the good times will be reminiscent of 2018.
“The first half of 2018 was an excellent year for carriers, especially flatbed ones, boosted by a robust industrial economy, rising oil prices, and significant rebuilding efforts following hurricanes Irma and Harvey in late 2017,” Croke wrote. “Changes in the tax code also benefited carriers that placed a record number of orders for new trucks later that year. Owner-operators and small fleet carriers made, on average, $24,000 gross profit … after all expenses were considered during that year; by all accounts, it was a good year in trucking.”
Croke told TRA in mid-March that there’s still “excess capacity in the truckload market. Although the rate of carrier exits in February slowed considerably, there are signs that supply is getting closer to where demand is toward the end of the first quarter. Any meaningful change in truckload demand really hinges on interest rate cuts, so absent the Fed cutting rates, we expect truckload demand to be relatively flat this year as there are just no signs that demand will change materially to change the trajectory of the current market.”
‘Hopefully, We’ve Found a Floor’
Kevin Hill, owner of Brush Pass Research, posted on LinkedIn that “spot market woes eased” in February.
“Hopefully we’ve found a floor and the lows will trend higher in the coming months. It’s difficult to find a bearish scenario that would drive spot rates lower from here. It’s easier to put together a scenario where rates will stabilize or start a YoY slight positive trend. A concrete bull case scenario though where the market flips with volatility to the upside is still a reach,” Hill wrote.
While rates may have started to stabilize, volatility in the freight brokerage industry continues, according to Brush Pass Research, which said the number of U.S. brokerages with active MC numbers dropped 9.2% to 27,864 in February, down from 28,055 in January.
TheStreet reported that already this year, Boateng Logistics and Wise Choice Trans Corp., both of California, Texas-based J.J. & Sons Logistics, and Illinois-headquartered Nationwide Cargo Inc. have declared bankruptcy.
While they didn’t go out of business, in January major players Uber Freight cut 150 employees from its digital brokerage team and Coyote Logistics reportedly laid off an undisclosed number of staffers in sales and operations.
“With OTRI [Outbound Tender Reject Index] at under 4% as of [March 12], there’s still way too much truck capacity, combined with way too many freight brokerages competing for loads. These two factors create a perfect storm for a race to the bottom when it comes to rates,” Hill said.
More Containers Appear to Be on the Horizon
In The McCown Report, shipping expert John McCown reported that the 10 largest U.S. ports recorded a 9.2% increase in inbound volume in January, the fourth consecutive increase after 15 months of decreases – many of them in double-digit percentages.
“The combined inbound and outbound loaded containers in January were up 7.2%, one of the strongest performances since June 2021, when the spikes from the pandemic began to dissipate,” McCown said. “At a macro level, the strong showing in January is an encouraging sign regarding the economy of tangible things and is made more so by upward trends in an array of measures.”
But Descartes expressed caution in its global shipping report on U.S. container volume in February.
“The March update of the logistics metrics Descartes is tracking shows that 2024 is starting off to be a strong year for U.S. container imports; however, global supply chain performance may be impacted throughout the year because of ongoing conditions at the Panama and Suez Canals and upcoming labor negotiations at U.S. South Atlantic and Gulf Coast ports,” it said.
Regarding the canals, severe drought conditions continue to impact traffic flow through the Panama Canal, and Houthi attacks on container ships and tankers in the Red Sea have forced the diversion of cargo that typically would transit the Suez Canal.
As for the upcoming labor talks, the agreement between the International Longshoremen’s Association (ILA) and the U.S. Maritime Alliance (USMX) expires at the end of September. “Labor action would disrupt operations at South Atlantic and Gulf Coast ports,” the Descartes report said. “ILA leadership has stated that it will not extend the current agreement and told members to prepare for the possibility of a coast-wide strike in October 2024. There are still no statements of progress from either organization.”
One of the things Descartes will be watching is port transit wait times. “If they decrease, it’s an indication of improved global supply chain efficiencies capabilities or that the demand for goods and logistics services is declining. February port transit times decreased on all coasts with East and Gulf Coast ports still experiencing the longest delays.”
Drewry’s World Container Index, released March 14, showed ocean shipping spot rates had started to come down and were expected to continue to decline.
Greg Miller, named the “Best News Journalist of the Year” by the Seahorse Freight Association in late 2023, explained why. “Regardless of how long Panama Canal and Red Sea disruptions last, the impact on spot rates is temporary because networks adjust,” Miller wrote in an Inside Shipping column. “Liners have plenty of extra vessel capacity to handle the longer routes, with more new ships delivered every week. Spot rates have already fallen back materially in the Asia-Europe trade and will follow suit in the Asia-U.S. trade.”
Retailers Face ‘Enormous Risks From Disruptions’
Nathan McGuire, co-founder and chief operating officer of Wicker Park Logistics, examined how various industries dependent on freight movement will fare in 2024.
“As the freight landscape evolves in 2024, rate dynamics will uniquely impact different industries,” McGuire wrote in a blog posted on the Chicago-area company’s website. “Each sector faces challenges and opportunities in the context of changing freight rates and logistics practices.”
Among the industries affected by rate dynamics are oil and gas, solar, paper and packaging, automotive, food and beverage, and retail.
“Retail demand in 2024 is expected to fall in the low-single-digit range, particularly in discretionary categories, according to Fitch Ratings. Supply chain resilience and inventory management strategies will be key,” McGuire said.
The retail industry has already been hit by a number of whammies in the first quarter of 2024. E-commerce powerhouse Wayfair and venerable retailer Macy’s announced major layoffs and warehouse and store closures. And it was announced March 13 that about 1,000 Family Dollar and 30 Dollar Tree stores would close. CNN reported that CEO Rick Dreiling told analysts that “persistent inflation and reduced government benefits continue to pressure the lower-income customers that comprise a sizable portion of Family Dollar’s ]customer base].”
Paul Bingham, director of transportation consulting for S&P Global Market Intelligence, told Inside Shipping that while the impact on the supply chain from COVID is over, “now we’ve got the Red Sea and the Panama Canal, and who knows what will happen in the South China Sea, and supply chain managers have to manage against those risks. You never want to get to the point where you’re suddenly scrambling for air charters to keep your factories running or to avoid stockouts that cripple your stores.”
Bingham stressed that retailers still “face enormous risks from disruptions. They need to incur a higher inventory carrying cost as an insurance policy. They cannot go back to the pure, lean ‘just in time’ supply chain model from years ago because the repercussions from disruptions are just so huge. Companies have to have more of a buffer, and incur higher inventory carrying costs.”
Airfreight Providers Must Meet Heightened Expectations
Frank Hung, VP of sales and marketing at Descartes, said in a SupplyChainBrain article that 80% of cross-border e-commerce is transported by air.
“The growth of Chinese online shopping platforms such as Shein and Temu has markedly escalated the volume of small parcels moving by air. A closer look at China’s Singles Day on November 11, 2023, shows that the country’s e-commerce giants Alibaba and JD.com recorded year-on-year growth in the 24-hour online shopping period, while the worldwide air cargo industry managed to move 657 million packages worth $17.8 billion,” Hung said.
“As competition in China’s e-commerce landscape grows, it also intensifies among air freight providers and their logistics partners, such as freight forwarders and customs brokers. To secure coveted contracts with e-commerce platforms, companies must not only offer competitive pricing structures but also provide efficient and reliable shipping services aligned with heightened customer expectations.”
Class I Railroads Want Heightened Communication
Ari Ashe, a senior editor at the Journal of Commerce, said Class I railroads BNSF Railway, Norfolk Southern, and Union Pacific are looking for ways to break down communication barriers.
“Railroads would like more information on which containers will sit for a week or more. The importers have this information and would be happy to share it. The railroads want it. The importers have it. Why isn’t the information getting through? Because the importers have to go through ocean carriers, who aren’t as adept as domestic intermodal providers like Hub Group, J.B. Hunt, Schneider National, and others at sharing the information with railroads,” Ashe wrote on LinkedIn.
Obviously, better communication could help the railroads improve their service metrics and would ultimately hit the bottom line.
What About the Presidential Election?
According to CNBC’s Jeff Cox, the investment community isn’t paying much attention to the presidential campaign. That would suggest a willingness to invest in freight brokerages and transportation providers.
“As far as things that could bring the election more into play, they include the potential for more trouble in the Middle East and Russia, with disruptions in oil triggering higher energy costs. There’s also a possibility that inflation could be stickier than expected and keep interest rates higher for longer,” Cox said.
Veteran maritime journalist Miller pointed to the United States’ dependence on goods from China, referring to Descartes data showing that Chinese imports accounted for 39.8% of total U.S. containerized imports in January.
“So, U.S. supply chain exposure to China is extremely high. And in addition to the threat of incremental tariffs in the case of a Trump win, we’ve had military exercises by China off Taiwan since 2022, China aligning with Russia on the Russia–Ukraine War, and increased trade tensions with China involving the EV market,” Miller wrote in Inside Shipping. “Clearly, there’s more pressure than ever on U.S. importers to diversify supply chains away from China.”
S&P’s Bingham agreed there is momentum, telling Miller that “even if Trump doesn’t win and we don’t see incremental tariffs, you’ll still see more supply chain diversification over time, despite increased capital costs and pressure from inflation and other negatives pushing back against that. Look at Mexico: We’ve seen growth in Mexico–U.S. trade to the point where Mexico has risen to be the number-one U.S. trading partner.”
Nearshoring is a major reason why El Paso, Texas, is a hot warehousing market, according to Supply Chain Dive, which said other industrial real estate markets to watch this year are Savannah, Georgia, and Southern California.
Citing a CBRE report, Supply Chain Dive said that demand for industrial space in El Paso last year “remained far above the historical average as tenants seek to gain or expand on the location advantages of the market. … With existing supply still tight, tenants will continue to look at the construction pipeline to find future space.”
Caution and Hopefulness for the 2024 Freight Market
“The freight market has not fully broken out of its recession,” according to the LMI.
“Looking further out into 2024, if we continue to see over-the-road dry van capacity exit and we see demand start to strengthen, we should enter the next bull market pricing cycle,” said Michigan State’s Miller.
“Any meaningful change in truckload demand really hinges on interest rate cuts, so absent the Fed cutting rates, we expect truckload demand to be relatively flat this year as there are just no signs that demand will change materially to change the trajectory of the current market,” said DAT’s Croke.
“With OTRI [Outbound Tender Reject Index] at under 4% as of [March 12], there’s still way too much truck capacity, combined with way too many freight brokerages competing for loads. These two factors create a perfect storm for a race to the bottom when it comes to rates,” said Hill of Brush Pass Research.
Bio: Adam Robinson is a data-driven storytelling marketer who has fallen in love with the quest to make supply chains as high functioning, collaborative, waste-free, and productive as possible in an altruistic endeavor to maximize human capital. Adam works at the intersection of sales, marketing, and product, giving him a unique opportunity to build a community around a platform at FreightWaves that meets his passion & personal mission of hyper-efficiency.
