By Adam Robinson, CEO, The Robinson Agency
2022 was a wild ride for the freight market, with immense fluctuations and unanticipated events. Prices of spot truckload freight saw wide disparities, diesel fuel hit record highs, and spot truckload capacity variability went from scarce to equaling pre-pandemic levels. These changes were caused by changing consumer preferences, inflation, and supply chain issues.
It appears that 2023 will also be a tumultuous year for trucking, as a thorough examination of the last quarter of 2022 will provide insight into what to expect in the initial three months of 2023.
Economists’ predictions for 2023 are varied and range from minor, potentially beneficial recessions to full-fledged disasters. The Federal Reserve Bank is trying to avoid a severe recession by tightening, but a slowdown is still likely.
Consumers are already feeling the strain of high inflation, with their purchasing making up a big chunk of their budgets. Credit utilization also rises at high percentages while the savings rate has decreased. This situation is becoming increasingly critical, and it is uncertain how further consumer trends will develop.
Although hiring rates are still relatively good, they are dropping quickly, and if recessionary pressure persists, it could lead to higher unemployment rates by the middle or end of 2023. The Fed aims to achieve this, and the Great Resignation has shown that employment can shift dramatically in a short period.
Any shock to the labor market could be devastating, and the combination of a slowing new home construction market, tech fallout, and reduced consumer spending could have a massive impact.
Manufacturing activity has been slowing, with product categories below prior levels.
- Paper products -6.0%
- Construction supplies -0.07%
- Textile materials -8.6%
- Primary metals -3.7%
- Wood products -2.8%
The automotive industry has rebounded since the pandemic-induced shortages of materials and semiconductors caused car values to plummet. October 2022 saw the highest production levels, but since then, the sector has declined due to the increased interest rates. While inventory levels are still low, they have been increasing, as evidenced by the plummeting stock prices of Carvana, which have dropped 97% in the last year alone. The auto market is navigating a downward trajectory.
Industrial production has decreased by 0.2% and is expected to decline for the first two years of 2023.
Despite the current backlog of orders and production slowing, the Institute for Supply Management (ISM) has confirmed the ongoing contraction of general manufacturing.
The ISM’s PMI reading of 49.0 and the new orders reading of 47.2 both indicate contraction for the measured month. The manufacturing decline is expected to speed up in Q1 2023, likely due to past COVID-19 supply chain disruptions.
Consumer Conditions & Retail
The consumer savings rate has been declining and is now at its lowest since 2005. Credit usage is rising in response to inflation, as consumers rely on borrowed funds to make ends meet. This pattern of borrowing and spending leads to greater credit balances and dwindling savings accounts, causing consumers to rein in their spending.
November was not a great month for retail sales as the peak season failed to provide a boost. Non-store retailers dropped by 0.9%, while furniture and electronics saw 2.6% and 1.5% declines, respectively. The overall retail sales decreased by 0.6%.
The monthly Consumer Price Index (CPI) experienced a slight uptick of 0.1%, which increased the overall index to a 7.1% increase year-over-year. Despite the slight increase, used car and truck prices decreased by 2.9%, and gasoline prices declined by 2.0%, contributing to the CPI growth slowdown. On the other hand, certain consumer staples saw an increase, specifically food at 0.5% and shelter increasing at 0.6%.
The U.S. economy took a hit in December when new home permits, a reliable economic leading indicator, dropped by 11.2%, leading to a year-over-year decrease of 22.4%. This downturn was attributed to a combination of rising mortgage interest rates and higher costs of building materials, making new home construction more difficult to finance. Nevertheless, new home construction remains an integral part of the U.S. economy, providing employment and stimulating the sale of raw materials.
In November, the number of housing starts decreased by 0.5% after a 2.1% reduction in October. The greatest decline was seen in the single-family start category, which dropped 4.1% in November and an incredible 32.1% year-over-year. Of the most influential U.S. areas, the Midwest experienced a significant fall of -26.7%, and the South had a decrease of -6.6%.
Housing permits and starts are crucial economic gauges, and all signs point to them remaining consistent in the subsequent months. These figures are a reliable barometer used to predict future economic growth.
Freight Market Overview
Trucking has undergone massive fluctuations and alterations over the past year, and this trend will likely continue into 2023. Consequently, a comprehensive strategy to address this ongoing climate must be considered when devising logistics plans.
Truckload Freight Market Trends 2023: What to Expect
Over the past two years, logistics companies have experienced immense disruption due to the freight market’s persistent issues and unpredictability. With the added pressure of the coronavirus pandemic, influenza, and RSV, shippers, and transportation providers have had to tackle high diesel prices, U.S. economic inflation, and a continuous shortage of trucks. This has caused disruption in supply chains all over the world and has cast a shadow of worry over the future of the freight marketplace as we approach the last quarter of the year and a new era of unknowns.
A Look Back at the 2022 Truckload Market
2022 was a difficult year for many players in the logistics sector. Small and big companies alike have been forced to close their doors as a result of decreasing retail sales and a decrease in truck volume in comparison to before the pandemic. This has caused competition among carriers to become even more fierce, and truck profit margins to become ever smaller. Fuel prices stayed elevated throughout the year, making it even harder for carriers to decide which shipments to take on. Moreover, the economic conditions in the U.S. have not provided any relief.
As the cost of living increases across the United States, it appears that other sectors of the retail market have felt the pinch. Purchases of food and used cars have declined, demonstrating that the economic slowdown is impacting many different industries.
A Technological Turn
In order to stay competitive and stay ahead of the curve, many logistics companies have implemented advanced technologies to assist shippers in streamlining their supply chains. By providing tracking and tracing, GPS monitoring, and route optimization services, these transportation service providers have been able to maintain their operations despite the tumultuous market conditions of the past year.
Data analytics from 3PL companies using software offer key market indicators like the outbound tender volume index (OTVI) and outbound tender rejection rate index (OTRI). The OTRI, which tracks the percentage of truckload shipments carriers reject, has dropped to a near low, suggesting a softer market with fewer load options. This data, combined with the contract versus spot freight index, gives shippers an inside look at carrier capacity and lane-specific freight market rates, trends and access to a comprehensive set of analytics tools.
The consumer’s increasing demand for e-commerce has driven the focus on technology in the logistics industry. Companies have adapted their services to meet the needs of middle-mile, final-mile, and parcel deliveries. To further support this, trucking companies are utilizing tech stacks such as TMS enabled visibility and tracking and tracing technologies. This allows shippers to access an online portal and gain a better understanding of their shipments, which enables them to make the necessary adjustments to guarantee timely deliveries.
2023 Truckload Market Trends
According to a recent FreightWaves survey of 400 carriers and brokers, nearly 70% predicted Q1 2023 or Q2 as when spot rates would hit bottom. This indicates a tough start to next year, as many logistics managers anticipate the economic patterns of 2022 will continue. Carriers and broker groups that rely on a thriving spot market are particularly vulnerable, as retail activity decreases and Q1 is typically a slow period in the industry. Consequently, they may struggle financially over the first half of 2023.
The decreased demand for retail goods can work to shippers’ advantage, as it opens up more transportation options and likely leads to cheaper freight rates. With profit margins lowered, both brokers and carriers are incentivized to keep their trucks running. However, a drop in freight volume can make it difficult for brokers to acquire new customers. In these situations, shippers often stick with their usual service providers, rather than taking a chance on an unfamiliar carrier.
Many businesses are likely looking to sustain their current portfolio, enhance customer service, and boost their network capabilities. During this time, brokers have a great chance to adjust their prices, bring in extra freight opportunities, and find truckers who are happy to cover more miles.
Spot vs. Contract Rate Expectations
The rapid fall in truckload spot rates in 2022 does not inevitably lead to a similar drop in contracted rates. Contract rates are likely to experience a small rise instead. Compared to the spot rate market, contract rates are less volatile and tend to feature a higher margin to support carriers over a longer period of time, such as a year or quarter. Additionally, the impact of the global pandemic, economic inflation, and high fuel costs are also taken into account when determining contracted rates, allowing carriers to make up for any loss in income.
Despite the extra barriers, transportation providers are still required to meet their contractual obligations. This has created openings for new carriers to join in on freight mini-bids – requests for pricing on certain lanes where a shipper might be having difficulty.
The potential of major retailers and global shippers transitioning to mini-bids to address some of their struggles in the upcoming years is evident. By using mini-bids, shippers can take advantage of more competitive rate quotes and better services, as well as more reliable transportation partners when their current providers can no longer operate their lanes profitably or meet their contractual obligations. As a result, mini-bids provide a viable solution to many of the supply chain challenges these organizations face.
The LTL market is improving its efficiency with the help of technology and consolidation. While the truckload market is made up of numerous carriers, only 25 of them account for 91% of the LTL revenues.
The capital-intensive nature of LTL has necessitated an expansion in market capacity. This has been made difficult due to truck and labor shortages, as well as several mergers, acquisitions, and bankruptcies. Despite these obstacles, demand for LTL continues to increase due to the rise of e-commerce.
Due to a decrease in consumer spending, tonnage is projected to drop 3% in 2022 and an additional 3% in 2023. This could lead to a balance between tonnage/volume and capacity in 2023.
General published LTL rate increases are estimated to be around 5% for the next three years. Although this is the expectation, it is thought that there could be a decline in pricing come 2023, with analysts forecasting a yearly range from -3% to 1%. This would mean that certain lanes could experience a decrease in pricing, whilst others could see an increase.
Despite the 1.9% decrease in domestic carload volume for 2022, intermodal volume experienced a more considerable drop at 5.9%. This could indicate that the industrial sector is healthier than the consumer sector. This is supported by the growth in motor vehicle carloads (5.4% year-over-year), food products (3.1%), and coal volume (flat year-over-year).
A drop in import levels, particularly at ports in the West, had a negative effect on both domestic and international intermodal volumes, with a year-on-year decrease. Moreover, the abundance of freight in the truckload market also played a role in the decline in volumes.
Flat intermodal spot rates seen since September 2022 seem to suggest that Class 1 rails and their domestic intermodal partners are confident in their capacity to meet contractual shipper needs. This assurance is likely due to the low expectation that a fall volume surge will occur and carry into 2023. This lackluster peak season could lead to a decrease in rates, disregarding fuel surcharges, as compared to the high levels of 2022.
In summary, the difficulties experienced by shippers in 2022 will most likely persist into the first quarter of 2023. After the high demand season of Thanksgiving, Black Friday and Christmas, people tend to curb their spending on non-essential items after the New Year’s festivities.
It is likely that spot rates will decrease in Q1, as fewer loads are offered and carriers battle for them. This is usually a period of the year when shippers issue their RFPs to secure transportation providers while the market is relatively stable and advantageous to shippers.
It appears that the logistics sector is likely to confront similar obstacles as it enters 2023, in light of the present market atmosphere and the unpredictable prognosis for the U.S. economy.
The freight market has been a roller coaster ride due to the pandemic and the inflation surge, and markets still have a considerable amount of obstacles to overcome. Generally, rates are anticipated to decrease, however there are some issues that could make this more difficult, like the potential for smaller fleets and independent operators to go under, as well as the continual high cost of fuel.
The trucking economy appears to be transitioning away from growth and towards a recession, which will result in increased capacity and lower contract rates. After the substantial dip in 2022, spot rates should remain generally steady.
The growth of LTL capacity is limited due to the high cost of capital investments, leading to only a minor drop in prices or even a slight rise in an economic recession. E-commerce, which was the main factor in driving up the LTL market, has been slowing down recently.
This coming year will be a difficult one for freight companies, but smart shippers can leverage any market volatility to their advantage. To make the most of the situation, shippers should collaborate with freight brokers to identify potential savings and stay up to date on any market shifts in the upcoming year.