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Trucking Swerves Erratically Across the US Economy

ARCADIA, FL - OCTOBER 04: Trucks haul cases of water and MREs through floodwaters near the Peace River on October 4, 2022 in Arcadia, Florida. Fifty miles inland, and nearly a week after Hurricane Ian made landfall on the gulf coast of Florida, the record breaking floodwaters in the area are receding to reveal the full effects of the storm. (Photo by Sean Rayford/Getty Images) (Photographer: Sean Rayford/Getty Images North America)

If the trucking market were the ocean, red flags would be fluttering along the beach to warn of all the crosscurrents and riptides that make it treacherous to predict freight’s near-term future and its impact on the broader economy.

The freight industry is slowing in general, but it’s not so much falling off a cliff as returning to earth from the soaring heights of a hot cargo market that peaked in the fourth quarter last year. Having a crystal ball is most important now because how cargo demand holds up over the next couple of months will determine the leverage shippers will have to push for lower rates as they negotiate freight contracts for 2023.

Consumer spending is cooling, and there are pockets of weakness, such as housing, that are weighing down cargo volume. United Parcel Service Inc.’s average daily package volume in the US fell 1.5% in the third quarter from a year earlier and is likely to decline even more in the fourth quarter. The word is that there will be no peak holiday season for truck companies this year because warehouses are already stuffed with inventory, and those goods aren’t moving off shelves rapidly. Rates in the spot market are plummeting, down 40% from a year earlier, according to Cowen & Co.

This is where the crosscurrents come into play. Freight in the contract market, where rates are locked in through shipper agreements that typically last a year, is still rising. Cargo tonnage in this market rose 5.5% in September from a year ago, reaching the highest level since August 2019, according to the American Trucking Associations. Contract rates have risen 15% from a year earlier, Cowen said.

Cargo strength is being bolstered by infrastructure projects, increased domestic oil drilling, industries with large backlogs such as aerospace and rebounding auto shipments. The cleanup and reconstruction work from Hurricane Ian in Florida has created trucking demand, and the drought that has left barges stuck on the Mississippi River also pushes some bulk demand to trucks.

Signals from the large trucking companies that have reported earnings so far have also been mixed. J.B. Hunt Transport Services Inc. and Landstar System Inc. topped expectations and, more important, analysts adjusted up their fourth-quarter earnings estimate for J.B. Hunt while leaving Landstar’s little changed. Knight-Swift Transportation Holdings Inc. reported earnings below analysts’ expectations and lowered its full-year guidance. Analysts, accordingly, adjusted down their fourth-quarter earnings-per-share estimates by 15 cents, to $1.16.

Still, large carriers are better positioned to weather a market downturn than their smaller peers that operate 10 or fewer trucks, which account for about 97% of companies in the $875 billion trucking market. The big operators have more cushion to deal with rising costs for drivers, trucks, maintenance, financing and insurance that are dragging on profit as spot prices drop.

The shakeout, as usual, will hit the smaller companies first because they depend more on that volatile spot market. The fallout could be massive because many of the new carriers that jumped into the hot freight market are now feeling the squeeze. Since the beginning of 2021, an unprecedented 265,000 new companies obtained their operating authority in the US. Many paid exorbitant prices for used big rigs, which almost doubled in price to about $100,000 earlier this year and were still up 64% in August from the same month in 2019.

“We have never seen capacity come out as early as we’ve seen it come out of this cycle,” David Jackson,  the chief executive officer of Knight-Swift, said in an Oct. 19 conference call with analysts.

The semiconductor shortage and supply chain snags that kept truck makers from producing as many new big rigs as the market wanted to buy have helped keep a lid on new capacity. The ease of adding trucks during times of strong cargo demand is one reason the trucking industry has regular boom-and-bust cycles.

That same dearth of new truck capacity that drove up freight prices since last year will help cushion the blow now that demand is flagging. J.B. Hunt still can’t purchase all the new trucks it wants and is being forced to keep older trucks on the road, driving up maintenance costs. The company had planned to spend $1.5 billion this year, mostly on equipment, and will fall short of that by $500 million.“We continue to face difficulties in equipment availability for growth and replacement along with the uncertainty of the direction of macro conditions,” J.B. Hunt CEO John Roberts said on a conference call last week. 

The timing of the freight weakness couldn’t be worse for carriers as they begin negotiations with shippers to renew contracts for next year. Trucking companies have had the upper hand on these contract talks for two years, and shippers will be keen on reversing that trend. Last year’s surge of freight demand in the fourth quarter spilled into the early part of this year, and spot rates finally peaked and began to fall in February. Given the uncertainty of demand, Landstar provided guidance for the fourth quarter only and didn’t attempt to forecast how 2023 will unfold. 

“It’s going to be an extremely tough first half next year based on, just on the comparisons and the direction of the economy,” Landstar CEO Jim Gattoni said on a conference call last week.

Trucking companies will argue that contract rates didn’t rise as much as those in the spot market and therefore shouldn’t fall as much. Even with lower cargo demand, price increases on everything from driver wages to tires will continue into next year.

“You start to see pressure on contractual rates, but it’s been a much different story than what happened to spot rates,” Jackson said. “I’m not expecting that there is the kind of room to retrench a whole lot on contractual rates now as we go through this process.”

What this means for the broader economy will depend on how these mixed signals in the trucking market play out over the next few months.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he covered U.S. industrial and transportation companies and Mexico’s industry, economy and government.

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