Transportation Industry Update

Dec 8, 2022

It is predicted that the U.S. economy will experience a mild recession early next year. Because of the pandemic, there was a shift in spending away from services and toward goods in 2020 and part of 2021, which helped drive an increase in freight demand. Now the economy is transitioning back to normal spending on both services and goods—and in turn softening freight demand. According to Freight Transportation Research (FTR), real GDP is expected to increase just 1.7 percent in 2022 and 1.8 percent in 2023.

Consumer spending, which accounts for about 70 percent of the United States’ economic activity, expanded at a 1.4 percent annual pace in the third quarter, down from a 2 percent rate in the second quarter, which indicates the personal consumption of goods is slowing. Over the same time, housing starts have plunged 26 percent, due to surging mortgage rates as the Federal Reserve aggressively raises borrowing rates to combat chronic inflation—currently estimated to be around 7 percent annually. The housing market has experienced its sixth straight quarterly drop in residential investment, which contributes to weakened freight demand. And while factory related manufacturing freight is holding up, it is also decelerating, according to the American Trucking Associations (ATA).

However, U.S. consumers are expected to increase spending by 6 to 8 percent during the peak holiday season, according to the National Retail Federation. This spending level indicates a relatively strong economy, but it does not touch the record 14 percent increase shoppers tallied last year. Moreover, it is unclear if end-of-year shoppers will help retailers wind down huge idle inventories sitting in warehouses and in cargo containers clogging supply chains.

In October, the ATA’s for-hire truck tonnage index saw the largest month-over-month decrease since the beginning of the pandemic, a report that aligns with a muted fall freight season and slowing economy. Through October, truck tonnage was up 3.9 percent compared to the same period in 2021—and it was dominated by contract rather than spot market freight, indicating that most freight can be handled with existing capacity without the need for spot loads. In fact, according to DAT Freight and Analytics data, 90 percent of all loads that are moving on the road today are contract freight, compared to a year ago when it was 75 percent contract and 25 percent spot. As a result, contract rates are up about 8 percent year-over-year, while spot rates are down 14.5 percent. FTR expects both spot and contract rates to decline in 2023. Additionally, tender rejections on contract loads are under 5 percent, the lowest level since May of 2020, which means that carriers are willing and able to accept loads as tendered to them by shippers under contract terms.

One key driver behind the increase in contract rates, despite softening demand and increased capacity across the supply chain, is fuel. Compared to around $3.73 per gallon last year, diesel is climbing again and hovering around $5.23 per gallon at the end of November. The American Transportation Research Institute’s (ATRI) 2022 Operational Costs of Trucking study found year-over-year increases of 35 percent in the cost of fuel per mile, which can have a serious impact on the bottom line of many trucking companies.

News reports of a diesel fuel shortage have sparked fear of a supply crunch. Russia’s war on Ukraine has dramatically decreased Russia’s exports of gas and diesel, causing low inventory amid high demand. Moreover, refineries shift to maintenance mode in the winter months to prepare for high activity into summer, so a decrease in capacity occurs. But as refineries continue to operate, they are expected to meet the demand for fuel.

The American Trucking Associations recently downgraded its estimated driver shortage to 78,000 from 80,000, but the shortage is expected to continue to grow in the longer-term. In the near term, a slowing economy has taken the shortage out of the spotlight, as carriers are managing with their existing driver pools. As more drivers continue to retire or be taken out of service through the Drug and Alcohol Clearinghouse, the shortage will persist, and the industry will be required to find ways to attract the next generation. The Federal Motor Carrier Safety Administration’s Safe Driver Apprenticeship Program for 18- to 20-year-old drivers could prove effective in attracting high school graduates to the industry. To the extent that this program can safely allow 18-year-old drivers to obtain a CDL, it will eliminate a major structural gap in the driver pipeline for high school graduates, which has existed for decades.

As a result of pent-up demand, truck orders continue to be above average after two years of constricted production due to pandemic related disruptions. In October, new truck orders were up 3 percent year-over-year after OEMs opened their order boards more broadly as component shortages began to resolve. Many companies, including ours, continue to struggle with OEM asset allocations. It remains to be seen what the freight market will look like in six to nine months when those trucks are received. If the freight market is not in an upcycle, used trucks may be hitting the market and bringing prices down from record highs experienced during the pandemic.

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