Consumer spending is cooling, and there are pockets of weakness, such as housing, that are dampening cargo volumes. United Parcel Service Inc. said average daily package volume in the U.S. fell 1.5% in the third quarter from a year earlier and could decline further in the fourth quarter. Word is there won’t be a peak holiday season for trucking companies this year because warehouses are already stuffed with inventory, and those products aren’t moving off the shelves fast enough. Rates are falling in the spot market, down 40% from a year ago, according to Cowen & Co.
This is where crosscurrents come into play. Freight in the contract market, where rates are locked in through shipper contracts that typically last a year, is still growing. Cargo tonnage in this market rose 5.5% from a year earlier in September, the highest level since August 2019, according to the American Trucking Association. Cowen said contract rates are up 15% from a year ago.
Cargo strength is being boosted by industries with large backlogs such as infrastructure projects, increased domestic oil drilling, aerospace and rebounding auto shipments. Cleanup and reconstruction work from Hurricane Ian in Florida has created demand for trucks, and the drought that has stranded barges on the Mississippi River has also pushed some bulk truck demand.
Signals from large trucking companies have also been mixed. JB Hunt Transport Services Inc. and Landstar Systems Inc. Topping expectations and more importantly, analysts adjusted their fourth-quarter earnings estimates for JB Hunt while Landstar was little changed. Knight-Swift Transportation Holdings Inc. reported earnings that fell short of analysts’ expectations and cut its full-year guidance. Analysts, accordingly, adjusted their fourth-quarter earnings-per-share estimate by 15 cents to $1.16.
Still, large carriers are better positioned to weather market downturns than their smaller peers who operate 10 or fewer trucks, which account for about 97% of companies in the $875 billion trucking market. Big operators have more cushion to deal with rising costs for drivers, trucks, maintenance, financing and insurance that drag on profits as spot prices fall.
The shakeout, as usual, will hit smaller companies first because they rely more on that volatile spot market. The fallout could be massive as 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 have received their operating authority in the United States. Many paid exorbitant prices for used big rigs, which nearly doubled earlier this year to around $100,000 and were still up 64% in August from the same month in 2019.
“We’ve never seen capacity come out as quickly as we’ve seen it come out of this cycle,” Knight-Swift Chief Executive Officer David Jackson said in an Oct. 19 conference call with analysts.
Semiconductor shortages and supply chain snags that have helped truck makers put a lid on new capacity as they seek to bring new big rigs to market. The ease of adding trucks during periods of heavy cargo demand is one reason for the trucking industry’s regular boom-and-bust cycle.
The same lack of new truck capacity that has driven up freight prices since last year will help cushion the blow now that demand is flagging. JB Hunt still can’t buy 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 be $500 million short of that. “We are facing difficulties in the availability of equipment for growth and replacement with uncertainty over the direction of macro conditions,” JB Hunt CEO John Roberts said in a conference call last week.
The timing of freight weakness couldn’t be worse for carriers as they begin negotiations with shippers for next year’s contract renewals. Trucking companies have held off on contract negotiations for two years, and shippers will be eager to reverse that trend. Last year’s surge in freight demand in the fourth quarter dissipated early this year, and spot rates eventually peaked and began to fall in February. Given the uncertainty in demand, Landstar only provided guidance for the fourth quarter and did not attempt to forecast how 2023 would unfold.
“It’s going to be a very tough first half just based on comparisons and the direction of the economy,” Landstar CEO Jim Gattoni said in a conference call last week.
Trucking companies will argue that contract rates have not risen as much as in the spot market and therefore should not be as low. Even with lower freight demand, increases in everything from driver wages to tire prices will continue into next year.
“You start to see pressure on contractual rates, but that’s a much different story than what happened with spot rates,” Jackson said. “I don’t expect there’s room to completely cut contractual rates now as we go through this process.”
What this means for the broader economy will depend on how these mixed signals play out in the trucking market over the next few months.
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This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.
Thomas Black is a Bloomberg opinion columnist covering logistics and manufacturing. Previously, he covered US industrial and transportation companies and Mexico’s industry, economy and government.
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