The US trucking industry experienced the late-cycle phase of the classic truckload cycle in 2022, leading us into the bottoming phase in early 2023.
The freight cycle remains clearly weak, but there are encouraging rays of light at the end of the tunnel. We think freight market supply and demand dynamics are tightly intertwined, with the two main explanations for the recent improvement in spot trends in April on the demand side: imports are starting to recover and produce season is beginning. But in a market with loosening capacity, these factors may not matter for rates, like last year. The medium-term demand outlook is as encouraging as we’ve seen in over a year, but supply tends to matter more for rates, statistically speaking, and capacity is starting to contract as fleet profitability is hit hard by lower rates.
Freight volumes have weakened further in April, with destocking contributing to the softness. The worst of the destocking is likely behind us, though, with the 24% y/y decline in contained imports in the first quarter. A slowing in destocking would be a positive for volumes. Inflation, while showing tentative improvement, continues to gnaw at consumer spending power, with retail sales in real terms down 3.6% y/y in April. The slow start produce season may also be a headwind.
But with the freight downturn likely closer to the end than the start and significant destocking behind us, even a little less destocking means more freight volume from here. With inflation easing, improving real income trends will allow for a bit more holiday spending later this year. And indeed, we are seeing signs of improved seasonal freight demand of late.
How confident should your business be in ACT's forecasting for 2023?
For 2022, ACT's forecasts for the shipments component of the Cass Freight Index® were 97.5% accurate on average for the 24-month forecast period. Our January 2021 forecast, two full years out, was 99.8% accurate.
ACT Research’s full-year 2022 DAT spot rate forecasts were 99.7% accurate from Q2’21 (19-21 months out) for dry van and 98.5% for reefer. DAT dry van spot rates, net fuel, finished 2022 at $2.06 per mile, in line with our forecasts to the penny from 18 and 19 months out (June and July 2021).
Major Trends Within the Trucking Industry
Over the past year, the primary modal trend as capacity growth accelerated has been a considerable increase in the proportion of TL freight, and consequent declines in less-than-truckload (LTL) and intermodal volumes.
TL and LTL are the two largest modes in the Cass database. Currently, TL represents considerably more of the data set than a year ago, and LTL is similarly below its year-ago level. Interestingly, and as we’d expect, in tight markets, freight flows from TL to LTL, and from LTL to TL in loose markets.
Critically, though it’s probably too early to call it a trend, the trend change so far this year suggests the trucking industry has passed peak looseness. Freight has been migrating to TL from other modes, but capacity growth has started to slow, and a rebalancing has begun.
Inflation
Inflation is down from 9% last summer to mid-single digit now, but it's far from the Fed's 2% target.
The expectation is that inflation will be tamed in the next three or four quarters. That would allow the Fed to ease back on rates through 2024. If so, it would open a path to “normality”: GDP growth close to 2%, industrial production growth slightly above that, support from consumer and particularly investment spending, and inflation reaching the Fed’s targeted +/-2% range. That would be a base trajectory we would see lasting all the way to the end of the forecast span in 2028.
How many more Fed rate hikes ahead?
The May 2 rate boost of 25 basis points (bps) is the tenth in the current cycle, and the cumulative 500bps of increase is the most aggressive in 40 years.
Some analysts expect the FOMC will now take a break; however, monetary tightening is all about reversing the 2021-22 inflation spike. Until the Fed's target of 2% is at hand, future rate hikes can't be ruled out.
Falling Oil Prices
Since mid-April, the price of West Texas Intermediate (WTI) fell 17% to below $70. Energy markets are notoriously volatile, but WTI has been essentially range bound between $70-$80 per barrel in 2023. We view the sharp decline, in the face of partly implemented OPEC+ production cuts, as a sign of weakening global demand.
Deteriorating ACT Tractor Dashboard
The top line on the Class 8 Tractor Dashboard deteriorated in March to a -8 reading, the lowest reading yet in the current downturn (albeit less severe than the double-digit declines in prior downturns).
What Does the Future Hold for the Trucking Industry?
We’ve spent most of the past year warning about a potential recession. Admittedly, the economy has proven more resilient than initially envisioned. That said, we think broader economic conditions are softening, and we reiterate our cautious view, including our forecasts for slowing 2H’23 production rates. We continue to expect a shallow recession to materialize, centered on mid-year.
Will the trucking industry grow in 2023?
The critical factor in forecasting, especially as we look to 2024, is when do those demand headwinds, lower freight volumes and rates, plus higher borrowing costs, compress carrier profits sufficiently to kill the peak-cycle activity?
One of the critical heavy vehicle demand components, carrier profitability, is increasingly under pressure. In Q1, the public carriers’ profits took a hit, falling to levels last seen in early 2020. While some of the decline was seasonal, core carrier margins were down 250bps y/y, and 300bps below the cycle’s Q4’21 peak. With contract rates expected to deteriorate through 2023, profit margins should continue to narrow.
What is the trucking demand forecast?
Class 8 demand to this point has remained relatively resilient, but ACT Research sees clear softening in big fleet profitability and other ancillary metrics. Expectations are that current strong production and sales in the face of weak freight creation will exhaust pent-up demand in 2023, as lower freight rates, higher equipment and borrowing costs, improved equipment availability, and shrinking profits put downward pressure on demand overall.
How are trucking rates likely to change in 2023?
While the pricing pendulum remains with shippers for now, the next capacity rebalancing has begun. With capacity slowing and set to decline later this year, rate trends should begin to recover as soon as traction on freight volumes is established.
The intersection of additional volume and tightening capacity underpins our forecast for a near-term bottom in spot truckload rates. We’ve been expecting the bottom roughly around this month since we introduced 2023 forecasts 16 months ago. Though rates are lower than those early forecasts, we still think Roadcheck will mark the bottom this May.
What will trucking capacity be in 2023?
Interstate operating authorities are diminishing at a record rate, with about 11,000 net revocations since last October, including about 1,600 net revocations in April. Total revocations were about 10,800 in April, near record levels, though grants and reinstatements are also elevated. This is beginning to tighten capacity, which will also help spot rates find the bottom and begin to rise.
Long-distance trucking employment is also contracting. Long-haul trucking jobs declined by 8,700 jobs in Q1’23, or 1.0%. While still up 3.0% y/y in that latest March data point, the series will be down on a y/y basis by June on its current level.
Since trends in employment follow trends in freight rates, long-haul jobs are set to decline this year.
For more details on the trucking industry forecast for 2023, see ACT's freight & transportation forecast.