Consumer spending is cooling and there are areas of weakness, such as housing, that are reducing the volume of goods. The average daily package volume of United Parcel Service Inc. in the US fell 1.5% in the third quarter from a year earlier and is likely to decline further in the fourth quarter. The thing is, this year won’t be the peak holiday season for trucking companies because warehouses are already filled with inventory and those goods aren’t flying off the shelves quickly. According to Cowen & Co, prices in the spot market are falling sharply, down 40% from a year ago.
There is a cross flow here. Shipping in the contract market, where prices are locked in by carrier agreements that typically last a year, is still growing. Freight tonnage in the market rose 5.5% in September from a year earlier, the highest level since August 2019, according to the American Trucking Associations. Cowen said the rate of contracts was up 15% from a year ago.
Shipping power will be boosted by infrastructure projects, increased domestic oil drilling, industries with large backlogs such as aerospace and re-shipment of vehicles. Cleanup and recovery efforts from Hurricane Ian in Florida have fueled trucking demand, and a drought that has stranded barges on the Mississippi River is also driving demand for trucks.
Signals from major shipping companies that have reported earnings so far are also mixed. JB Hunt Transport Services Inc. and Landstar System Inc. beat expectations and, more importantly, analysts revised up their fourth-quarter earnings estimates for JB Hunt, while leaving Landstar little changed. Knight-Swift Transportation Holdings Inc. reported revenue below analysts’ expectations and cut its full-year guidance. Accordingly, analysts revised fourth-quarter earnings estimates down 15 cents to $1.16.
However, large carriers are better able to weather market downturns than their smaller peers operating 10 or fewer trucks, which make up about 97% of the companies in the $875 billion trucking market. Large operators have more cushion to deal with rising costs for drivers, trucks, maintenance, financing and insurance, which benefit from lower spot prices.
The shock, as usual, will hit smaller companies first, as they are more dependent on this volatile market. The fallout could be huge, as many new carriers that entered the hot freight market are now feeling the pinch. As of the beginning of 2021, an unprecedented 265,000 new companies will be authorized to operate in the US. Many paid high prices for the big used devices, which nearly doubled earlier this year to around $100,000 and were still up 64% in August from the same month in 2019.
David Jackson, chief executive of Knight-Swift, said in an Oct. 19 conference call with analysts: “We’ve never seen capacity as strong as we’ve seen it come out of this cycle.”
Semiconductor and supply chain shortages that prevented truck makers from producing the large quantities of new big devices the market wanted to buy helped keep new capacity at bay. The ease with which trucks can be added during periods of high freight demand is one of the reasons why the trucking industry has regular boom and bust cycles.
The same lack of new truck capacity that pushed up freight prices last year is cushioning the blow at a time when demand is slowing. JB Hunt is still unable to purchase all of its new trucks and is forced to keep older trucks on the road, which increases its maintenance costs. The company had planned to spend $1.5 billion this year, mostly on equipment, and that would be $500 million less. “We are facing problems in the availability of equipment for growth and replacement along with the uncertainty of the direction of the macro-burning conditions.” JB Hunt CEO John Roberts said in a conference call last week.
The timing of the cargo slump couldn’t be worse for carriers as they begin negotiations with carriers to renew contracts for next year. Shipping companies have dominated these contract negotiations for two years, and shippers are looking to reverse that trend. Last year’s increase in freight demand in the fourth quarter carried over into the early part of this year, and spot prices finally peaked in February. Given the uncertainty in demand, Landstar only provided guidance for the fourth quarter and did not attempt to forecast what 2023 would look like.
“It’s going to be a very difficult first half of next year, just based on benchmarks and the direction of the economy,” Landstar CEO Jim Gattoni said in a conference call last week.
Trucking companies will argue that contract prices have not risen as much as in the spot market and therefore should not fall as much. Even as demand for freight eases, price hikes in everything from driver wages to tires will continue into next year.
“You’re seeing pressure on contract prices, but that’s been a very different story than what’s happened to spot prices,” Jackson said. “I don’t expect there’s any room to lower contract prices now that we’re going through this process.”
What this means for the broader economy will depend on how these mixed signals play out in the freight market over the next few months.
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This column does not necessarily reflect the opinion of the editorial staff 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 Mexican industry, economy and government.
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