Now that inventory levels are shrinking and inflation is easing, trucking rates may have finally hit bottom. Could we be nearing the end of the freight recession?
Sean Maharaj is a vice president in the Global Transportation Practice of the management consultancy Kearney. Additionally, Maharaj is a chief commercial officer of Kearney’s Hoptek.
Balaji Guntur is a vice president in the Global Transportation Practice of the management consultancy Kearney. Additionally, Guntur is a co-founder and chief executive officer of Hoptek, a Kearney company focused on the trucking industry with a suite of software-based products.
The transportation industry has always been vulnerable to economic shocks or slowdowns, and the trucking sector has certainly seen its fair share of rough road conditions over the decades. The current cycle, however, is more severe than any that has occurred in the last two decades.
Several factors made for a perfect misalignment of supply and demand in 2022–23. Stubbornly high inventory levels and high inflation led to cooling demand for shipping. At the same time, increased trucking capacity entered the industry after the pandemic, which created a situation characterized by industry experts as a “freight recession.” Furthermore, leading up to the recent cooling off, there was a healthy run of profitability post-pandemic, which resulted in record high spot rates. As a result, the cliff from which trucking spot rates dropped was that much steeper.
However, even with more than half of the year in the rearview mirror, there’s so much more to unfold in the world of shipping and transportation in 2023. In terms of volume, the industry typically sees the busiest season beginning August through October. This period also contributes to the lion’s share of revenues. In 2023, we have seen a mixed bag of signals related to inflation, the job market, and the war in Ukraine. As a result, the jury is still out on the timing and extent of the much-touted recession.
The trucking market continues to remain “loose,” but as inventory levels shrink and inflation abates, rates are expected to recover. However, as persistently high inflation and recessionary headwinds continue, it isn’t clear if the trucking industry is out of the woods yet, so to speak.
Have truckload rates hit bottom?
According to ACT Research, spot rates bottomed out in April with May seeing a slight uptick. The transportation data analysis firm speculates that some of that upward movement was caused by a loss of labor, as approximately 50,000 jobs were purged in Q1 of 2023, potentially leading to more competitive terms.1 In fact, we could be looking toward the end of oversupply and the beginning of a recovery or transition phase in the second half of 2023. Most of 2023 thus far has been marred by tremendously low spot rates, which have pushed many smaller fleets and owner operators out of the market. That said, as hiring slows and smaller players exit, the market will see a rebalancing of supply and demand.
As evidenced by the ACT For-Hire Trucking Index in Figure 1, rates remain contracted for 2023, but May shows a slight uptick. Whether this indicates a bottoming out of rates will have to be proven beyond a sample of one data point, but many in the marketplace do believe that further rate reductions are unlikely to occur.
From a revenue perspective, the upturn in rates should help carriers forecast a little better for the remainder of the year. When the carrier “earnings party” came to an end in the third quarter of 2022, forecasting revenue for the near future became harder. For example, for Q1 2023 some carriers reported revenue as flat or only slightly up, while others saw revenue fall through the floor by double digits. It’s important to keep in mind that during the past year many carriers benefitted from heavy gains on the sale of existing assets at prices not seen before. Equipment prices, however, have been falling, and many believe they have not yet found their floor. So that revenue opportunity may not resurface again for the foreseeable future.
Much speculation exists around what will help to drive the trucking industry back to healthy territory. Financial pressures include, but are not limited to, inflation, slowing consumer demand, weakness in the technology and media sectors, and a general sentiment of market weakness across the board. However, projections of a recession happening in 2023 are confounded by a red-hot job market that is adding jobs at well above projected rates.
To get out of the current freight recession, the trucking industry will need to see volumes recover due to increased consumer spending. Meanwhile carriers are still dealing with the compounding effect of cost increases on their business, some of which are “sticky.” For example, removing fuel from consideration, some fixed costs—which include driver salaries, maintenance and equipment costs, and overall operating costs for a fleet—have risen by almost a third since 2019.
For the truckload sector, challenges will remain—no one is out of the woods by any stretch of the imagination. Initial indicators are directionally welcome, and the anecdotal feedback is turning somewhat more positive than prior months. Indeed, some organizations do seem to be anticipating better times ahead and are starting to consider investments across areas that will drive greater levels of efficiency, utilization, and execution.
LTL holds strong
In contrast to truckload, the over $80 billion less-than-truckload (LTL) sector continues to be the darling of the industry. LTL’s strong pace of growth is a result of a rapid acceleration of e-commerce trends during the pandemic years and the resulting improvements by fleets to achieve high levels of efficiency and profitability. While the industry slowed down a little at the end of 2022, it still maintains a healthy position. Thanks to industry leaders like UPS and FedEx, LTL players have adjusted pricing and business models that reflect strength across the industry. In fact, LTL carriers have even managed to fend off price erosion when demand softens. “The LTL carriers seem to have figured it out,” says Bob Costello, chief economist at the American Trucking Associations.
LTL carriers are less fragmented compared to their truckload counterparts, with the top 25 LTL carriers owning 80% of the market.2 In addition, existing providers also benefit from the sector’s intricate hub-and-spoke organizational structure, which is hard to replicate, creating a high barrier of entry and limiting new competitors. As a result, providers have the scale and ability to manage the industry forces currently at work.For example, at the start of 2023, some LTL carriers implemented general rate increases to account for changes in business costs and other related network factors directed at maintaining critical customer services levels in key lanes.
With the above in mind, we expect LTL rates to increase steadily for the remainder of the year, and potentially rise by single digits in 2024, especially as the effects of the recent bankruptcy of Yellow, the nation’s third largest LTL carrier, is already starting to be felt. While the industry is not immune to geopolitical factors, many experts project a positive outlook for LTL carriers.
Technology’s helping hand
Regardless of market conditions, carriers have an opportunity to improve their profitability by increasing their focus on technology and innovation. By harnessing real-time data, such as truck location and driver hours of service, carriers can improve their visibility into the state of their network. Artificial intelligence (AI) and real-time optimization can help them increase efficiency and utilization, lower operating ratio (OR), improve driver retention, and increase return on assets, while also meeting customer demands. Better data literacy and AI have also helped leaders to improve decision-making by addressing chronic challenges related to manual effort, tribal knowledge, and human judgement.
Those carriers that have embraced AI, real-time optimization, and digital freight search have seen a 20-point improvement in OR and a 70% reduction in driver turnover, while achieving up to 2,500 revenue miles per week. These statistics show that even though economic cycles in trucking are inevitable, carriers have an opportunity to leverage data and technology to ride through them and deliver consistently better performance and financial results.
Online merchants should consider seven key factors about American consumers in order to optimize their sales and operations this holiday season, according to a report from DHL eCommerce.
First, many of the most powerful sales platforms are marketplaces. With nearly universal appeal, 99% of U.S. shoppers buy from marketplaces, ranked in popularity from Amazon (92%) to Walmart (68%), eBay (47%), Temu (32%), Etsy (28%), and Shein (21%).
Second, they use them often, with 61% of American shoppers buying online at least once a week. Among the most popular items are online clothing and footwear (63%), followed by consumer electronics (33%) and health supplements (30%).
Third, delivery is a crucial aspect of making the sale. Fully 94% of U.S. shoppers say delivery options influence where they shop online, and 45% of consumers abandon their baskets if their preferred delivery option is not offered.
That finding meshes with another report released this week, as a white paper from FedEx Corp. and Morning Consult said that 75% of consumers prioritize free shipping over fast shipping. Over half of those surveyed (57%) prioritize free shipping when making an online purchase, even more than finding the best prices (54%). In fact, 81% of shoppers are willing to increase their spending to meet a retailer’s free shipping threshold, FedEx said.
In additional findings from DHL, the Weston, Florida-based company found:
43% of Americans have an online shopping subscription, with pet food subscriptions being particularly popular (44% compared to 25% globally). Social Media Influence:
61% of shoppers use social media for shopping inspiration, and 26% have made a purchase directly on a social platform.
37% of Americans buy from online retailers in other countries, with 70% doing so at least once a month. Of the 49% of Americans who buy from abroad, most shop from China (64%), followed by the U.K. (29%), France (23%), Canada (15%), and Germany (13%).
While 58% of shoppers say sustainability is important, they are not necessarily willing to pay more for sustainable delivery options.
Gulf Coast businesses in Louisiana and Texas are keeping a watchful eye on the latest storm to emerge from the Gulf Of Mexico this week, as Hurricane Rafael nears Cuba.
The category 2 storm’s edges could also brush Florida as it heads northwest, causing tropical storm force winds in the lower and middle Florida keys. However, the weather agency said it is too soon to forecast Rafael’s impact on the U.S. western Gulf Coast.
In the face of campaign pledges by Donald Trump to boost tariffs on imports, many U.S. business interests are pushing back on that policy plan following Trump’s election yesterday as president-elect.
U.S. firms are already rushing to import goods before the promised tariff increases take effect, to avoid potential cost increases. That’s because tariffs are paid by the domestic companies that order the goods, not by the foreign nation that makes them.
That dynamic would likely increase prices for U.S. consumers as importers pass along the extra cost in the form of price hikes, according to an analysis by the National Retail Federation (NRF). Specifically, Trump’s tariff plan would boost prices in six consumer product categories: apparel, toys, furniture, household appliances, footwear, and travel goods. “Retailers rely heavily on imported products and manufacturing components so that they can offer their customers a variety of products at affordable prices,” NRF Vice President of Supply Chain and Customs Policy Jonathan Gold said in a release. “A tariff is a tax paid by the U.S. importer, not a foreign country or the exporter. This tax ultimately comes out of consumers’ pockets through higher prices.”
The rush to avoid those swollen costs can already be measured in the form of rising rates for transporting ocean freight, as companies start buffering their inventories before the new administration officially announces tariff hikes. Transpacific rates are still $1,000/FEU or more above their April lows, showing increased ocean volumes and climbing rates generated by shippers’ concerns about supply chain disruptions including port strikes and the Trump tariff increases, supply chain visibility provider Freightos said in an analysis. "The Trump win may start shaking up supply chains even before he takes office. Just the anticipation of higher tariffs may lead importers to pull forward shipments, creating a preemptive freight frenzy," Judah Levine, Head of Research at Freightos, said in a release. “Frontloading will cause freight rates to feel the heat as importers race to dodge the extra costs, similar to what took place with Trump’s tariffs on Chinese goods in 2018 and 2019."
Another group sounding a note of caution about international trade developments was the Global Cold Chain Alliance (GCCA), a trade group which represents some 1,500 member companies in more than 90 countries that provide temperature-controlled warehousing, logistics, and transportation. “We congratulate President Trump on his election. We also congratulate all those who have been elected to the U.S. Senate and House of Representatives,” GCCA President and CEO Sara Stickler said in a statement. “We are also committed to promoting the growth of exports from U.S.-based food production and broader manufacturing sectors. We will engage constructively in the policy discussion about future trade policy and continue to make the case for the importance of maintaining balanced and resilient trade routes for food and other temperature-controlled products across the world.”
Businesses in the European Union (EU) were likewise wary of tariff plans, judging by a statement from the VDMA, a trade group representing 3,600 German and European machinery and equipment manufacturing companies. "Donald Trump's second term will be a greater challenge for German and European industry than his first presidency. We must take his tariff announcements seriously, in particular. This will once again put a noticeable strain on transatlantic trade and investment relations," VDMA Executive Director Thilo Brodtmann said in a statement. “The USA is and will remain the most important export market outside the EU for mechanical and plant engineering from Germany. Our companies offer the products required to implement the re-industrialization of the USA that Donald Trump is striving for. The VDMA's overall outlook for the American market therefore remains positive."
In addition to its flagship Clorox bleach product, Oakland, California-based Clorox manages a diverse catalog of brands including Hidden Valley Ranch, Glad, Pine-Sol, Burt’s Bees, Kingsford, Scoop Away, Fresh Step, 409, Brita, Liquid Plumr, and Tilex.
British carbon emissions reduction platform provider M2030 is designed to help suppliers measure, manage and reduce carbon emissions. The new partnership aims to advance decarbonization throughout Clorox's value chain through the collection of emissions data, jointly identified and defined actions for reduction and continuous upskilling.
The program, which will record key figures on energy, will be gradually rolled out to several suppliers of the company's strategic raw materials and packaging, which collectively represents more than half of Clorox's scope 3 emissions.
M2030 enables suppliers to regularly track and share their progress with other customers using the M2030 platform. Suppliers will also be able to export relevant compatible data for submission to the Carbon Disclosure Project (CDP), a global disclosure system to manage environmental data.
"As part of Clorox's efforts to foster a cleaner world, we have a responsibility to ensure our suppliers are equipped with the capabilities necessary for forging their own sustainability journeys," said Niki King, Chief Sustainability Officer at The Clorox Company. "Climate action is a complex endeavor that requires companies to engage all parts of their supply chain in order to meaningfully reduce their environmental impact."
Supply chain risk analytics company Everstream Analytics has launched a product that can quantify the impact of leading climate indicators and project how identified risk will impact customer supply chains.
Expanding upon the weather and climate intelligence Everstream already provides, the new “Climate Risk Scores” tool enables clients to apply eight climate indicator risk projection scores to their facilities and supplier locations to forecast future climate risk and support business continuity.
The tool leverages data from the United Nations’ Intergovernmental Panel on Climate Change (IPCC) to project scores to varying locations using those eight category indicators: tropical cyclone, river flood, sea level rise, heat, fire weather, cold, drought and precipitation.
The Climate Risk Scores capability provides indicator risk projections for key natural disaster and weather risks into 2040, 2050 and 2100, offering several forecast scenarios at each juncture. The proactive planning tool can apply these insights to an organization’s systems via APIs, to directly incorporate climate projections and risk severity levels into your action systems for smarter decisions. Climate Risk scores offer insights into how these new operations may be affected, allowing organizations to make informed decisions and mitigate risks proactively.
“As temperatures and extreme weather events around the world continue to rise, businesses can no longer ignore the impact of climate change on their operations and suppliers,” Jon Davis, Chief Meteorologist at Everstream Analytics, said in a release. “We’ve consulted with the world’s largest brands on the top risk indicators impacting their operations, and we’re thrilled to bring this industry-first capability into Explore to automate access for all our clients. With pathways ranging from low to high impact, this capability further enables organizations to grasp the full spectrum of potential outcomes in real-time, make informed decisions and proactively mitigate risks.”