Market Update April 2023

The Freight Economist

April 2023

Executive Summary

US Economy

Freight Market

Executive Summary

Monthly Economic and Market Update

Shipper and Carrier Recommendations

Uber Freight Platform

Key Data Points

Meanwhile, supply has proven to be more resilient than previously thought. After shedding 5.1K jobs in February, payroll trucking employment added 5.7K jobs in March, setting a new all-time high. In the coming months, we expect seasonal produce demand to set the floor to spot rates, which are likely near the cycle bottom.

5.7K

Spot rates are at their lowest level in 10 years on an inflation-adjusted basis.

US Economy

Inflation and Labor Market

Manufacturing

Consumer Spending on Goods

Housing and Construction

Freight Market

Supply / Demand Indices

Spot Rates

Freight Demand

Freight Supply

Shipper and Carrier Recommendations

The Uber Freight Platform

As the US economy shrugs off the effects of recent bank failures, year-over-year inflation continues to cool down. In March, prices in the services sector (less shelter) fell by 0.1%. On an annual basis, services inflation was 6% y/y, the lowest since May of last year. Rent of shelter continued to see high price increases, however, the month-over-month growth was the lowest since April 2022. Deflation was more pronounced in the wholesale sector; the Producer Price Index (PPI) of final demand fell by 0.5% in March, the steepest m/m decline since the beginning of the pandemic. The labor market is also showing signs of softening. The US economy added 236K thousand jobs in March, the lowest monthly gain since December 2020. While the unemployment rate still hovers near its 50-year lows, the labor participation rate continued to improve, reaching its highest level since the beginning of the pandemic. In addition, wage growth, which is believed to be a key driver of inflation, fell to 4.2% y/y, the lowest annual growth since June 2021. While the labor market might be softening and helping to tame inflation, the US economy still faces the risk of a looming recession. In the Federal Reserve’s Beige Book, consumer spending was generally seen as flat to down slightly amid continued reports of moderate price growth. Manufacturing activity was widely reported as flat or down even as supply chains continued to improve.

Inflation and labor market

As the US economy shrugs off the effects of recent bank failures, there are signs that the labor market is softening and inflation in services is trending down. The consumer goods economy remains relatively healthy, as consumers are still buffered by a wealth of savings they accumulated during the pandemic. However, the manufacturing sector continues to contract. In addition, declining factory orders point to more weakness ahead. Our outlook for aggregate freight demand is flat to slightly down year-over-year.

The US manufacturing sector contracted further in March, as the ISM manufacturing PMI dropped to 46.3. In addition, the US Federal Reserve’s Manufacturing Output index fell by 0.5%, and was 1.1% lower than March 2022. Durable goods manufacturing fell by 0.9% in March, as motor vehicles and parts production dropped by 1.5%, the largest decrease in 4 months. Non-durable goods production was nearly flat m/m (-0.1%). The US manufacturing sector is headed towards more weakness. The ISM forward-looking indices of backlogs and new orders both slipped to 43.9 and 44.3 respectively, foreshadowing sharper declines in production in the coming months. The US Census Bureau reported similar findings in its manufacturers’ survey, which indicated that manufacturers’ orders fell by 2.8% in the first two months of the year.

Manufacturing

US Retail sales fell by 1% in March, and were only 1.5% higher than a year ago, the lowest annual growth rate since the beginning of the pandemic. Although decreases were observed across various categories, They were mostly concentrated in three sectors: gasoline stations, general merchandise, and motor vehicles and parts. The drop in gasoline stations’ sales can be attributed to a reduction in fuel costs, and has almost no implications on freight demand. Excluding gasoline stations, retail sales were down only 0.6% in March. In addition, the decrease in general merchandise sales can be attributed to the continued substitution towards nonstore retailers (e-commerce), which increased by a similar order of magnitude in March.

Consumer spending on goods

The housing sector still bears the consequences of high interest rates. In the first quarter of 2023, housing starts and building permits were 19% and 23% lower than Q1 2022 respectively. However the q/q trend suggests that the worst is already behind us. For the first time since the beginning of the rate hike cycle, housing starts remained flat q/q, while building permits increased by 2.5%. This was accompanied by a recovery in homebuilder sentiment. The National Association of Home Builders/Wells Fargo Housing Market index rose to 45 this month, the highest level since September 2022, and 14 points above December’s trough (31). A reading below 50 still indicates that more builders view conditions as poor rather than good, but the fraction of these builders has fallen sharply in the first quarter of 2023.

Housing and construction

Our aggregate indices of trucking demand and supply both decreased in February. However, the drop in demand was sharper than the drop in supply, mostly driven by weaker imports and exports. On a year-over-year basis, demand was 2% lower, while supply was 6.6% higher. Preliminary data shows that the demand index has remained flat in March. The increase in import TEUs was enough to offset small reductions in manufacturing output and personal consumption on goods. The supply index has increased by 0.5%, driven by the recovery in trucking employment. The gap between our supply and demand indices is highly correlated with spot rates. The last few months saw supply stagnating, a trend which we expect to continue throughout 2023. We also expect total freight demand to remain weak throughout the year.

Supply / demand indices

Dry van spot rates (excluding fuel) declined about 6 cents per mile in March, signaling a weak start of the produce season. This was partly driven by flooding on the West Coast, which resulted in the destruction of a significant amount of agricultural output. Rates continued to fall in the first two weeks in April, and were only slightly higher than the pre-pandemic levels. We still expect spot rates to bottom out in May, and recover partially with the start of the summer produce season in June. However, we believe that the recovery will be mild, and mostly driven by seasonal demand in Q3, rather than structural changes in supply or demand beyond seasonality. Considering overall inflation in the economy, and especially in carriers’ operating costs, the spot market is significantly softer than where it was in 2019 and early 2020. Real spot rates (adjusted for price inflation) hit their lowest level in 10 years in March, excluding April and May 2020, when the economy hit the brakes.

Spot rates

Economic data relating to freight demand were negative in the last month, as all three segments (housing, manufacturing, and consumer spending) fell slightly. Forward-looking indicators of freight demand were mixed: imports recovered from February’s trough, but building permits and manufacturers’ orders fell.

Freight demand

(1) Retail trade and food services (excluding gasoline), adjusted for inflation using the CPI indices of durable and nondurable goods (March, 2023) (2) Federal Reserve’s Industrial Production: Manufacturing Index (March, 2023) (3) US Census Bureau data on Housing Starts and Building Permits (March, 2023) (4) US Bureau of Economic Analysis Personal Income and Outlays data (February, 2023) (5) US Census Bureau data on manufacturing orders (total manufacturing, February, 2023), adjusted using the Producer Price Index: Total Manufacturing. (6) Descartes (March, 2023, not seasonally adjusted).

Driver supply is proving to be more resilient than what seemed to be the case a month ago. February’s payroll data showed the largest drop in trucking employment since April 2020, as the industry shed 8.5K jobs. However, March’s data painted a more bearish picture for the freight industry. First, February’s drop was revised down from 8.5K to 5.1K jobs. Second, the industry has recovered February’s losses in March by adding 5.7K jobs. This brings payroll trucking employment to an all time high of 1.612 million employees. The general freight trucking employment (NAICS 484) figure reported by the BLS is not perfect. It includes non-driver roles, such as dispatchers and maintenance staff, as well drivers in LTL, specialized freight, and local trucking, many of which are straight truck or delivery truck drivers. A more relevant indicator of over-the-road trucking is employment in the long-distance truckload sector (NAICS 484121), which is a subset of total trucking employment. Unfortunately, this data is only available until February. But since the two series are highly correlated, it’s safe to assume that long-distance truckload employment, which was already 5.1% higher y/y, also increased in March.

Freight supply

Key Data Points and Commentary

Demand Indicators

Freight Volumes

Trucking Supply

Routing Guide Trends

Dry van spot volumes stabilized in the past few months, however, spot rates continued to fall, as route guides’ performance improved. Contract rates also fell, and were 17% lower y/y (excluding fuel), according to Uber Freight’s data. Similar trends were observed across all modes except flatbed, where spot rates rose slightly and tender acceptance deteriorated. Spot volumes were about 2% to 3% lower y/y across trucking modes.

Routing guide trends: costs and service

Rates fell across all regions in March. The largest declines were observed in the Northeast and Midwest (both inbound and outbound), and the Southeast (inbound). Year-over-year declines were also significantly higher in these three regions, exceeding 35% Y/Y (net fuel) in the Northeast and Midwest.

Average van spot rate index by origin regions – January

Average van spot rate index by destination regions – January

Trucking supply

New carrier authorities issued by FMCSA exceeded revocations for the first time in 5 months, indicating a slight increase in the net carrier population. Falling diesel prices helped small carriers and owner-operators survive the soft market despite lower spot rates. On the equipment side, new truck orders recovered from January’s dip in March and rose by 33%, however they were still lower than the levels seen in Q4 of last year. Truck production continued to improve, and was 33% higher than the same time last year.

Payroll trucking employment gained 5.7K in March after shedding 5.1K jobs in February, setting a new record. Employment was 3.2% higher y/y. Long-distance truckload employment, which is highly correlated with spot rates, fell by 2.3K in February, but has likely recovered in March as well. Employment in this sector saw a 5.1% increase since February 2022.

Economic demand indicators

Retail sales fell by 1% in March, mostly driven by a drop in gasoline stations, general merchandise stores, and motor vehicles & parts dealers. Excluding motor vehicles and parts and gasoline stations, sales fell by 0.3% on a seasonally adjusted basis. As real disposable income increased by 4% y/y, consumers continued to rebuild their savings, which increased to 5.1% in March. This was the highest rate since December 2021, but it remains below the pre-pandemic levels, averaging around 7%.

The US consumer remains resilient. Real personal consumption expenditures on goods (PCE) declined slightly in February and March, but were still 1% higher y/y. In the first quarter of 2023, spending on goods rose by 1.8%, and was 0.8% higher y/y. This strength was driven by increased spending on durable goods.

Retail inventories rose by 0.7% in February after remaining flat in the previous month, and were 7.2% higher y/y. However, February’s gains were mostly driven by motor vehicles & parts. Excluding these, inventories only rose by 0.3%. Merchant wholesalers’ inventories remained flat in February, but were still 12% higher than a year ago.

The Federal Reserve’s industrial production index rose by 0.4% in March. However, this was driven completely by utilities, where output surged by 8.4%. Meanwhile, the manufacturing output index fell by 0.5%, and was 1.1% lower y/y. In March, durable goods orders rose by 3.2%, driven by transportation goods. Meanwhile, core capital goods orders fell by 0.4%.

Freight volumes

Rail volumes continued to underperform in 2023, mostly due to weakness in intermodal demand. In the first three months of the year, carloads were 2% higher y/y, while intermodal loads were 10% lower. Intermodal demand is struggling because of two reasons: weaker imports, especially on the West Coast, and losing market share to truckload, where price declines are steeper and capacity is abundant.

Freight volumes took a dive in March, as the Cass Shipments Index fell by 4% (seasonally adjusted), and was 4% lower y/y. This index is volatile, and has had similar drops in April and June last year, but this is a notable drop that we should keep an eye on. This index is highly correlated with manufacturing output. The manufacturing outlook looks more pessimistic, with backlogs, new orders, and production all trending lower, according to ISM. Similarly, the ATA Truck Tonnage Index decreased by 5% on a seasonally adjusted basis in March.

Mazen Danaf

Senior Economist and Applied Scientist at Uber Freight

Mazen’s work focuses on analyzing the freight transportation landscape, and producing short- and long-term forecasts based on supply and demand dynamics. He is also a research affiliate with the Intelligent Transportation Systems (ITS) Lab at MIT, where he completed his PhD in 2019. His work falls at the intersection of ITS, economic modeling, and analytics.

mdanaf@uberfreight.com

By Mazen Danaf, Senior Economist and Applied Scientist, Uber Freight

Carriers can also plan around produce season to maximize their utilization Understanding geographic and temporal variations in produce volumes can help carriers plan their operations ahead of time. Digitally enabled carriers can stay up-to-date on market rates and supply/demand dynamics, to know where and when capacity is needed the most. Lower diesel and equipment costs provide a much needed relief to carriers On the positive side, fuel costs and used truck prices continue to fall. Diesel prices fell for 10 consecutive weeks between February and April, before rising slightly in the third week of April. Average diesel price per gallon is about 19% lower than a year ago. The average selling price of Class 8 trucks fell by 40% from their peak last year, according to ACT Research. So what’s driving prices lower? Unlike last year, getting new trucks is now easier. New truck sales are up about 30% from last year. In addition, when carriers buy new trucks, the replaced trucks go into the secondhand market. The last few months saw the largest increase in trucking authority revocations in history. This means that small and medium-sized carriers, who got squeezed between low spot rates and rising operating costs, are exiting the industry. When carriers exit the market, they would also want to sell their trucks. The appeal of a new truck is much less than it was a year ago, given that spot rates have fallen about 33% Y/Y. Having said this, the sky isn’t falling. Used truck prices were still $11K above Feb 2021.

Carrier

No matter what you’re shipping, it’s time to plan for produce season. Between February and July, different fruits and vegetables become ready for harvest, causing a rush in freight demand, especially for climate-controlled shipping and reefers. As a result, rates tend to fluctuate, especially around this time of year. Historical data at the national level shows that rates usually increase by 5% - 8% on average between May and June. To prepare for produce season, shippers can: Analyze historical trends across lanes and geographies to understand demand surges and anticipate market tightening. Manage volatility by creating an accurate volume forecast and planning for unforeseen scenarios ahead of time. Take advantage of real-time technology: opt for a transportation management partner that offers real-time data visibility, flexible procurement solutions and a network of digitally-enabled carriers. If you are shipping produce, plan shipments around the forecasted demand surges to ensure produce is shipped safely, in the proper packaging and right temperatures. Finally, work with carriers who are compliant with the Food Safety Modernization Act (FSMA).

During periods when freight is light, shippers have a perfect opportunity to plan and optimize their networks ahead of future market swings. Here are some steps that shippers can take to prepare for the future: Deploy procurement and carrier strategies that will prepare for when the market turns. Look internally to network, inventory, and warehouse assessment and optimization. CPG shippers can prepare for the upcoming OTIF program changes. Create better visibility that delivers actionable insights. Explore smoothing inventory and creating efficiency on inbound networks.

Shipper

Carrier

Shipper

Carrier

Carriers can also plan around produce season to maximize their utilization. Understanding geographic and temporal variations in produce volumes can help carriers plan their operations ahead of time. Digitally enabled carriers can stay up-to-date on market rates and supply/demand dynamics, to know where and when capacity is needed the most. Lower diesel and equipment costs provide a much needed relief to carriers On the positive side, fuel costs and used truck prices continue to fall. Diesel prices fell for 10 consecutive weeks between February and April, before rising slightly in the third week of April. Average diesel price per gallon is about 19% lower than a year ago. The average selling price of Class 8 trucks fell by 40% from their peak last year, according to ACT Research. So what’s driving prices lower? 1. Unlike last year, getting new trucks is now easier. New truck sales are up about 30% from last year. In addition, when carriers buy new trucks, the replaced trucks go into the secondhand market. 2. The last few months saw the largest increase in trucking authority revocations in history. This means that small and medium-sized carriers, who got squeezed between low spot rates and rising operating costs, are exiting the industry. When carriers exit the market, they would also want to sell their trucks. 3. The appeal of a new truck is much less than it was a year ago, given that spot rates have fallen about 33% Y/Y. Having said this, the sky isn’t falling. Used truck prices were still $11K above Feb 2021.

With contract rates hypercompetitive to start the year and tender acceptance at all time highs, many customers have put a pause on exploring real time pricing options and chosen to invest in other areas of their business. What we are already noticing a quarter into ‘23, however, is that even with hyper competitive contract rates in place, the market is slightly softer than expected and savings could have been driven in Q1 with a diversified real time procurement strategy in place. For this reason, we launched Index-based Pricing in Q1. With Index-Based Pricing, you can lock in initial rates by lane for your freight and make monthly adjustments based on market index rates. Uber Freight leverages market benchmarks and can incorporate your market benchmarks, too. Executing this program allows our customers to only select the lanes where we have a competitive advantage versus carriers on linehaul while also locking in the cost delta versus the market indices. As markets change monthly or quarterly at the lane level, we compare the market change versus the base index and adjust the base RFP rate accordingly (example below). Because rates are forward-looking, no rebates or reconciliations are needed. Uber Freight calculates all rate refreshes so customers can review, audit, and upload the most competitive rates for their routing guides/to their TMS. How to try: Customers can pilot Index-Based Pricing with Uber Freight within 48 hours—no tech integrations are needed and we work off our current SCAC. Contact your Uber Freight representative to learn more and see how rates could become more competitive in your current contracts or be integrated into your upcoming RFPs.

Featuring insights and contributions from Uber Freight leadership, technologists and market specialists.

Earth Week

It's Earth Week

As electric trucks hit the road, environmentally-conscious shippers and customers are turning to electrified capacity to meet their transportation needs and achieve their sustainability commitments. In February, Uber Freight, WattEV, and CHEP announced a strategic, joint effort to deploy electric trucks on select routes in Southern California. As part of this collaboration, WattEV will provide electric trucking capacity to Uber Freight shippers, starting with CHEP. Since then, electric trucks have traveled more than 1,500 miles on the Uber Freight network. In the coming months, this technology will become available to more shippers, powered by Uber Freight’s expansive network of digitally-enabled carriers, especially those with EVs. To learn more about how Uber Freight can help your supply chain transition towards a green future, please visit us at www.uberfreight.com.

Building on the Inflation Reduction Act and advancements in clean-vehicle technologies, the US Environmental Protection Agency (EPA) has proposed new rules setting vehicle emissions standards for heavy-duty trucks. These regulations are meant to accelerate the ongoing transition to clean vehicles. If implemented, these regulations would avert about 10 billion tons of CO2 emissions. In addition, they would lower maintenance costs and deliver significant fuel savings to drivers and truck operators. These standards would apply to vehicles from model years 2027 through 2032 and beyond. The set of regulations targeting heavy-duty trucks “Greenhouse Gas Standards for Heavy-Duty Vehicles - Phase 3,” would apply to heavy-duty vocational vehicles (such as delivery trucks, refuse haulers or dump trucks, public utility trucks, transit, shuttle, school buses) and trucks typically used to haul freight, according to the EPA. These standards will complement the pollutant standards for MY 2027 and beyond that the EPA outlined in December 2022.

Electric trucks are finally here

The EPA outlines new emissions standards for heavy-duty trucks

Payroll trucking employment does not capture owner-operators, most of which operate under a different business structure. A good proxy for this segment is the number of new trucking authorities and authority revocations issued by the FMCSA. The latter captures carriers who chose to cease operations under their own authority, either to exit the industry, or to enroll with larger fleets. Revocations have outpaced new authorities for 5 consecutive months prior to March, indicating a net decrease in the carrier population. This was expected, given rising operating costs and low spot rates. The last two quarters saw a net decline of 8,500 carrier authorities. Although these declines are the largest ever recorded, they are small compared to the net increases since June 2020, totalling more than 123,000 carriers.

Freight supply

With contract rates hyper competitive to start the year and tender acceptance at all time highs, many customers have put a pause on exploring real time pricing options and chosen to invest in other areas of their business. What we are already noticing a quarter into ‘23 though is that even with hyper competitive contract rates in place, the market is slightly softer than expected and savings could have been driven in Q1 with a diversified real time procurement strategy in place. For this reason, we launched Index-based Pricing in Q1. Our Index-Base Pricing logic and execution is rooted off of a RFP rate (6- or 12-month) at the lane level and a market index agreed to between us and the customer. Executing this program allows our customers to only select the lanes where we have a competitive advantage vs. carriers on linehaul while also locking in the cost delta vs. the market index. As markets change monthly or quarterly at the lane level, we compare the market change vs. the base index and adjust the base RFP rate accordingly (example below). Because rates are forward-looking no rebates or reconciliations are needed. Uber Freight calculates all rate refreshes so customers can review, audit, and upload the most competitive rates for their routing guides/to their TMS. How to try: Customers can pilot Index-Based Pricing with Uber Freight within 48 hours—no tech integrations are needed and we work off our current SCAC. Contact your Uber Freight representative to learn more and see how rates could become more competitive in your current contracts or be integrated into your upcoming RFPs.