Market Update June 2023

The Freight Economist

June 2023

Executive summary

US economy

Freight market

Executive summary

Monthly economic and market update

Shipper & carrier insights

Key data points

Dry van spot rates have likely hit the bottom after declining in 13 of the last 16 months. In May, rates rose by 2 cents/mi. Although this slight increase was driven by seasonality, various signs indicate that structural headwinds are receding: the demand outlook was more positive in May, and capacity continued to contract as failing carriers exit the market.

increase in housing starts in May. Is the housing market making a strong recovery?

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 & carrier insights

The US Federal Reserve has paused its rate hikes after 15 months of consecutive increases. This came after the Consumer Price Index (CPI) rose by only 4% in the last 12 months, the lowest growth rate since April 2021. Although this remains well above the stated Fed’s target of 2%, the Producer Price Index (PPI) of final demand points to rapid disinflation in wholesale prices. The PPI, usually a leading indicator of CPI, fell to 1.1% y/y. The US unemployment rate rose by 0.3% in April to 3.7%. Although it remains near its historical lows, increases of this magnitude are generally unusual. In the past 20 years, the US unemployment rate rose by 0.3% only once outside a recession. If unemployment increases further, it might put an end to elevated consumer spending, especially as savings dwindle. It is estimated that consumers have saved more than $2 trillion during COVID, mostly because of suppressed consumption and government stimuli. However, consumers have been tapping into these savings to maintain their high levels of spending. We estimate that the remaining amount of these savings ranges between one fourth and one third of the original amount saved, or about $0.6T - $0.75T.

Inflation and labor market

Inflation continues to decline gradually on the consumer side, but rapidly in the wholesale market. The US job market also shows signs of softening, as the unemployment rate rose by 0.3% in May, the largest since April 2020. With regards to freight demand, the housing market made a comeback, as housing starts, building permits, and homebuilder sentiment all surged. Retailers and wholesalers also continued to destock their excess inventories, except in the motor vehicles industry, where pent-up demand drivers restocking.

The US manufacturing sector contracted for the seventh consecutive month, according to the Institute for Supply Management (ISM). The ISM Purchasing Manager Index fell slightly to 46.9. In addition, the forward looking indicators of backlogs and new orders both saw sharp declines to 42.6 and 37.5 respectively. Data from the US Federal Reserve and US Census were less pessimistic. The US Industrial Production: Manufacturing Index indicated that manufacturing output rose by 0.1% in May, and was only 0.3% lower y/y. Similarly, the US Census Survey of Manufacturers’ Shipments, Inventories, and Orders showed that new orders rose by 0.4% in April, and were 0.2% higher than a year earlier.

Manufacturing

May’s retail sales increased or remained almost flat across all categories, except gasoline stations. The latter decline was due to a reduction in gas prices, and not lower demand. In total, sales were up by 0.3% in May, mostly driven by motor vehicles and parts, building materials, and garden supplies. On a y/y basis, retail sales were also flat or positive across all sectors except gasoline stations. If we exclude gasoline stations, sales were 4% higher than the same time last year. This level of growth is higher than the rate of inflation in goods prices, indicating that consumers are indeed buying more goods than last year.

Consumer spending on goods

Housing starts and building permits in the US both rose in May, but by different magnitudes. Housing starts surged by 22%, breaking positive y/y for the first time since April 2022, while building permits rose only by 5%, and were 13% lower y/y. In addition, according to the National Homebuilder Association (NAHB), solid demand, a lack of existing inventory, and improving supply chain efficiency helped shift builder confidence into positive territory for the first time in 11 months. A stronger housing market is expected to accelerate recovery in freight demand. In addition to its direct effect on the flatbed market, the housing sector stimulates various freight drivers, such as furniture, appliances, and building materials, all of which directly impact the dry van market.

Housing and construction

In April, both truckload supply and demand rose slightly by 0.5% m/m. However, demand was 3.8% lower y/y, while supply was 4.8% higher. Supply stagnated in the last few months as carriers reduced their headcount, but continued to purchase new equipment. However, capacity expanded again in April, as driver hiring surged, especially in the long-distance truckload sector. We believe this increase in supply will be short-lived, especially because drivers’ productivity is plummeting. Drivers’ work hours dropped sharply in April to 41.4 hrs/week, about 1 hour below the historical average of the last 10 years. Therefore, we expect capacity to contract further in the second half of the year.

Supply / demand indices

Spot rates rose significantly in the second half of May and remained flat in the first two weeks of June. This was driven by the DOT RoadCheck week, which sidelined a significant portion of capacity, and the start of the summer produce season which is expected to last through July. Despite this increase, rates are still about 15% lower than the same time last year, and about 41% lower than the record high level seen in January 2022. Total spot rates (including fuel) have remained almost flat, as the rise in linehaul rates was offset by a reduction in diesel prices, which were 33.6% lower y/y, after falling in 16 of the last 17 weeks, according to the EIA.

Spot rates

Economic data on freight demand were positive in May, with a notable increase in inflation-adjusted consumer spending (excluding gasoline), and a surge in housing starts. However, the forward-looking indicators of freight demand were mixed. The personal savings rate fell for the first time in 6 months. In addition, although imports rose by 3.8% in May, this fell short of the 5% expected increase, assuming typical seasonality. Therefore, seasonally adjusted imports declined by 1.1%, and were 20% lower y/y.

Freight demand

(1) Retail trade and food services (excluding gasoline), adjusted for inflation using the CPI indices of durable and nondurable goods (May, 2023) (2) Federal Reserve’s Industrial Production: Manufacturing Index (May, 2023) (3) US Census Bureau data on Housing Starts and Building Permits (May, 2023) (4) US Bureau of Economic Analysis Personal Income and Outlays data (April, 2023) (5) US Census Bureau data on manufacturing orders (total manufacturing, April, 2023), adjusted using the Producer Price Index: Total Manufacturing. (6) Descartes (May, 2023, seasonally adjusted using Uber Freight’s data).

Despite the slight increase in trucking employment (+0.6K), we believe that May’s data carried bearish signs for trucking supply. First, the carrier population saw a sharp decline by more than 3K carriers, as FMCSA authority revocations surged. In the last 7 months, the net carrier population has decreased by more than 11.5K carriers, the largest decline in the history of this data. However, these sharp declines are just “a drop in the bucket”, compared to the 123K carriers added in the prior two years.

Freight supply

Key data points and commentary

Demand indicators

Freight volumes

Trucking supply

Routing guide trends

Despite the slight uptick in spot rates in May, contract rates continued to decline. The first tender acceptance rates improved in the dry van and reefer markets, but fell in flatbed and intermodal. We expect contract rates to decline further, because the difference between contract and spot rates remains at historically high levels.

Routing guide trends: costs and service

In line with typical seasonality, spot rates surged in the West and Southeast (outbound). This is expected because California and Florida are among the first and largest markets to experience the summer produce rush. However, rates were still between 17% and 27% lower than a year ago in all regions.

Average m/m and y/y van spot rate index by origin regions – April

Average m/m and y/y van spot rate index by destination regions – April

Trucking supply

New Class 8 truck builds and sales maintained their strength in May, and were 9% and 16% higher than the 2022 averages. The expected lead time between ordering a truck and receiving it dropped to 6.7 months, the lowest since October 2020. Meanwhile, new truck orders recovered slightly in May to 18K units, but remained weak compared to last year’s average (about 24% lower).

For-hire trucking employment added 0.6K jobs in May (+0.4%). However, growth slowed on a y/y basis to 1.6%. Surprisingly, April recorded a 3.4K increase in long-distance employment (+0.6%) after three consecutive declines. Employment in this sector was 5.1% higher y/y. However, productivity fell to its lowest levels since the Omicron surge, indicating that this level of hiring might not be sustainable.

Economic demand indicators

Spending on goods fell despite an increase in real disposable income by 0.3%. This is because spending on services increased, and more money went into consumers’ savings accounts. The personal saving rate rose slightly from 4.3% to 4.6%. Retail trade and food services sales increased by 0.3% in May, and were 1.6% higher y/y. Excluding gasoline, sales rose by 0.6% (+4% y/y). The strength in retail sales was primarily driven by motor vehicles and parts sales, which rose by 1.4% in May, and were 4.4% higher y/y.

Real spending on goods fell by 0.4% in May, but was 1.1% higher y/y. Spending on durables fell by 1.2% in May, and was 2.4% higher y/y, while spending on nondurables remained flat, and was 0.4% higher y/y. In addition, spending on services rose by 0.2% in May, and was 2.6% higher y/y.

Retailers’ inventories increased by 0.1% in May, and were 7.6% higher y/y. However, strength was mostly driven by motor vehicles and parts. Excluding that sector, inventories fell by 0.2%, and were only 1.9% higher y/y. Wholesalers’ inventories also fell by 0.1%, but were 6.3% higher y/y. Similarly, this y/y increase was mostly driven by durable goods, including motor vehicles and parts.

The US Industrial Production Index fell by 0.2% in May, and was only 0.2% higher y/y. The manufacturing component of this index rose by 0.1%, but was 0.3% lower y/y. Recent strength in manufacturing has been also driven by motor vehicles, where pent-up demand and easing supply chain constraints continue to drive production. On a positive note, manufacturers’ new orders of core capital goods rose by 0.7% in May, and were 2.1% higher than a year ago.

Freight volumes

In May, total rail loadings were 7% lower y/y. Weakness was mostly driven by the intermodal sector, where volumes fell by 14% y/y. On the other hand, carloads were flat compared to last year. Intermodal demand continues to face major headwinds, including port strikes, nearshoring, and competition with the truckload sector, where prices have fallen at a sharper pace.

Freight volumes continued to decline in April and May, according to the Cass Freight Shipments Index, and the American Trucking Associations (ATA) Truck Tonnage Index. The Cass Shipments Index fell by 1% in May, and was 6% lower y/y. Similarly, the ATA Truck Tonnage Index fell by 2% in April and was 3% lower y/y.

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

The cost to operate a truck surged by 21% in 2022, according to the American Transportation Research Institute (ATRI). In a report published in June, ATRI concluded that costs rose above $2.00/mi for the first time, and by a significant margin. The increases were mostly driven by fuel, driver wages, and rising equipment costs. In the truckload sector, the operating cost was $2.15/mi.

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

21.7%

Mazen Danaf

Senior Economist and Applied Scientist at Uber Freight

Managed transportation:

21.7%

Shipper & carrier insights

The weakness in the manufacturing sector is likely associated with elevated inventory levels, especially in the wholesale sector. Despite stagnating in the last few months, wholesale inventories remained 6.3% higher y/y in April, while sales were 3.4% lower. Therefore, inventories are unusually high, especially relative to sales, with the ratio of the two being 140%. In the history of the data reported by the US Census, this ratio has only been exceeded twice: during the Great Financial Crisis in 2009, and at the onset of the COVID pandemic in 2020.

We also believe that May’s increase in trucking employment will be short-lived, because it does not reflect a real increase in the demand for truck drivers, whose productivity has been falling to historically low levels, only seen during the Great Financial Crisis and the beginning of COVID-related shutdowns in 2020.

Carrier insights

From a shipper perspective, we continue to see shippers focused on price. Many shippers have concluded recent RFP’s and have seen considerable savings on a year-over-year basis. Those with favorable budget positions are focusing on items that have been neglected over the past few years, including: - We are seeing an uptick in consulting services, mainly within the network design area, as shippers are looking to see if their network is rightsized for optimal performance. - Freight terms conversion: Many shippers are evaluating the pros/cons of changing terms to have better control over their inbound freight flow. - Dedicated and private fleet analysis continues to ensure shippers are rightsizing their fleets to maximize utilization of their dedicated assets. - Many shippers are working on their carrier relationships and strategies to protect their organizations in an inflationary environment. One of the first items is development of a score card that allows the shipper to track market trends to help forecast the start of an inflationary market.

Managed transportation

- API channels remain hyper competitive, with loads not falling in routing guides or to the spot market, but we have seen shippers making conscious decisions to pivot overflow contract commitments to the spot market, or fully convert low volume lanes. - Index Pricing deals continue to flow in with both mid-market and enterprise shippers as contract rates continue to be softer than expected. - With various real-time pricing options such as index-based pricing on contract freight, API for overflow spot freight, and Market Access for low volume freight, shippers have multiple ways to take advantage of decreases in spot market rates.

Digital brokerage

Shipper insights

These costs are based on all the miles driven by ATRI’s surveyed carriers. To be directly comparable to rates, we need to calculate the cost per revenue mile (CPRM): - For a carrier deadheading only 10% of the time, the CPRM would be $2.39/mi. - For a carrier deadheading 30% of the time, the CPRM would be $3.07/mi, almost $1/mi above the current spot rates (including fuel). This means that carriers of all sizes must watch their operating costs and empty miles. They can also reduce these expenses with network optimization, and benefit from Uber Freigth’s bundles and personalized rankings to cut their deadhead.

Digital brokerage

Shipper insights

Carrier insights