Monthly Economic and Market Update
February 2023
The Freight Economist
Table of Contents
1. Executive Summary 2. US Economy - GDP - Inflation - Consumer Strength - Manufacturing 3. Freight Market Update - Supply / Demand - Spot Rates - Demand Indicators - Supply Indicators
4. Shipper and Carrier Recommendations 5. The Uber Freight Platform - API - Market Access 6. Chart and Analysis - Routing Guide Trends - Trucking Supply - Demand Indicators - Freight Volumes
Executive Summary
US consumers started to watch their spending, as their COVID savings dwindled. In January, they saved 4.7% of their income, the highest since January 2022. At the same time, factory output continued to decelerate, and new orders are pointing to further pain ahead. This followed a sharp decline in containerized imports, which fell by about 25% since mid 2022. All of this indicates that there are less goods for trucks to move. And while payroll trucking employment remains healthy, smaller carriers and owner-operators are exiting the market at a faster pace. January saw the largest net decline in carrier population ever recorded, as 9.3K carriers had their operating authorities revoked. Following the relentless decrease throughout 2022, trucking spot rates have followed historical seasonality since December. Seasonality also implies that rates should continue to decrease in H1, reaching the bottom around April or May. Contract rates, which are currently 12% lower than a year ago, are expected to decrease further, as expiring contracts from last year’s historically tight period get repriced.
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1. Executive Summary
2. US Economy
- GDP
- Inflation
- Consumer Strength
- Manufacturing
3. Freight Market Update
- Supply / Demand
- Spot Rates
- Demand Indicators
- Supply Indicators
4. Shipper and Carrier Recommendations
5. The Uber Freight Platform
- API
- Market Access
6. Charts and Analysis
- Routing Guide Trends
- Trucking Supply
- Freight Volumes
US Economy
The US economy grew by 2.7%, according to last month’s GDP release by the Bureau of Economic Analysis. However, as we showed in our recent blogpost, the resilience of the overall economy does not imply strength in freight demand. This growth was mostly driven by rising inventories and lower imports, two factors that are counted positively in calculating GDP, but contribute negatively to freight demand.
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Inflation rose by 0.5% M/M in January, according to the Consumer Price Index (CPI). Core inflation, which excludes food and energy, also increased by 0.4% and was 5.6% higher than a year ago. Furthermore, the Bureau of Labor Statistics recently revised the weights used in calculating CPI, showing that the slowdown in inflation we saw in the previous months was not as steep as previously thought. Year-over-year inflation remained high in the services sector. Over the past few months, the personal consumption expenditures (PCE) price index showed significant disinflation in the prices of durable goods, and moderation in the prices of nondurable goods. However, inflation in services remained high, at 5.7% Y/Y in January. Finally, the US labor market remains historically tight. Nonfarm payroll employment added 517K jobs in January, the highest since July 2022. Meanwhile, the unemployment rate fell to 3.4%, its lowest level since 1969, despite a 0.1% increase in the labor participation rate. Because of this tightness, payroll earnings continued to grow, and were 4.4% higher than a year ago.
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Inflation has rebounded, and the devil is in the details
The last two years saw strong levels of consumer spending, especially on goods. This trend reversed in Q4’2022, with two consecutive declines in real personal consumption expenditures (adjusted for inflation) in November and December. Real spending on durable goods fell by 1.7% in December, and spending on nondurables dropped by 0.7%. However, spending on goods has recovered in January, as indicated by the US Census retail sales data, which showed a 3% M/M increase on a seasonally adjusted basis. So was the recent decline in consumer spending temporary, or was January’s retail sales reading an outlier?
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Is the recent weakness in consumer spending temporary?
Inflation took a toll on consumers’ real disposable income. Although this started the year 1.8% lower than January 2020, we estimate that real incomes were 6% below their pre-COVID trend (i.e, where they would have been if Covid hadn't occurred). Despite the substantial decrease in real income, consumers’ purchasing power in 2022 was still supported by their COVID savings, which exceeded $2.3 trillion dollars, according to the Federal Reserve. Therefore, they were able to maintain high levels of spending, especially on goods. However, that meant that less money went into their savings accounts. In June 2022, consumers only saved 2.7% of their income, the lowest rate in 17 years. In recent months, however, consumers have been saving more. In January, they saved 4.7% of their income. The need to save might reflect their dwindling accumulated savings over the past few months. As of today, the remaining COVID savings are estimated to be around $1 trillion. This leads us to believe that January’s retail sales reading was an outlier, and the recent weakness in consumer spending might persist at least through the first half of 2023.
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Consumers have depleted more than half of their COVID savings
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Manufacturing continued to contract, according to the Institute for Supply Management. The ISM Purchasing Managers’ Index (PMI) recorded 47.4 in January, the lowest level since May 2020. Similarly, the ISM Production Index fell below the expansion threshold (50.0) for the second month in a row, indicating declining output. Forward-looking indicators of manufacturing output point to further softening. The indices of backlogs and new orders were 43.4 and 42.5 respectively, indicating dissipating backlogs and fewer factory orders. The bright spot in this report is the Prices Index, which indicated disinflation in raw materials for the fourth month in a row.
Manufacturing
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Freight Market Update
The tight labor market indicates that the broader economy is not in a recession yet. However, we could be experiencing sector-specific downturns, including a freight recession. According to our aggregate truckload demand index, freight demand has been falling since the second quarter of 2022. In December, demand was flat year-over-year, and down about 4% from April 2022. On the other hand, the aggregate supply index (a weighted combination of available trucks and drivers) rose by 6% during the same period, ending the year 8% higher than December 2021. We estimate that December’s gap between supply and demand was about 3.8%, the equivalent of 800,000 dry van loads per month.
This gap between supply and demand made it clear that the surge in spot rates observed in late December / early January was going to be short-lived. Following the second week of January, spot rates declined sharply, giving away all their gains of the previous four weeks. Spot rates are currently slightly higher than those seen in January 2019 and 2020.
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Spot rates back to their downward trend
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Softer demand is broad-based
Softer demand was not only driven by weaker consumer spending. Although US Imports increased by 7.2% in January, they were still significantly lower than a year ago. After a sharp decline in the second half of 2022, the number of imported containers was similar to that of 2019 and 2020. Furthermore, February is expected to be even weaker, with TEU volumes projected to be down 26% Y/Y, according to the National Retail Federation (NRF).
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Import volumes are generally a small fraction of trucking demand. However, west coast imports constitute a meaningful percentage of rail volumes. In addition, the weakness in imports reflects softening in the broader manufacturing economy, which drives the majority of trucking demand. Manufacturing output in the US turned negative Y/Y in December, according to the US Federal Reserve. Although it bounced back in January by 0.9%, it was still 2% lower than its peak seen in April of last year.
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Not all is doom and gloom
After a year of aggressive growth, retailers have been controlling their inventory levels. Inventories, measured in Dollars, have fallen in Q4 across various sectors, except motor vehicles and parts, where pent-up demand continues to drive restocking. This indicates that in the short-term, bloated inventories might become less of an issue for freight demand. However, demand continues to face other headwinds, such as lower retail and manufacturing sales.
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Is a supply correction underway?
As trucking demand continued to fall, supply indicators (trucks and drivers) moderated. Trucking employment rose only by 0.3% in January. Similarly, carriers in the long-distance truckload sector added 1.9K payroll jobs (0.34%) in December. Wages in that sector saw an unexpected decline of 1%, but were still 7.7% higher than a year earlier. Despite the persisting strength in payroll trucking employment, owner-operators and small carriers are exiting the market at a faster pace. January saw a record number of trucking authority revocations by FMCSA, according to FTR (9.3K). On the other hand, FMCSA authorized 5.9K new carriers, slightly down from December. As such, January saw the largest monthly drop in the for-hire trucking company population ever recorded.
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Shipper and Carrier Recommendations
After two years of excessive freight costs, shippers can reap the benefits of the softer freight market in 2023. There are several ways to do so, without necessarily being exposed to a possible sudden tightening in the coming months. We have seen shippers opting for index-based contracts, which allow them to benefit from declining spot rates, without risking network stability if the market suddenly tightens. Other tools, such as mini-bids and Market Access have been serving the same purpose. A soft market presents a timely opportunity for shippers to consider a few positive operational adjustments, plan for the future and prepare for the inevitable market rebound. It’s a great time to invest in and deploy operational and technology enhancements, such as updating outdated TMS technology, or increasing consulting assessments on the overall health of your supply chain. In a soft market, carriers will also be more responsive in addressing opportunities to improve performance, so shippers should re-establish operational rules and expectations with carrier bases, taking stock of performance and re-establishing contractual requirements for tracking, visibility and status updates. Shippers can use this time to segment freight on a service versus cost basis, exploring strategic carrier and spot options based on shipment priorities. Shippers should consider re-evaluating terms for inbound freight with suppliers, as there’s an opportune window to regain control of inbound supply chains, scale with core carrier bases, and control and reduce inventory. The market has also alleviated some pressure off shippers’ budgets, allowing them to invest in areas where they could not in the past two years. Sustainability is a clear winner. Uber Freight moved its first load on a fully electric truck in January, after which, several shippers expressed interest. From this pilot, we learned that some load profiles are already profitable for EV deployment, to both shippers and carriers. This will expand further as the technology matures, with cheaper and better batteries, and more access to chargers. Shippers who are adopting this technology early on are also learning quickly what it takes to support EV deployment, and how to become the shipper of choice to attract EV trucks. Carriers’ primary concern should be how to control their costs. First, carriers should avoid over-hiring, given the weak demand, and recent inflation in wages. Similarly, they should be aware of the easing supply chain constraints that limited the production of trucks and trailers in the past two years. This should result in better equipment availability and lower costs, especially in the second-hand market. Another way carriers can control their operating costs is by reducing their deadhead. Lower demand density, especially in the spot market, can result in excessive empty miles, which can degrade carriers’ margins. Although carriers are not paid for these empty miles, they cost them almost as much as full miles do.
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The Uber Freight Platform
API
This channel showed continued growth MoM, while total quotes across our customer base remained about flat, signaling that customers adoption of the execution method is improving. We saw two recent use cases by our top volume partners: 1. Moving excess volume above RFP commitment over to API when contract rates are over 3 months old 2. As RFPs reset, routing guide API is used to support failures from carriers on new lanes that may not understand acceptance or execution expectations from the customer
Market Access
As RFP rates come in throughout our customer base, many of our customers are questioning the legitimacy and sustainability of the rates offered. Our stance with all partners is that in high risk parts of your network, this is an extremely dangerous time to accept pricing at the floor. What we advise instead is to invest in partners that can prove a competitive historical buy versus market on these lanes and then transparently judge their buying versus the market over the course of your RFP. To prove that we are industry leaders in executing an automated, competitive and transparent program, we are offering two proposals to customers to try Market Access: 1. Short term, hyper competitive carrier cost + percentages for new partners 2. Monthly, volume based incentives to reduce the market access fee To understand how to position real time pricing solutions into your procurement strategy, please email Realtimepricing-Group@uber.com to learn more. To request a demo or learn more about how Uber Freight can help you navigate today’s market conditions, please visit us at www.uberfreight.com.
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Apendix A: Routing Guide Trends: Costs and Service
First tender acceptance continued to improve across all trucking modes despite the end-of-year surge in spot rates. Dry van spot volumes have stabilized just under 10%, but are significantly lower Y/Y. The persisting gap between spot and contract rates continues to apply downward pressure on contract rates, which are now about 12% lower Y/Y (excluding fuel).
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Over the past year, spot rates have fallen sharply in all US regions. However, the collapse was mostly pronounced in the West, and least pronounced in the Southwest. January saw minor month-over-month increases in spot rates in most regions, except the West (inbound and outbound), and the Northeast (inbound).
Average van spot rate index by origin regions – January
Average van spot rate index by destination regions – January
Apendix B: Trucking Supply
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Employment growth in the trucking sector is starting to slow down following weaker demand, but there are no signs of capacity reduction yet. For-hire trucking employment added 4.1K jobs (+0.25%) in January, and was 3.7% higher Y/Y. Payroll employment in the long-distance truckload sector added 1.9K jobs in December (+0.34%).
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The last quarter of 2022 saw record levels of truck and trailer orders. This was unusual given the soft market. The recent surge was supply driven, as OEMs opened order slots to mitigate their hefty backlogs before the end of the year. In January, Class 8 truck orders dropped significantly to 17,000 units (seasonally adjusted), and dry van trailer orders fell to 15.8K (63% lower MoM). January saw the largest net monthly drop in the for-hire trucking company population as net revocations set a record (9.3K), and exceeded the number of new carriers by 3.5K.
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Apendix C: Economic Demand Indicators
Real personal consumption expenditures (PCE) rose in January after declining in November and December. Real PCE on nondurable goods started the year 1.4% lower Y/Y, while spending on durable goods was 0.5% higher. Spending on goods is expected to deteriorate further in 2023, as consumer savings dwindle.
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Retail sales rebounded in January, increasing by 3% on a seasonally adjusted basis. Without seasonal adjustment, sales declined by 17.8%, which was better than what the seasonal adjustment algorithm would have predicted (-20.8%). Increases were broad based; if we exclude gasoline, retail sales were still up 3.2%%, and if we exclude auto and parts dealers, they were up 2.6%.
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Following the inventory gluts of 2022, retailers have depleted their inventory levels between August and November of last year. The only sector that saw significant gains during that period was motor vehicles and parts dealers, where pent-up demand continued to drive restrocking. In December, retailers’ inventories rose by 0.7%, after 3 consecutive declines. These inventories, measured in Dollars, were 14% higher than a year ago, which is significantly above the price inflation of goods (+4.6%).
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Industrial production remained flat in January, according to the US Federal Reserve, and was 0.8% higher than a year ago. The manufacturing component of this index increased by 0.9% after declining for 2 months. Meanwhile, orders for core capital goods decreased by 0.1% in December, according to the US Census.
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Apendix D: Freight Volumes
The Freight Cass Shipments Index fell by 3.2% in January, but remained flat on a seasonally adjusted basis. The index was up 4.3% Y/Y, but that is because of easy comps; the freight economy in January 2022 was heavily impacted by Omicron-related absenteeism and quarantines.
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Total rail volumes (carloads and intermodal) were almost flat Y/Y in the first week of February. However, intermodal volumes were down 4% Y/Y, because of weaker demand and a softer truckload market, while carloads were up 3% Y/Y.
Mazen Danaf
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.
Senior Economist and Applied Scientist at Uber Freight
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mdanaf@uberfreight.com
