Monthly Economic and Market Update
January 2023
Market Update
Table of Contents
1. Executive Summary 2. US Economy - Lower inflation - Troubling signs - Risk of a global recession 3. Freight Market Update - Declining freight demand - Mixed supply signals - Spot rates surge
4. Shipper and Carrier Recommendations 5. The Uber Freight Platform - API - Market Access - Routing guide strategy 6. Chart and Analysis - Freight costs and insights - Trucking supply - Demand indicators - Freight volumes
Executive Summary
As inflation continues to cool down, economic headwinds emerge across various sectors. These headwinds are particularly troubling for freight demand. After two years of growth, the manufacturing economy is starting to contract, as new orders drop and backlogs dissipate. The housing and construction sector continues to struggle due to high mortgage rates, and consumer demand remains stagnant heading into 2023. Meanwhile, trucking supply had its largest year-over-year gain on record. The long-distance trucking sector added 38.1K jobs between January and November of 2022, resulting in a 9% year-over-year growth. Class 8 truck orders and sales continued to outperform, driven by pent-up demand and easing supply chain constraints. However, long-tail marginal capacity is starting to exit the market at a faster pace. After a weak start to Q4, dry van spot rates surged just before New Year, bringing December’s average rate per mile to $1.92, about 7% higher than November. However, this increase was driven by seasonality, declining diesel costs, and severe weather conditions. In Q1 of 2023, we expect rates to resume their downward trend, until they level-off in April.
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1. Executive Summary
2. US Economy
3. Freight Market Update
6. Charts and Analysis
4. Shipper and Carrier Recommendations
5. The Uber Freight Platform
- Lower inflation
- Troubling signs
- Risk of a global recession
- Spot rates surge
- Declining freight demand
- Mixed supply signals
- API
- Market Access
- Routing guide strategy
- Freight costs and insights
- Trucking supply
- Demand indicators
- Freight volumes
US Economy
Various data points in the past month indicated that inflation is cooling down. In December, the Consumer Price Index (CPI) decreased by 0.1% from the prior month, driven by declining energy costs. Wage inflation also seems to be moderating, as payroll wages increased by 0.3% in December, equivalent to an annual growth rate of 3.7%. Recent inflation has been concentrated in services. The prices of goods are actually decreasing, especially durable goods. However, the prices of services also seem to be rising at a slower pace than before. If we exclude shelter, December’s CPI points to a 1.6% drop in prices over November. The recent slowdown in inflation led the FOMC to raise rates by only 25 basis points in its most recent meeting. While prices have been moderating for 6 consecutive months, the fight against inflation is far from over. The labor market remains historically tight, with the unemployment rate remaining at a record low level (3.5%). Job openings remained high in November, almost double the number of unemployed persons. So what are the early signals to watch out for? These include indicators of services and shelter prices, such as the ISM Services Price Index, the New Tenant Repeat Rent Index (NTRR) recently developed by the Bureau of Labor Statistics to get more timely data on shelter inflation, and Zillow’s Observed Rent Index (ZORI).
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Inflation is abating
The recent decrease in inflation was accompanied by troubling signs for the US economy, and particularly freight demand. Although consumer spending remained at its record high level, consumers are saving less. In November, US consumers saved only 2.4% of their income. That figure was north of 7% before the pandemic. US consumers are still supported by $1.6 trillion of excess savings which they accumulated during the pandemic. However, as they tap into these savings, their ability to spend will deteriorate. The outlook for manufacturing also looks murky. After two years of growth, the ISM Manufacturing PMI has pointed to two consecutive months of contraction; the index recorded 49.0 in November, and 48.4 in December. The indices of backlogs and new orders both declined, indicating that future demand is likely to contract as well. The bright spot in this report was the index of input prices, which dropped for the 9th consecutive month to 39.4, indicating that prices have been falling since September of last year.
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Troubling signs for the US economy
The housing market also continues to bear the brunt of rising interest rates. The 30-year fixed mortgage rate in the US averaged 6.33% in the second week of January, almost double the rates in January 2022, according to Freddie Mac. Accordingly, housing starts and building permits continued their downward trend in December, and were about 20-30% lower than the same time last year. US imports have also dropped sharply over the past few months. The number of TEUs imported in November was comparable to the 2019 volumes. Imports from China have been a major factor driving this decrease, but not the only one. According to Container Trade Statistics, global TEU volumes have been declining since May of last year.
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According to a recent report by the World Bank, the global economy might tip into recession in 2023. Although the global GDP is forecast to grow by 1.7%, this is substantially lower than the Bank’s forecast in June 2022, which predicted 3.0% growth. The recent report also expects slowdowns to affect advanced economies disproportionately. The GDP of the US is forecast to grow by 0.5% only, while that of the Euro Zone is expected to remain flat.
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Risk of global recession
Freight Market Update
Uber Freight’s composite supply and demand indices show that supply continued to expand in November, as carriers added new drivers and trucks. Meanwhile, demand contracted, mostly due to plunging imports. In November, demand was 1% lower YoY, while supply was 8% higher.
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December’s increase in rates was not driven by a recovery in freight demand (beyond typical seasonality). While real personal consumption expenditures remained flat in December, consumers spent more on services and less on goods than they did in November. Real spending on durable goods decreased by 1.5%, and spending on nondurable goods remained flat month-over-month. Manufacturing output also declined in December by 0.6%, according to data from the US Federal Reserve. The decline in economic activity was reflected by various freight indices. Although the Cass Shipments Index gained 1.2% points on a seasonally adjusted basis in December, it was still 3.9% lower year-over-year. Similarly, ATA’s for-hire truck tonnage index decreased by 2.5% in November, the largest single monthly decrease since the start of the pandemic.
Freight demand is declining
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Mixed supply signals
Excludes supervisory and non-production roles.
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While most economic signals indicate a decline in freight demand, the supply landscape is more ambiguous. After increasing through most of 2022, payroll driver employment seems to be moderating. For-hire carriers added 2.1K jobs in December, about 0.1% m/m. Carriers operating in the long-distance truckload sector added 1.1K jobs in November, bringing employment to its highest level since 2007. Remarkably, employment in this sector was 9% higher than the same time last year, making 2022 the best year ever in terms of hiring (38.1K jobs were added between January and November). The hiring spree was followed by a wave of truck orders. Through the pandemic, carriers could not obtain the trucks they needed because of supply chain constraints. As these constraints began to resolve, OEMs opened their order books and increased production. In 2022, net truck orders dropped by 18% because of stagnant demand and plunging spot rates. However, truck production surged by 18%, and truck sales increased by 13% YoY, according to ACT Research. As backlogs dissipated and production resumed, the expected lead time (time between ordering a truck and receiving it) decreased by 3 months compared to 2021. While large carriers could finally grow their much needed capacity in 2022, the year was not as bright for owner-operators and smaller carriers. FMCSA authority revocations continued to rise, with more than 16,000 revocations recorded in November and December. On the other hand, new authority registrations continued to decline. The number of new registrations fell for the third month in a row in December, and has decreased in 8 out of 12 months in 2022.
Dry van spot rates increased in December to $1.92/mi. This increase does not come as a surprise, given that drivers usually take some time off during the holidays. However, it was the first increase after declining for 10 months in a row. The increase in linehaul spot rates was partly driven by a drop in diesel prices, since these rates exclude a hypothetical fuel surcharge. Diesel prices averaged $4.71/gallon in December, 10.3% lower than November’s level. On the other hand, dry van contract rates remained stubbornly flat in December. While spot rates have dropped by 30% year-over-year, contract rates have decreased by only a few percentage points.
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Spot rates rose in December after 10 consecutive declines
Spot rates are usually all-in, a fuel surcharge is not applied separately as with contract rates.
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Shipper and Carrier Recommendations
Carriers and shippers should be careful in interpreting December’s surge in spot rates. This was driven by three temporary factors: lower diesel prices, unusual weather conditions, and seasonality. Unless diesel prices continue to fall in the coming months, we expect linehaul spot rates to decrease, in line with typical Q1 seasonality. However, we expect marginal carrier capacity to continue exiting the market in the first half of 2023, which will accelerate the bottoming process. Shippers should remain cautious instead of chasing the bottom and stay flexible with routing guides as rates might rise unexpectedly in the second half of the year. Flexible pricing tools, like Uber Freight’s Market Access and index-based pricing contracts, allow shippers to benefit from lower spot prices, while protecting their service levels against sudden market tightening.
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The Uber Freight Platform
December shipment volumes across Uber Freight’s customer base slightly rose month over month as we saw our first sign of a “capacity crunch” given the winter storm and holidays. The shippers that saw the largest uptick in volume were ones that had API routing guide integrations in place, resulting in an uptick in quotes and an assumption from our end that other carriers' primary tender acceptance slightly dropped during the last two weeks of the year. Execution was critical during this time and leveraged a “10x Playbook” to tackle service concerns through a combination of quoting logic, sourcing strategy and extra speciality ops resources. As we look to diversify capacity solutions in this channel, Uber Freight has recently expanded quoting functionality to include Drop and Multi Stop. Drop quoting is available on an ad hoc basis but is available consistently if there is a Powerloop trailer pool available at certain shippers facilities. Multi Stop quoting is available for all shipper partners across the US and is one of the highest growth areas among API loads.
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API
With opportunity to capitalize on real time pricing vs inflated contract rates, some of the largest UF shippers are utilizing Market Access to set up a transparent pricing model and a pre-agreed fee. Market Access can be used through EDI/API-based integrations into Shipper TMSs, allowing customer operators to remain within their workflow. For higher volume lanes, UF also offers an advanced Market Access model that allows shippers to cap costs on lanes but still realize cost savings if UF is able to procure capacity under the capped lane rate. Q4 was our highest volume for new Market Access customers ever as we saw a spike in shippers that set up Market Access in advance of their RFPs going live in Q1. Productive conversations with shippers are usually 1-2 months before their RFP’s launch, to discuss segmenting a portion of their network such as low volume, regional, customer based or volatile lanes to this program. By clearly identifying a segment of their network to run this program, we can provide a comprehensive cost analysis, an execution plan and real-time analytics.
Market Access
High tender acceptance (92%+) is an indicator of price opportunity within your carrier routing guide. For our Managed Transportation customers, we are collaborating with many of our shippers to assess their risk appetite for carrier change to strategically make adjustments with carriers that are more aggressive with their pricing. We work with our customer to assess risk profile by segmenting order types (i.e customer orders vs stock transfers) and adjusting their routing guide to move to carriers with more aggressive pricing for order types that are conducive to a higher risk profile, typically deploying stock moves at a 90% tender acceptance with a carrier 10% below market rate, but retaining customer orders at over 92%. By deploying a segmentation strategy, shippers are able to take advantage of a softer freight market without risking service for key customer deliveries. 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.
Routing guide strategy
Charts and Analysis: Freight costs and market conditions
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Spot rates increased across all trucking modes in December, after counter-seasonal decreases in the beginning of Q4. However, they were still 25-30% lower year-over-year. Contract rates are slightly decreasing heading into 2023, and the gap between spot and contract prices remains sizable.
Charts and Analysis: Trucking supply
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For-hire trucking added 2.1K jobs in December, resulting in a 4.1% year-over-year (Y/Y) gain. Throughout the year, approximately 62.6K jobs were added. The largest gains were observed in the long-distance truckload sector, which is the best predictor of dry van spot rates. This sector saw a 9% Y/Y growth. Employment in the long-distance truckload sector slowed down in November, which saw 1.1K added jobs.
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Class 8 truck net orders fell to 24.1K units in December, after spiking in the previous 3 months. This spike was driven by OEMs opening their order books to serve pent-up demand, as the chip shortage eased. Production increased by 6% in December to 29.8K units. Despite the recent spike in orders, the truck order lead time (defined as the backlog-to-build ratio) dropped to 7.2 months, in line with historical levels.
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Despite lingering supply chain constraints, OEMs are expanding the availability of 2023 trailer build slots. While down from October, trailer net orders were up 22% y/y, with 39,592 net orders placed. The strength was led by dry vans, according to ACT Research. The build rate was +13% y/y, and is up more than 14% ytd.
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Although for-hire trucking employment has been adding jobs in the past few months, many trucking companies have been running out of business. According to FMCSA, the number of net authority revocations exceeded the number of newly granted authorities for the third month in a row. This implies that long-tail capacity is exiting the market due to rising operational costs and low spot rates.
Charts and Analysis: Economic demand indicators
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Real personal consumption expenditures on goods decreased by 0.9% in December, and were flat from last year. This was mostly driven by a 1.6% drop in spending on durable goods. Meanwhile, spending on nondurable goods decreased only by 0.4%. This disparity is expected, because durable goods consumption is usually more sensitive to economic downturns.
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Retail sales dropped further in December, driven by reductions across all sectors (retail, auto and parts dealers, and gasoline stations). Retail spending (excluding auto and gasoline) was 7.2% higher year-over-year, which is slightly above the rate of inflation in goods prices (6.1%). Consumers have maintained high levels of spending, but at the expense of saving. Real disposable income increased slightly in the past few months, but was flat Y/Y. Meanwhile, the personal saving rate was still 3.4%, substantially below the pre-COVID average.
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Retail inventories decreased for the third month in a row in November, after rising through most of 2023. The inventory-to-sales ratios are adjusting back to their long-term trends. Inventories (measured in Dollars) have increased by about 20% in 2022, substantially outpacing the rate of inflation. Wholesalers inventories have also begun to decelerate in the past few months, with the I/S ratio rising back to the pre-COVID level.
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Manufacturing output decreased by 1.3% in December after dropping by 1.1% in November, according to data from the Federal Reserve. Similarly, data from the US Census shows that manufacturers’ new orders and shipments (measured in Dollars) remained flat in November. Although orders were 6% higher y/y, this increase is mostly attributed to price inflation. Shipments have begun closing the gap with orders since October, indicating that backlogs are dissipating.
Charts and Analysis: Freight volumes
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The Cass Shipments Index dropped by 3.3% in December and was 3.9% lower Y/Y. However, on a seasonally adjusted basis, the index increased by 1.2%. This index is closely correlated with manufacturing activity in the US. Similarly, the ATA truck tonnage index dropped by 2.5% in November, but was still 1.1% higher Y/Y. The latter index is dominated by contract freight, so its Y/Y increase does not indicate growth in overall freight volumes, but rather a shift in volumes from the spot market to the contract market.
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Rail volumes have underperformed throughout 2022, ending the year about 4% lower than 2021. In the second half of the year, carloads were 2.4% lower y/y, while intermodal loads were 5% lower. While labor shortages constrained volumes in H1, declining demand was the main factor in the H2, especially as imports plummeted.
