The trucking and transportation logistics sector as we know it has been thrown completely out of whack over the past two years. From the pandemic to supply chain issues and more, there have been a lot of issues for trucking companies to deal with.
The list of problems has been many. From supply and demand discrepancies, low reliability, global port congestion, labor shortages, capacity constraints, and more – it has all come together to put pressure on trucking companies and shipping rates. Fortunately, there is some light at the end of the tunnel.
While the circle of inflation affecting freight rates and freight rates affecting inflation is set to continue in the short term, the outlook is positive for pressure coming down in the not-too-distant future. Certainly, we won’t see these factors fall to the levels seen before COVID due to inflation’s impact on operational costs, but things are getting better.
Staggard Economic Changes Take Their Toll
Truck, rail, barge, and ocean freight rates don’t always react to broad economic changes all at the same time. In fact, they often suffer in different ways. While the entire transportation industry appeared to crumble during COVID, normally any number of factors may affect each mode independently, regionally, and in other ways. COVID was tough, but some transportation sectors fared much worse than others.
According to industry analysts, freight volumes for sea, air, and trucks are expected to decline in 2023. They go on to say that freight rates for all three modes are on track to drop from their pandemic high points. And why is that? Because there has been a severe rate of contraction in transportation prices measured in November 2022.
According to the US Department of Agriculture, third-quarter transportation costs for shipping soybeans to China and Europe from both the United States and Brazil declined from the second quarter. With agricultural starts declining, other sectors need to pick up the slack, but are they?
During the period in question, truck rates fell in both the United States and Brazil, with lower diesel fuel prices a factor in the United States, and ocean freight rates declined due to weaker demand for bulk commodities. This was in part related to COVID lockdowns in China. And while COVID lockdowns in China have ended, there is still a lot of disruption that needs to work its way through the system.
In the United States, barge freight rates rose as lower water levels restricted movement on the Mississippi River, and rail freight rates also moved higher. Many are saying changes brought on by climate change will increasingly impact the trucking and transportation sectors. The cost of US shipping corn and soybeans to Japan also declined in the second quarter.
More Data on U.S. Shipping Measures
Let’s continue to examine U.S. specific shipping data. In the United States, lower grain and soybean exports have had an outsized influence on shipping rates. The United States Department of Agriculture has stated that 2022-23 US wheat exports are down 3.1% from 2021-22 and down 22% from 2021. Likewise, corn exports down are 16% and 24%, respectively, and soybean exports down 5% and 10%. Is the food supply chain finally finding its legs after a chaotic start to the 2020s?
If you look at quarterly ocean freight rates, the picture is largely the same. Quarter-to-quarter and year-to-year ocean freight rates decreased mainly because of falling global trade and shrinking demand from Asia for bulk grain products. As countries around the world continually decouple from each other, shipping rates should continue to fall.
There may also be an oversupply in freight capacity in 2023. For ocean freight, not only has volume for bulk commodities decreased, but containers also are in oversupply. What could this mean for 2023? We could see a freight price war break out, leading to an even bigger drop in prices, depending on what you are shipping.
As with ocean freight, trucking capacity remains available, a stark contrast to conditions early in the pandemic. Some industry analysts consider the trucking industry to be the best barometer for logistics, even if it may be less important than rail, barge, and ocean vessels for agricultural commodities. But trucking does account for 80% of total freight spending, which gives it an outsized influence. While more expensive per mile than other modes of transportation due to smaller load volumes, trucks are the key source of “quick” freight movement and the all-important “last mile.”
What do Spot Rates Say?
Another good way to examine how 2023 might shake out is to examine spot rates. The good news is that spot freight rates (excluding fuel surcharges) for trucks peaked in January 2022 after more than doubling from May 2020 lows. Since then, spot rates charges have remained at low levels. Escalating spot rates have not led to a collapse in the supply chain or in trucking rates.
In fact, if you look at year-over-year spot truck rates, they are down more than 25% in the first quarter of 2023 and may be down 25% to 35% from their January 2022 peak by the time you read this article. Many industry analysts and spot rate watchers expect spot truck freight rates to hold stable in 2023 and contract rates to “normalize,” falling from pandemic highs as freight tonnage declines as economic conditions move toward pre-pandemic levels. It looks like things are getting back to normal and both companies and trucking interest should be happy about that.
Still, diesel fuel remains an unknown. After huge spikes earlier in the year, diesel prices have finally fallen back to more normal levels. The impact of fuel prices on freight costs to shippers is unknown for next year. The average on-highway diesel price reported by the EIA was $4.754 per gallon as of Dec. 12, down more than $1 per gallon, or 18%, from the late June high of $5.81 per gallon, but still up more than $1 per gallon, or 30%, from a year earlier. A lot of this is unknown due to the ongoing war in Ukraine.
Will there be a Recession in 2023?
The much-forecast arrival of a recession in 2023 should help reduce freight demand and subsequently freight rates as consumers buy less. Still, not everyone is convinced a recession will actually occur in 2023. High freight costs were seen as a major contributor to rising US inflation and now may contribute to helping rein in inflation if they drop. It all depends on factors outside of the industry’s control.
Recessions often take everyone by surprise. Fortunately, in 2023 there is a very good chance a recession will not come by surprise. But why? Economists have been forecasting a recession for months now, and most see it starting early next year. Whether it’s deep or shallow, long or short, is up for debate, but the idea that the economy is going into a period of contraction is pretty much the consensus view among economists. There is a historical precedent at play here.
Historically, when you have high inflation, and the Fed is jacking up interest rates to quell inflation, that results in a downturn or recession. It has happened like clockwork over the past 100 years. That invariably happens — the classic overheating scenario that leads to a recession. We’ve seen this story before. When inflation picks up and the Fed responds by pushing up interest rates, the economy ultimately caves under the weight of higher interest rates.
Why We May Avoid a Recession
According to some analysts, the U.S. will probably stick a soft landing next year: the world’s largest economy is forecast to narrowly avoid a recession as inflation fades and unemployment nudges up slightly. This obviously comes as good news to just about everyone.
Some economists say there’s a 35% probability that the U.S. tips into recession over the next year, an estimate that’s well below the median of 65% among forecasters in a Wall Street Journal survey. The U.S. may avoid a downturn in part because data on economic activity is nowhere close to recessionary. GDP grew 2.6% (annualized) in the third quarter, according to an advance report. The country added 261,000 jobs last month.
Of course, we will be keeping a very close eye on these developments and will report them to you next year as we get more data. The future of our economy and the trucking sector is so important and you will find out exactly what we know when we know it!