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The State of Trucking in the New Year – Part I

We recently put out a new blog post discussing what we expect for the trucking industry in 2023. The outlook is mixed, but we are optimistic that 2023 is going to be a good year for the trucking and transportation sectors. That’s why we wanted to revisit the state of trucking in 2023. The New Year is here, so how is the trucking industry doing? And what can we expect from it as we move into the New Year? Let’s first look at demand.

With the holidays behind us, peak season has passed. And as such, the hope for something exciting to happen and dramatically shift the market outlook is rapidly diminishing. Why? Because the truckload market continues to soften as we start 2023. Truckload volumes and tender rejection rates have continued to move lower in November, resulting in rates following suit. The LTL market is softening too as LTL carriers report tonnage declines in October 2022 and carrying over into November. That slack in the market has continued into 2023.

A Softer Truckload Market to Start 2023

Now, the question is, how are things holding up from an intermodal perspective? The intermodal market, which had been holding up well compared to the truckload market, finally started to cool in the past month. This isn’t entirely unexpected considering that is the normal pattern following the holiday season and New Year. This year, however, the prospect of intermodal chaos is weighed upon by last year’s rail strike. Fortunately, we avoided a costly and drawn-out rail strike, but the market is still working through those disruptions.

How about ocean traffic? Sea freight has shown further softness overall, but some ports, specifically on the East Coast, reported strong import levels for October and November compared to their West Coast counterparts. As ports in Long Beach and Los Angeles are finally back to normal container levels, East Coast ports are now hogging the spotlight. Still, ocean spot rates have continued to fall and the runway for declines to persist into the first quarter intensifies as ocean carriers continue to add capacity. The good news? All these falling spot rates are a good sign where inflation is concerned.

This is good news because retailers have worked hard to clear the inventory levels over the past two quarters. Still, as the economy shifts, consumer buying patterns continue to change. Credit card debt is at the highest level it has ever been. This comes as a surprise to many analysts and economists considering the costs of credit (rising interest rates) are becoming more expensive as each day goes by. And while the holiday buying season offered some respite, retail sales were not as high as many were hoping considering the current market environment.

Inventory Correction Levels Impact the Truckload Sector

Caught between a weak season for maritime imports and a prolonged correction in inventory levels by retailers, truckload carriers are increasingly nervous, and here is good reason to be. If the market continues to deteriorate, the 2023 outlook for smaller trucking companies will deteriorate right alongside it.

Even worse, small trucking companies will find it difficult to contend with broad-based market deterioration. Tender rejections, freight demand, and spot rates have all continued to plummet while, in late October, contract rates reached their lowest level since November 2021. The result? Larger carriers and companies getting ready for layoffs to account for shrinking profits. It won’t be long before truck drivers feel it on the front lines. But will it be transitory pain or long-lasting?

Let’s look at what happened in November and December of last year. November is typically a month in which maritime imports begin to move inland for their final push before the holiday shopping season. Yet, if you look at the data, that did not really happen this past holiday season. Many large carriers were fighting with each other to book work even before Thanksgiving.

Contract Rates Hold Steady

Contract rates lost their start-of-quarter bump in mid-October of last year and by November had fallen to their lowest level since November of 2021. Fortunately, many got some of those losses back by the time December rolled around. How? It was likely because shippers anticipated greater activity during peak season and priced their lanes accordingly.

One month ago, contract rates were down 1.47%, but picked up steam at the beginning of the year. Still, despite the beginning-of-year growth, many operators are still pulling themselves out of a weak end to 2022.  Why? Because the fundamentals behind pricing contract rates remain unchanged. It is therefore incredibly likely that as we move deeper into Q1 2023, we will see a more significant reduction in contract rates.

The National Truckload Index (NTI), which comprises a seven-day moving average of national dry van spot rates, has continued to drop. Year-over-year the average is down by 22.87%, which is at the high end of expectations. What does this all mean? Trucking companies will need to get creative in order to stay ahead in a difficult marketplace such as this.

Where are LTL Rates?

LTL contract rates saw a sizable increase beginning in October of last year and stretching through December. This was like what happened in 2020, and around the same timeframe. At their peak, the average LTL contract rate broke $50 per hundredweight. If you don’t know, that represents a record high going all the way back to January 2017. Yet these gains were lost almost as quickly as they appeared, falling back by the start of the New Year.

Earnings reports from major LTL carriers revealed weakened demand as tonnages slid by the end of 2022. One thing to watch, however, is industrial production, which is a bell weather for LTL industrial volumes. Currently, that reading remains stable. While many big LTL operators have been cutting back on their tonnage in order to pursue and service higher-priced freight, it appears that in Q1 many are coming back home to more familiar service offerings. Why? Because there is pessimism in the market.

Manufacturing firms are concerned about the potential for recession in 2023. And this is even though many are still increasing hiring and putting money into big projects and capital expenditures. While many businesses are benefiting from a reduction in input material costs, inflationary pressures continue to be a problem for a once-healthy consumer.

One cause for optimism, however, is that supply chain disruptions for many respondents have been steadily dissipating. The supply chain has been a major pain point for many firms. Seeing the ports unravel themselves has been a boon to businesses across the country.

Trucking Supported in the Maritime Sector

The sea shipping market has continued to suffer from demand drops that really began over the summer but started to accelerate by September of last year. October import levels were better, especially on the East Coast, while the major Southern California ports continue to lose share overall. Consider that the Southern California ports had finally worked through their backlog, yet they continue to see a deterioration in their market share of ocean volume.

There is a strange thing happening though. Although the backlogs have faded from the collective consciousness and generated fewer headlines, the decline in overall bookings and TEU volumes continues. Overseas departures have fallen off beginning in Q1 2023 and that could bring bad news for ports. The first half of the year always brings with it difficult comps. Slumping ocean freight volume could exacerbate the problem.

So, what’s the main issue? Too much capacity. The risk with ocean freight remains as ocean carriers are adding too much capacity to the market. Shippers are taking delivery on new, larger ships throughout the rest of 2023 and there simply is not enough demand to chew up all this new capacity. The big picture takeaway here? Expect import levels are going to continue to deteriorate until at least the Lunar New Year, which is on January 23, 2023.

Now, the only outstanding question is what 2023 will bring. We believe the market will stabilize and the economy may even avoid a protracted recession. Still, no one can know for sure what will happen. Whatever happens, you can rest assured we will bring you up-to-date news and a comprehensive analysis of events and happenings within the trucking and transportation sectors. Thanks for following the QuickTSI blog over all these years!

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