Many say the trucking sector is the canary in the coal mine. Whatever happens in the trucking sector can be used to extrapolate what will happen in the broader economy. And with so much unease in the world, between a lingering pandemic, a new land war in Europe, and rising inflation, what can industry insiders expect when it comes to trucking and the overall economy? Should we expect doom and gloom?
Well, we will be the first to tell you that the trends don’t look entirely positive. There has been an unexpectedly sharp downturn in demand in freight shipments. Whether you’re looking at food or furniture – rates on the spot market are taking a big nosedive. In fact, the dive it took was so deep many were unexpecting it. Are we seeing another downturn in the trucking sector that could put some smaller operators out of business?
Trucking Companies and the Global Marketplace
If history has proven one thing, it is that you can use the trucking sector as a broader indicator of economic activity. The reason is simple: When people pull back on purchasing, manufacturers and vendors produce less, which results in less shipping. Generally, an economic recession follows a trucking recession. This is just a simple fact of history.
The initial assumption was that the trucking sector would see some shift as consumers changed their buying patterns. It was expected that people would venture out more and buy less online, which would obviously lead to a big dip in trucking activity. Still, there were other factors that could not be accounted for, such as Russia’s invasion of Ukraine, which sent fuel prices soaring to record highs. It was the rise in these fuel prices that changed the equation on inventory management.
Therefore, we are essentially seeing a correction in the spot market itself. The spot market is dominated primarily by small trucking companies. These could be owner-operators or others with less than a few vehicles. And not only were spot rates rising, but diesel prices were going through the roof, which was hitting small truckers in a big way.
The Spot Market Goes Through Major Convulsions
Are we seeing a see-saw reaction in the spot market? Just consider what happened during the COVID-19 pandemic when trucking conditions underwent huge convolutions. Consumer spending on durable goods rocketed nearly 20 percent at the height of the pandemic. To ensure they could meet those orders, retailers and other companies massively ramped up their shipping efforts.
As a result, at one point there were more trucks in use shipping products during the pandemic than at any other time in known history, with more than 1 million loads per day being handled. Compare that to around 400,000 per day under normal circumstances, and it isn’t hard to see how the pandemic created truly extraordinary conditions within the spot market and broader trucking sectors.
Then, in March 2022, demand took a huge hit. As oil skyrocketed, retail sales and gas prices fell by 0.3%. Even online sales, which had been on a growth tear during the pandemic, tumbled. As oil prices went through the roof and hovered over $100 per barrel, shippers put the brakes on filling their truck trailers. No one wanted to send a trailer out partially loaded, which would have been acceptable in a more affordable environment.
While this environment was tough, larger trucking companies are better able to manage boom and bust cycles like these due to their yearly contracts. They operate with their customers on a fixed-price basis. Now trucking insiders expect softer truckload demand to round out the next two quarters with a pick-up in holiday demand at the end of the year.
Charting a Route Through 2022 Won’t Be Easy
COVID-19 had negative impacts on almost every industry, it really is the new inflationary pressure that puts a hurt on the trucking industry and other transportation sector companies. Obviously, inflation burdens many Americans. Families feel it as prices from fuel to groceries go up. The trucking industry and just about every other industry feel it.
Consider the prices in raw materials that have impacted truck and trailer manufacturing. According to some estimates, what used to be a $30,000 trailer is now a $37,000 – $40,000 trailer. That represents a significant increase for trucking companies already suffering from the rise in diesel fuel costs. Any time raw material prices rise, prices for everything else rise as well.
According to FTR Intel data, demand has taken massive spikes and drops. In January 2022 trucking rates jumped 24% compared to where they were in 2021. Freight spot load postings also took a huge leap up by 44% at the beginning of 2022. When you remove fuel from the equation, rates were still up 18% over the same period a year ago. And these rate hikes were agnostic of type, with hikes in reefers, flatbeds, and dry van.
A Question of What Happens Now
As we mentioned earlier in the article, spot rates have now collapsed. The whipsaw effect can be seen, and trucking companies are feeling the impact. Many, including research companies like FTR, predicted this slowdown. The difference is back in January, they expected them to be slow, but not coming to a complete stop. What we see today is considered anomalous.
Many analysts point to uncertainty driven by the ongoing Russo-Ukrainian war. It is unclear how the war will continue to impact oil prices, food prices, and materials prices. Already some have predicted hyperinflation on the horizon. And with consumer demand fluctuating in odd ways, there are still unexpected headwinds on the horizon.
Trucking companies of all stripes benefited greatly from lower diesel fuel prices during COVID-19. Did this lull them into a false sense of complacency? However, the price for ULSD fuel has been going up quite precipitously lately. Prices today are higher than they were before the pandemic. How can trucking companies continue to grow, increase cash flow, and improve profit margins without going out of business?
Problems Persist in Supply Chain and Semiconductor Shortages
Despite strong demand from trucking companies for Class-8 truck orders, at the end of 2021, those orders nosedived by 55%. Certainly, many of these problems stemmed from supply chain issues, but not all. There is also an ongoing semiconductor shortage, which causes huge backlogs at big companies, from automakers to home appliance providers.
One prominent trucking OEM even reported that were it not for the ongoing semiconductor shortage, they would have been able to fulfill 7,000 more vehicles than they were otherwise able to. Heavy-duty Class-8 trucks have become increasingly “connected.” The computing power they require is far, far advanced beyond what they required even 10 or 20 years ago. They require a lot of computer chips, so they are sensitive to problems in market availability. Consider the electric Tesla-Semi. Tesla has announced that they must push production of this vehicle back to 2023 simply due to a lack of available semiconductors to power the vehicles.
Trucking companies respond in different ways. Many simply use their existing rigs beyond their initial trade-in cycles. But this raises other problems, such as increased maintenance needs as the vehicles age. Many fleet managers would love to return to a normal trade-in cycle not driven by disruptions in the market due to supply chain issues.
The Trucking Sector Retains a Positive Outlook
According to the American Trucking Associations, the trucking industry moved 11.84 billion tons of goods in 2019 alone. That number spiked even more during COVID-19. Now inflation creates more problems. Yet, it isn’t all doom and gloom on the horizon. The supply chain is going to get itself sorted out. Already the backlogs at LA and Long Beach ports have eased up.
And despite supply chain problems and high wage pressures, pure truckload yields are creating higher revenue growth opportunities for companies. But will companies be able to turn profits and cut costs enough to survive inflation pressures? Large trucking companies will be able to better hold out during these big booms and busts, but it is tough to see continued cycles of economic growth and recession that impact smaller trucking operators.
So, what’s the outlook going into 2023? It could be just as tumultuous as 2022. American trucking companies will need to prepare themselves to pay for higher prices on just about everything. Even the price of rubber has gone up. Will your fleet be prepared?