Consumer spending is cooling, and there are weaknesses such as housing, which are reducing cargo volumes. United Parcel Service Inc.’s average daily package volume in the U.S. fell 1.5% in the third quarter from a year ago and is expected to decline further in the fourth quarter. Word is there won’t be a peak holiday season for trucking companies this year because warehouses are already full of inventory, and those goods aren’t flying off the shelves fast enough. Rates are falling in the spot market, down 40% from a year ago, according to Cowen & Company.
This is where crosscurrents come into play. In the contract market, where rates are typically locked in by shipper agreements lasting one year, it is still rising. Cargo tonnage in this market rose 5.5% in September from a year earlier, reaching the highest level since August 2019, according to the American Trucking Associations. Contract rates are up 15% from a year ago, Cowen said.
Cargo strength is being boosted by industries with large backlogs such as infrastructure projects, increased domestic oil drilling, aerospace and rebounding auto shipments. Cleanup and rebuilding work from Hurricane Ian in Florida has created demand for trucking, and a drought that has stranded barges on the Mississippi River is also pushing bulk demand for trucks.
Signals from major trucking companies that have reported earnings so far have also been mixed. JB Hunt Transport Services Inc. and Landstar System Inc. Topping expectations and, more importantly, analysts adjusted their fourth-quarter earnings estimates for JB Hunt while leaving Landstar little changed. Knight-Swift Transportation Holdings Inc. It reported earnings below analysts’ expectations and lowered its full-year guidance. Analysts, accordingly, cut their fourth-quarter earnings-per-share estimate by 15 cents, to $1.16.
Still, large carriers are better positioned to weather market downturns than their smaller peers who operate 10 or fewer trucks, which account for about 97% of the companies in the $875 billion trucking market. Larger operators have more room to cope with rising costs for drivers, trucks, maintenance, financing and insurance that are dragging on profits as spot prices fall.
As always, the shakeout will hit smaller companies first because they are more dependent on that volatile spot market. The fallout could be huge as many new carriers that jumped into the hot freight market are now feeling the squeeze. Since the beginning of 2021, an unprecedented 265,000 new companies have obtained their operating authority in the US. Many paid exorbitant prices for used big rigs, which nearly doubled to nearly $100,000 earlier this year and were still up 64% in August from the same month in 2019.
“We’ve never seen capacity come out of this cycle,” Knight-Swift Chief Executive Officer David Jackson said in an Oct. 19 conference call with analysts.
Semiconductor shortages and supply chain issues that have kept truck makers from producing rigs big enough for the market to buy have helped keep a lid on new capacity. The ease of adding trucks at times of strong cargo demand is one reason the trucking industry has regular boom-and-bust cycles.
The same lack of new truck capacity that drove up freight prices last year will help cushion the blow while demand continues to rise. JB Hunt still can’t buy all the new trucks it needs and is forced to keep older trucks on the road, driving up maintenance costs. The company had planned to spend $1.5 billion this year, mostly on equipment, and will see a $500 million cut of that. “We continue to face challenges in the availability of equipment for growth and replacement, coupled with uncertainty over the direction of macro conditions,” JB Hunt CEO John Roberts said on a conference call last week.
The timing of the freight weakness couldn’t be worse for carriers as they begin negotiations with shippers to renew contracts for next year. Trucking companies have dominated contract negotiations for two years, and shippers will be eager to reverse that trend. A surge in demand for goods in the fourth quarter of last year spilled over into the early part of this year, and spot rates finally peaked and began to decline in February. Given the uncertainty of demand, Landstar only provided guidance for the fourth quarter and did not attempt to predict how 2023 would unfold.
“The first half of next year is going to be extremely difficult, just by comparisons and the direction of the economy,” Landstar CEO Jim Gattoni said on a conference call last week.
Trucking companies will argue that contract rates have not risen as much as in the spot market and therefore should not fall as much. Despite low demand for cargo, price hikes on everything from driver wages to tires will continue into next year.
“You start to see pressure on contract rates, but that’s a much different story compared to spot rates,” Jackson said. “I don’t expect that there’s any kind of room to completely retrench contract rates now that we’re going through this process.”
What this means for the broader economy will depend on how these mixed signals play out in the trucking market over the next few months.
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This column does not reflect the opinion of the editorial board or Bloomberg LP and its owners.
Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he covered US industrial and transportation companies and Mexico’s industry, economy and government.
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