We are hearing today a great deal about a “freight recession”, but what exactly is a freight recession?
According to Freightwaves, when there are consecutive quarters of decline in freight volumes, this can be considered a freight recession. This typically means that both freight volumes and tender rejections are low, suggesting overcapacity in the industry. We hear a lot about a trucking recession but what are the root causes? We will describe the current market trends and the root causes behind them.
Why are we in this current situation?
JB Hunt Transport Services’ President Shelley Simpson described the current situation as follows: Ocean freight orders are a leading indicator of train and trucking earnings since 90% of the world’s trade moves by water. With manufacturing orders trending down between 30-40% since June of last year, it should come as no surprise that ocean bookings have declined. Fewer ocean orders mean less freight arriving into the U.S. to be moved by train or truck. Meanwhile, Union Pacific’s CEO Lance Fritz cites inflation, high inventory levels, and weak consumer spending as near-term challenges.
Additionally, we are seeing real weakness in the trucking industry with the bankruptcy of Yellow a few months ago. Then, last week, Convoy filed for bankruptcy protection, too. Yellow and Convoy are two totally different types of transportation companies. Yellow is a legacy trucking company that was one of the nation’s oldest. Convoy was a digital freight broker that was supposed to shake up and disrupt the trucking industry. In the end, both wound up closing their doors.
What were the factors that brought us to the current freight recession?
1. The Covid Pandemic
During the pandemic, consumers went on a buying spree. The U.S. government was giving out cash payments and people started ordering products for their new home offices, hobbies, and living rooms. The American Trucking Association (ATA)’s Chief Economist Bob Costello said the government pumped trillions of dollars into the economy during the pandemic. “I’ll call that the party,” he said. “Now is the hangover. We’re going to revert to the mean and see slower economic growth.” That led to higher inflation which the U.S. Federal Reserve has been aggressively fighting to curb with higher interest rates.
2. A Surge in Equipment Coupled with Less Demand
With the surge in business, transportation companies acquired new equipment to meet the demand. Last year, with the Covid pandemic easing, consumer spending started to recede resulting in too many trucks on the road compared to the freight available, forcing rates to go down.
Inflation is also playing a major factor. Operating costs like fuel are increasing. Uber Freight CEO Lior Ron says the freight recession may be at a “tipping point”. He stated, “low fuel prices earlier this year likely helped many carriers manage through low rates, but increasing fuel costs may be a tipping point for carriers operating with little to no margin.” He said shipper volumes are still down and carrier rates are still depressed. In the latest financial quarter, he said Uber’s team has observed carriers being more selective on the volume that they take in bids to remain profitable. Shippers, meanwhile, are being more selective on their carrier mix and have been leaning toward selecting carriers they think are stable and provide good service.
4. Labor Costs
Another factor is labor costs. The ATA’s Costello stated that wages have risen as companies struggle to find workers and that affects overall labor inflation. “We simply don’t have enough population growth, which ultimately will keep the labor market tighter,” he said.
5. Many More Freight Brokerages/Options
With the sudden increase in freight volume during the Covid pandemic, freight brokerages sprung up across the trucking industry. In 2000, freight brokers represented 6% of the trucking industry. In 2023, freight brokers handle over 20% of trucking freight. Originally, freight brokers handled low-margin freight and served as a shipper’s last resort if a carrier had a freight surge and could not handle their cargo. Today, as freight brokers invested in technology and offered better customer service, they were more attractive to shippers than traditional carriers and took on a greater role in routing freight. Now after the pandemic, so many brokerages have gone out of business. Many freight brokerages used low interest rates to finance their business growth. With interest rates rising and business slowing down, many are closing.
How long will the freight recession last?
Back in early 2022, when freight markets started to weaken, Freightwaves CEO Craig Fuller said, “I remember thinking that the downturn in freight was probably going to be at most a year.” After that period, inventory clearing and the need to restock would start again, the thinking went. Fuller noted that the reversal hasn’t started yet and stated the trucking industry “is starting to see the failures pile up. We are certainly reporting on a lot more bankruptcies than we have in the last six months.”
Fuller doesn’t expect the trucking market to strengthen until capacity is reduced by another 20%. It’s not just independent owner-operators leaving the business, its large carriers taking trucks off the road, not hiring the drivers, and leaving the equipment parked if they can’t make a profit now. The ATA’s Costello said, “There’s going to be more and more folks going out of business.” Carrier failures will continue, bringing supply and demand closer to balance. Costello believes this process must happen to restore stability in the sector.
What does the future hold for the trucking industry?
There are three main areas that affect trucking freight: consumer goods, construction, and factory/industrial production. Don’t expect consumer spending to create any extra lift. People accumulated $2.1 trillion in savings from government relief money during the pandemic. Spending, however, has shifted back to services again.
Consumers are not spending their money on the big-ticket products that caused the surge in the first place. The U.S. Federal Reserve’s aggressive interest rate increases have affected home building and existing home sales which will see housing starts fall 9% and existing home sales drop 17% this year. Thanks to the federal infrastructure spending law, non-residential construction is up 15% this year. A lot of this is infrastructure and ties into factory and industrial manufacturing. The ATA’s Costello said, “I am very bullish on North American manufacturing”, adding “This idea of nearshoring, reshoring, it’s real, it is happening. It doesn’t happen overnight, but we know it’s happening. Mexico is now the United States’ largest trading partner, not China.” While domestic truckloads are down 3-5% depending on the lane this year, truckloads from Mexico are up over 2% this year.