Consumer spending is cooling, and there are pockets of weakness, such as housing, which is weighing down freight volume. United Parcel Service Inc.’s average daily package size dropped. in the US 1.5% in the third quarter from a year earlier and is likely to decline further in the fourth quarter. Word is that there won’t be a peak holiday season for trucking companies this year because warehouses are already filled with inventory, and those items aren’t moving off the shelves quickly. Rates in the spot market are falling, down 40% from a year earlier, according to Cowen & Co.
This is where the cross currents come into play. Freight continues to grow in the contract market, where rates are locked in through shipper agreements that typically last a year. Freight tonnage in this market rose 5.5% in September from a year ago, reaching the highest level since August 2019, according to the American Trucking Association. Contract rates are up 15% from a year earlier, Cowen said.
Cargo strength is bolstered by infrastructure projects, increasing domestic oil drilling, industries with large backlogs such as aerospace and recurring auto shipments. The cleanup and rebuilding work from Hurricane Ian in Florida has created demand for trucks, and the drought that has left barges stranded on the Mississippi River is also driving some demand for trucks.
Signals from the major trucking companies that have reported earnings so far have also been mixed. JB Hunt Transport Services Inc. exceeded and Landstar System Inc. expectations and, more importantly, analysts adjusted their fourth quarter earnings estimate for JB Hunt while leaving Landstar little changed. Knight-Swift Transportation Holdings Inc. reported earnings below analysts’ expectations and lowered its guidance for the full year. Analysts accordingly adjusted their fourth-quarter earnings per share by 15 cents, to $1.16.
However, large carriers are better positioned to weather a market downturn than their smaller peers that operate 10 or fewer trucks, which make up about 97% of the companies in the $875 billion trucking market. The big operators have more reason to deal with rising costs for drivers, trucks, maintenance, financing and insurance that are dragging on profits as spot prices fall.
The shakeout will, as usual, hit the smaller companies first because they are more dependent on that volatile spot market. The payoff could be huge as many of the new carriers that jumped into the hot freight market are now feeling the pinch. 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 in price to around $100,000 earlier this year and were still up 64% in August from the same month in 2019.
“We haven’t seen capacity coming out as early as we’ve seen coming out of this cycle,” David Jackson, Knight-Swift’s chief executive officer, said in an Oct. 19 conference call with analysts.
The semiconductor shortage and supply chain snags that prevented truck makers from producing as many new big rigs as the market wanted to buy helped keep the new capacity topped up. The ease of adding trucks during periods of high freight demand is one reason the trucking industry has regular boom and bust cycles.
That same shortage of new truck capacity that drove up freight prices from last year will help soften the blow now that demand is picking up. JB Hunt still can’t buy all the new trucks it needs and is forced to keep older trucks on the road, increasing maintenance costs. The company had planned to spend $1.5 billion this year, mostly on equipment, and will fall short of that by $500 million. “We continue to have difficulties with the availability of equipment for growth and replacement as well as the uncertainty surrounding the direction of macro conditions,” said John Roberts, CEO of JB Hunt, on a conference call last week.
The timing of the cargo weakness could not be worse for carriers as they begin negotiations with shippers to renew contracts for next year. Trucking companies have dominated these contract talks for two years, and shippers will be looking to reverse that trend. Last year’s rise in fourth-quarter freight demand peaked early this year, and rates finally peaked and began to fall in February. Given the uncertainty of demand, Landstar only provided guidance for the fourth quarter and did not attempt to predict how 2023 will play out.
“It’s going to be a very tough first half next year based on, just the 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 haven’t risen as much as the spot market and therefore shouldn’t have fallen as much. Even with lower freight demand, price increases on everything from driver wages to tires will continue into next year.
“You start to see pressure on contract rates, but it’s a much different story than what happened to spot rates,” Jackson said. “I don’t expect there’s the kind of room to reduce contract rates a lot right now as we go through this process.”
What this means for the broader economy will depend on how these mixed signals play out in the trucking market in the coming months.
More from Bloomberg Opinion:
• $200 diesel puts Biden in an ugly corner: Javier Blas
• The Mighty Mississippi is Losing to Climate Change: Adam Minter
• Brad Jacobs is on the Hunt. Investors Should Watch: Thomas Black
This column does not necessarily 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 Mexican industry, economy and government.
More stories like this are available at bloomberg.com/opinion