Macroeconomics complicate Class 8 equipment outlook
The outlook for trucking companies buying new or used Class 8 trucks can best be described like a 2005 Facebook relationship status — “It’s complicated.”
Given rising interest rates from the Federal Reserve, declining consumer expectations and a gradual decline in freight demand, trucking companies will be torn between buying used equipment that is declining in value or waiting for the backlog of OEM builds to return to a sense of normalcy. Analysts are split on whether the supply chain constraints for those OEMs will ease or worsen based on how the economy performs moving into next year.
Regarding the potential macroeconomic impact to commercial vehicle markets, Kenny Vieth, ACT’s president and senior analyst said, “We continue to see at least three factors mitigating a more severe downturn. Carrier profits and profitability were at record levels in 2021, and contract freight rates are still expected to rise by high single digits this year. Vehicle demand remains healthy, if moderating from here, with pent-up demand and low inventories expected to help mitigate the depth of the downturn. Finally, some prebuy activity is anticipated prior to the implementation of [California Air Resources Board’s] Clean Truck mandate, entering a queue already filled with pent-up demand. States representing about 10% of industry demand will be adopting CARB mandates in both 2024 and 2025.”
The CARB Clean Truck mandate will be worth watching, as there is a potential for OEM newbuild orders to surge if the ruling takes effect since the newer CARB-compliant Class 8 trucks will be more expensive.
Class I Railroads remain on the rails for now
Earlier this week, due to the byzantine process of labor negotiations, we once again reached the precipice of a rail strike with the potential to take the economy “off the rails” on Friday.
It appears we have dodged the slow-moving, train-sized bullet, as negotiators and key union representatives reached a tentative agreement Thursday morning. According to the Association for American Railroads statement on the deal, “these new contracts provide rail employees a 24% wage increase during the five-year period from 2020 through 2024, including an immediate payout on average of $11,000 upon ratification.”
This is welcome news for the overall economy and supply chain. Predictions about the impact of a nationwide rail strike involved disruptions of cross-border supplies, cars, auto parts, beer, agricultural commodities and bulk materials. Experts estimated that had the strike occurred, the economic impact could have cost $2 billion per day and required an additional 467,000 long-haul trucks to cover the rail freight volumes.
For those who don’t remember, the last major rail strike we had was back in 1992 and involved an act of Congress to halt the shutdown.
The next challenge is getting the union members to ratify the agreement. Part of their desire to strike is due to pay issues and quality-of-life, job-related challenges. FreightWaves’ Rachel Premack wrote, “Rather than pay, rail workers have been most frustrated by the lack of flexible schedules. They will have the chance to review the White House-negotiated contract and vote on it sometime in the next week. The full text has not been released yet.”
Market update: Flexport sees trans-Pacific eastbound market declining at ‘unprecedented’ rate
Flexport, one of the largest global non-vessel operating common carrier/freight forwarders, sent out a special market update regarding the rapid softening it has experienced in the trans-Pacific eastbound lane.
While FreightWaves has been tracking these rapidly deteriorating conditions in this specific market, the update Flexport sent warrants attention as it is further evidence of what SONAR data has been indicating for the last couple of months. In the market update, Flexport states: “The ocean market has entered a new phase. The trans-Pacific eastbound (TPEB) specifically is seeing a post-COVID plummet. Multiple trades are experiencing rate declines from their pandemic highs, but the TPEB has been declining at an unprecedented rate since late July. Far from a traditional peak season on the trade, rates are plummeting to levels not seen since 2020.”
Flexport references that between 20% and 30% of capacity is still being removed from this lane because of congestion-related blank sailings but that demand is waning from both an overstocking of inventory by U.S. importers as well as from changes in consumer spending habits. As for rates, the company alludes to there being no clear indication of when or where rates can be expected to settle, but FreightWaves believes there is still significant room for rates to continue their decline. Ultimately, we expect demand to continue softening through the end of 2022, so it is very possible that rates could revert almost entirely to pre-COVID levels.
FreightWaves SONAR spotlight: Van contracted rate declines
Summary: FreightWaves data on the initial reporting of van contract rates indicates further deterioration in price, as shippers gain pricing power due to lowered load volumes and greater availability of trucking capacity. What is notable is the interplay between contracted outbound load tender rejection rates and contracted rates.
This decline in tender rejection rates beginning at the end of the first quarter of 2022 brought about a plateau in contracted rates, with geopolitical events and inflation, coupled with changes in consumer buying behavior, that led to a gradual decline in truckload tender volumes. The truckload capacity that entered the market to cover this record consumer demand now is competing against one another and undercutting on price in a “race to the bottom,” with contract rates becoming the next casualty as shippers seek transportation cost savings after two years of continuous contracted freight cost increases.
The important question to watch will be how far contracted rates fall, as not all trucking carriers have access to the same types of contracted committed freight. Most large shippers prefer to work with large carriers and brokers, leaving smaller carriers and owner-operators at further risk from rising costs or opportunistic pricing behaviors by other carriers.
The Routing Guide: Links from around the web
Cass: August freight volumes at 4-year high; linehaul rates down 3rd straight month (FreightWaves)
FedEx withdraws full-year guidance, posts massive decline in unit’s operating income (FreightWaves)
Appellate court upholds ex-Roadrunner CFO’s conviction in $245M securities fraud scheme (FreightWaves)
DOT to reduce interstate registration fee by 31% (Transport Dive)
Carriers try to make sense of unusual economic conditions (Trucknews)