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U.S. Xpress sees freight moving at ‘fever pitch’ through at least H1/22

Inventory replenishment to carry first half; inflation the wild card after that

U.S. Xpress is one of the largest trucking companies in the United States. (Photo: Jim Allen/FreightWaves)

A first-half 2022 economic outlook issued by truckload carrier U.S. Xpress Wednesday calls for strength in freight demand to last through at least the first half of the year. The company highlighted some caveats, most notably the impact of inflation on consumer spending.

Inventory replenishment is likely to carry freight demand through the beginning of the year, the report said. After that, it’s really up to how much of a bite inflation takes out of the consumer’s wallet.

“If the economy can maintain a recovery trajectory while staving off inflation, then expect another year of robust freight volumes and heightened truckload rates,” the U.S. Xpress (NYSE: USX) report stated. “However, if consumption does buckle under the weight of inflation and lackluster consumer sentiment, then supply chains will have to devote several months to rebuilding inventories before anyone will have the chance to catch their breath.

“We expect freight volumes to run at a fever pitch for at least two more quarters and remain strong for the balance of the year.”

Inflation hasn’t crimped retail sales yet

A tightening in consumer spending due to a 40-year high in inflation (the Consumer Price Index was up 7.5% on an annualized basis in January) would no doubt hurt freight demand. However, it is a double-edged sword.

A cooling in spending would allow supply chain bottlenecks to ease and backlogs of orders across many verticals to be filled. But if the consistent bright spot of the current economic cycle, consumer spending, declined for a prolonged period, chances of a recession would jump.

Potentially the biggest driver of higher prices has been an increase in labor costs. Stimulus and enhanced unemployment benefits throughout 2021 kept workers on the sidelines. Employers have raised wages to lure them back into the workforce, a trend likely to continue in 2022.

“People will always be indispensable ingredients in supply chains, even in a digital world,” the report said. “While 2021 was the year of congested container ports and heightened freight volumes, we believe 2022 will be the year of the truck driver, the forklift operator, and the other essential workers who hustle to sustain this country’s health and wealth.”

January retail sales, also released on Wednesday, increased 3.8% seasonally adjusted from December and were 13% higher year-over-year. The month contended with “a triad of forces,” including winter storms, a surge in omicron cases and inflation, according to Jack Kleinhenz, National Retail Federation chief economist. He also called out the cessation of advance payments of the child tax credit at the end of 2021 as a headwind.

The group’s Wednesday press release said “core retail” sales, which exclude numbers from auto dealers, gas stations and restaurants, were up 4.7% (seasonally adjusted) sequentially in January and 8.5% higher year-over-year (unadjusted). By comparison, core retail sales were down 3.6% sequentially in December but up 13% year-over-year.

“While robust consumer spending gave the economy a good deal of momentum heading into the new year, dwindling savings rates will have to contend with inflationary pressures over the first half of 2022,” the U.S. Xpress report stated. “If inflation continues to creep into Americans’ daily purchasing decisions, it’ll erode their sense of confidence in the economy.”

Drivers going off on their own

Truck capacity has seen incremental growth as drivers are returning to the industry “slowly, but surely.” The entrepreneurial side of the driver pool can’t resist the “allure of an inflationary rate environment and robust freight volumes,” the report stated.

Department of Transportation numbers issued in 2021 increased 55% to 92,000 as drivers have stepped out to run under their own authority. With some leaving company driving jobs, the report said carriers will likely be forced to find capacity through their brokerage operations, potentially hiring the same drivers who left under an owner-operator agreement.

However, the only real change in truck/driver capacity has been the move from large fleets to small or single-owner operators. Carriers continue to reject nearly one of every five loads tendered to them under contract (SONAR: OTRI.USA). While tender rejections have stepped down from all-time highs recently, a material lack of truck supply throughout the industry persists.

Chart: (SONAR: OTRI.USA). To learn more about FreightWaves SONAR, click here.

The leap for some drivers to owner-operator is also adding to the need for equipment, which is pushing prices higher, the report said. The primary reasons for a steep rise in equipment prices have largely centered on supply chain constraints, which have limited the flow of inputs like semiconductors and parts. Also, the OEMs have struggled with absenteeism due to COVID outbreaks.

The report said drivers are using “ballooning real estate values” to take equity out of their homes to buy equipment, essentially borrowing from one inflated asset to buy another one.

“Obviously, that’s not a sustainable proposition in adding capacity to the market. A strong housing market will persist for only so long, particularly with the prospect of rising interest rates on the horizon.”

Disclosure: FreightWaves founder and CEO Craig Fuller retains ownership of U.S. Xpress shares through his family trust.

Click for more FreightWaves articles by Todd Maiden.

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Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.