Road to recovery

Although the economy as a whole escaped a recession in 2023, the freight market did not, resulting in thousands of truck drivers and carriers leaving the industry. Will the situation improve this year?

How we got here

Now four years out from when COVID-19 first decimated economies in early 2020, the shockwaves from the pandemic are still being felt within the freight market.

Government lockdowns and subsequent layoffs led to consumer demand decreasing, and the supply chain reacted accordingly. Production and manufacturing came to a halt.

To mitigate the economic effects, the federal government began sending out a series of stimulus checks in March 2020, December 2020 and March 2021. According to data from the U.S. Bureau of Economic Analysis, real disposable personal income spiked dramatically in either the same month or the following month.

With more money in pockets and lockdowns getting lifted, consumer spending exploded. Unfortunately, the global supply chain was not equipped to handle that explosion, creating a massive bottleneck. From a trucking perspective, there were simply not enough truckers to clear out the cargo piling up at the ports.

At the time, this was actually a good scenario for truckers. With supply significantly exceeding capacity, carriers were able to set record-high rates. From January 2018 through March 2020, weekly spot rates for dry vans averaged $1.68 (ranging from $1.47 to $2.05), according to data from DAT Freight and Analytics. In April 2020, rates dipped to $1.32. Within a month, rates quickly rose and continued to rise. By the end of 2020, dry van rates were as high as $2.30. At their peak, rates were $2.70 in January 2022.

Seizing the opportunity, a surge of new carriers entered the industry. According to data from the Federal Motor Carrier Safety Administration, there were nearly 350,000 authorized property-carrying carriers in December 2021, an increase of nearly 78,000. Comparatively, 2020 saw an increase of only 30,500.

However, the party had to come to an end eventually. As the immediate effects of the pandemic began to subside, consumer spending began to stabilize.

After reaching a record high in March 2021, real disposable personal income plummeted in April 2021, where it began to stabilize slightly above pre-pandemic levels. Consequently, inventories and production quickly corrected themselves.

Although a return to normalization is typically a good thing, there was one problem. Tens of thousands of carriers entered the market when the iron was hot. With the iron cooling down, the tables were turned. Capacity far exceeded supply. Spot rates started a downward trajectory in January 2022. In October 2023, rates dipped as low as $1.52.

Making matters worse, pandemic-related disruptions caused a rise in inflation. In January 2021, the annual percentage change in the consumer price index was 1.4%. By December 2021, the annual change was 7%, reaching as high as 9.1% in June 2022. Since then, the inflation rate has slowly gone down to 3.4% at the end of 2023, nearing the target comfort mark of 2%.

Exacerbating an already bad situation, diesel prices also skyrocketed during this period. The average price of diesel nationwide in November 2020 was about $2.40. A year later, the average price was about $3.70, quickly reaching a high of more than $5.80 by June 2022. As of mid-January, diesel prices had dropped to about $3.86.

Overcapacity, low rates, high inflation and record-high diesel prices forced thousands of truckers out of the business. According to the Bureau of Labor Statistics, there was a net loss of more than 20,000 trucking jobs last year. Over the previous several years, the number of authorized carriers had been steadily increasing. In 2023, there were more than 24,500 fewer authorized carriers.

A glimmer of hope

Needless to say, the job of a trucker has been a battle for more than a year, but the worst may be behind us.

As pointed out above, there are plenty of indications that the rippling effects of the pandemic are beginning to smooth out, allowing for more predictability and stability. Diesel prices are trending downward, as is inflation. Spot rates were still not great as of January but had been trending upward since October.

First, the bad news. Don’t expect better conditions anytime soon. In its weekly report on Jan. 22, Freight Transportation Research noted that industrial production was stagnant, housing starts were dropping and sales of existing homes were the lowest in nearly 30 years.

The Owner-Operator Independent Drivers Association’s Foundation pointed out that manufacturing generates about 60% of all for-hire freight. Manufacturing is also in a recession.

Investors have scaled back spending with relatively high interest rates. If or when the Federal Reserve cuts those rates, manufacturing likely will go up.

That brings us to the good news. According to an Associated Press report, Wall Street investors and economists have predicted an interest rate cut in March. However, other indications suggest the first rate cut may not come until June. Any potential benefits of interest rate cuts are not likely to be felt until after the second quarter.

In its 2024 forecast, ACT Research has predicted that demand will begin to pick up in the second quarter. With that will come higher spot rates.

That jibes with CNBC’s Supply Chain Survey, which includes input from heavy-hitters in the logistics industry. According to the survey, two-thirds believe freight volumes will either go down or remain unchanged in the first half of this year. However, 100% of survey respondents expect volumes to increase in the second half.

Motive, a fleet-management company, had a similar outlook in its January economic report. In its report, Motive also predicted the poor freight market conditions will continue well into 2024. However, it noted the second half of the year looks promising.

“Similar to how consumer demand has been falling in line with pre-pandemic 10-year projections, we anticipate that by the middle of 2024, freight capacity will have adjusted accordingly,” the report said.

To summarize: This year started on a rough patch, but there is a consensus among industry experts that things will start looking up in the second half of 2024. Let’s hope they’re right. LL