This story is based on a blog post originally published Sept. 13, 2022.
From their peak earlier this year, spot trucking rates have been in decline, marking a shift versus prior years. Given how impactful the inflation in shipping costs had been across the broader economy from 2020 to 2022, the recent change in trend has widespread implications for many companies.
Trucking is the largest input into shipping costs across the U.S. economy and accounts for an estimated 80% of total freight spending, according to the American Trucking Association.
“For the goods that need to be shipped immediately by truck, the spot trucking rate serves as the prevailing price that shippers and trucking providers agreed upon,” says Yan Krasov, CFA, Partner, Research Analyst, U.S. Growth and Core Equity Team, at William Blair Investment Management. “Changes in spot rates are impacted by a supply/demand imbalance of goods needing to be shipped, the available trucking capacity to do so, and fuel prices. A sustained change in the direction of spot rates historically has proved to be a leading indicator of the change in the direction of contractual rates as well.”
According to DAT Freight and Analytics, trucking spot rates increased by more than 100% from their trough in May 2020 to their recent peak in January 2022 (both including and excluding the cost of fuel), making trucking a major component of overall freight cost inflation for the U.S. economy.
In Q1 2022, trucking spot rates were tracking up as much as 20% to 30% year-over-year, but they have been falling sharply since then.
“On a percentage basis, spot rates are now tracking down in the high single digits year-over-year and down in the high teens when excluding the cost of fuel. Despite a significant appreciation in diesel prices in 2022, which has curtailed some of the trucking cost declines, we expect spot rates to continue to trend lower year-over-year,” says Krasov.
Even if the current cost of diesel (around $5.10 per gallon versus $3.35 a year ago) holds steady, year-over-year trucking spot rates are on track to be down in the high single digits year-over-year in Q3, and down mid-teens to low-twenties on a percentage basis in Q4.
“Looking ahead to Q1 2023, rates could be down more than 20%, based on our estimates,” says Krasov. “Excluding the cost of fuel, the year-over-year declines would be even more dramatic, potentially down more than 25%. All in, we believe trucking spot rates could fall 25% to 35% from their peak in early 2022 to their trough, potentially by the end of 2023.”
What’s behind this trend?
Unlike typical boom-and-bust trucking cycles, the initial downtick in trucking spot rates in 2022 appears to have been mostly demand-driven. Normally, within six to 12 months of the initial rate increases there is an influx of trucking supply chasing higher rates. “However, this time, based on recent publication of new truck sales and orders from ACT Research, it appears that trucking supply had been growing at much more modest rates than in prior cycles, until recent months, when new truck sales began to accelerate,” says Krasov.
To understand these supply-demand dynamics, it helps to recall that over the past two years there has been a surge in freight-cost inflation driven by several factors. An overall increase in consumer income from stimulus checks, coupled with a strong recovery in employment, drove consumer goods demand to record highs.
“During the pandemic much of that consumer spending shifted away from services, like travel, concert attendance, and restaurant dining, and toward goods, like furniture, electronics, and home improvement products,” says Krasov. “As a result, retailers rushed to restock their shelves to meet the unexpected surge in demand, starting in the summer of 2020. However, the additional trucking supply needed to transport these goods was not available, as production of heavy-duty trucks was constrained by a shortage of parts, including semiconductors – as was the case in the automotive industry as well. This combination led to a significant increase in spot rates over the past two years.”
According to ACT Research, recent months have shown an uptick in new truck sales above normal replacement levels, yet the order backlogs for OEMs remain stretched, indicating further potential supply that could be added to the market. This could help relieve cost pressures. In addition, if consumer spending were to return to the pre-COVID mix of consumption between goods and services, an incremental 10% to 20% of freight demand could be removed from the system. This would further help alleviate the recent freight cost pressure for the shippers, especially if the supply of new trucks continues to grow.
Investment implications
“It’s important to note that demand for trucking is more volatile than the overall economy due to the bullwhip effect of inventory movement,” says Krasov. “Not every downturn in freight demand necessarily leads to a broader economic recession.”
That said, downturns in freight demand do typically coincide with at least decelerating GDP growth, as inventories transition from being additive to GDP to being neutral or detracting, as seen in data from the Q1 and Q2 of this year.
“In our opinion, the fall in spot rates should meaningfully curtail the pricing power of transportation providers in the second half of 2022 and into 2023, and that could benefit shippers by reducing their costs,” says Krasov. “For companies with stable revenue streams unaffected by swings in consumer and industrial demand, margin relief from falling transportation costs should begin in the second half of 2022 and carry into 2023.”
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