Mazen Danaf, an MIT-trained staff applied scientist and economist at Uber Freight, has been tracking the evolution of trucking capacity in the United States, trying to make sense of the dogged persistence of loose capacity in a challenging, depressed rates environment.
“Almost every mile driven in the spot market could be a losing mile,” Danaf said in a call with FreightWaves. “Even for large carriers who only go into the spot market 15% of the time, it doesn’t make sense except for a backhaul to a contract load.”
Danaf explained that while higher operating costs and plummeting truckload spot rates — which fell below $1.50 per mile according to Uber Freight’s Q3 update and are stuck around $1.60 per mile excluding fuel according to FreightWaves’ National Truckload Index — have put many owner-operators out of business, the current trough hasn’t taken them off the road. Instead, owner-operators and independent drivers found work at larger carriers, which explains why the Bureau of Labor Statistics’ for-hire trucking employment numbers are still positive compared to last year.
For-hire trucking employment fell by 0.2% sequentially in July and was still positive 0.5% compared to July 2022, while in the long-distance sector, carriers cut head count by 0.3% in June, although the number of long-distance trucking employees is still 1.5% higher year-over-year.
(Chart: Uber Freight.)
In other words, trucking capacity has only just now started to peak and potentially roll over. Until this point, while small carriers were getting hammered, larger carriers were still hiring. Because the independents stayed on the road, there hasn’t been a net reduction of trucking capacity until the past few months. Yellow’s failure may represent the opening of a period of capacity reduction, not the culmination.
“We haven’t seen capacity reduction at the pace at which many predicted before,” Danaf said. “The market is oversupplied; we still see a wide gap between supply and demand, a gap that’s still larger than what we observed in 2019. Supply is outpacing demand by a significant margin.”
The demand side of the market is similarly complex. There are reasons to think that the market may be picking back up: July saw super-seasonal volume growth in FreightWaves’ Outbound Tender Volume Index, and tender rejections, a measure of the balance of freight demand and truckload capacity, have been creeping back up, touching 3.95%.
(The National Outbound Tender Reject Index in white with Los Angeles OTRI in yellow. The Outbound Tender Reject Index measures the percentage of loads tendered by shippers that are then rejected by carriers. Chart: FreightWaves SONAR. To learn more about FreightWaves SONAR, click here.)
One telltale sign of an impending market turn is in the relationship between tender rejection rates in Los Angeles and the national tender rejection rate. Remember that carriers reject more freight when they don’t have a truck available for dispatch, either because there simply isn’t enough capacity or because that asset has been deployed on the spot market in search of more lucrative opportunities.
In soft markets, carriers flock to reliable sources of freight like Los Angeles, a key linchpin for taking on containerized imports, deconsolidating them in massive warehousing and transloading facilities in the Inland Empire and building new shipments to send across the country by truck or by rail. Paradoxically, carriers’ enthusiasm for Los Angeles ends up flooding the market with capacity, and in loose markets, LA tends to have even lower tender rejections than the national average. But when capacity tightens in Los Angeles relative to the rest of the country, it’s like an increase in water pressure upstream — it’s a signal that changing conditions may be headed to the rest of the country too.
It’s too early to call a market turn at this point, but we note that the national OTRI number has set higher lows and higher highs recently, which can be interpreted as a technical signal that an upward trend has begun.
“Demand is still struggling,” Danaf said. “Consumer spending has been flat for the second year in a row now; it’s not falling off a cliff, but it should increase by 3-4% year over year. Imports have started rising again, finally keeping pace with seasonality.”
The international trade picture is murky. Imports from China are down, and Canada’s GDP is expected to slow over the next three quarters, but trade with Mexico is booming. Truck imports from Mexico are up 7-8% year over year, Danaf said, and Laredo, Texas, is buzzing with logistics activity. The bright spot south of the border has a lot to do with Mexico’s growing automotive industry, the same industry that’s fueling industrial production in the United States.
(Chart: Uber Freight)
Automotive freight demand is still strong because inventories haven’t recovered in that industry yet, as the chart above shows. Inventories of nondurable and durable goods excluding automotive have all normalized, but automotive manufacturers and suppliers still have less than one month’s worth of inventory on hand. Rebuilding those stocks means continuing demand for transportation and distribution.
Danaf also thinks that the automotive industry is the key to understanding the conflicting signals given by the ISM Purchasing Managers’ Index (PMI) and government data. The ISM Manufacturing PMI, which is based on a diffusion survey, has shown contraction, or readings below 50, in production, backlogs, new orders and prices for months. Yet according to government data, manufacturing output in the second quarter rose by 0.5% year over year. Danaf said that the automotive sector is solely responsible for the growth in manufacturing output and that other industrial sectors are flat or down.
“Durable goods spending is being driven by the automotive sector, and low automotive inventories are stimulating some freight demand,” Danaf said. “When you look at the manufacturing sector, there are cyclical, short-term headwinds. All of that is bringing demand in manufacturing lower, but in long-term trends we see a lot of tailwinds for the manufacturing economy, from nearshoring and reshoring to investments in new technologies like EVs and semiconductors.”
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