Think of transportation as the proverbial canary in the coalmine.
When demand for freight transportation slumps, it’s a sign consumer spending is fading and since the consumer makes up about 70% of US economic activity that flags increased risk of the dreaded “R” word.
That’s why this chart caught my eye recently:
Source: Bloomberg; Truckstop.com
I created this chart using data from Truckstop.com, which shows rates trucking companies charge on a per mile basis. Since truckers impose excess fuel surcharges to offset fast-rising diesel fuel prices, I’ve netted out those charges to get a better feel for real demand and pricing conditions.
Trucking is an economically sensitive cyclical industry and, historically, truckers gain pricing power (rates rise) when the economy picks up steam and demand for moving goods around the country increases. As the economy cools, so do trucking rates.
For example, the US economy accelerated somewhat from a soft patch in 2012 and trucking rates increased from the middle of 2013 into early 2015. Also note that when the economy slowed in 2018, truck rates fell from a peak in January 2018 to a low in May of 2019.
This normal cyclicality was amplified by the coronavirus outbreak, draconian lockdowns and mandatory business closures. Simply put, since consumers weren’t able to shop in-store, they decided to increase online spending, which resulted in a surge in demand for trucks to move goods around the US.
In fact, starting in late 2020 and through much of 2021, the US experienced major transportation bottlenecks and shortages of drivers and equipment. Simply put, the industry just wasn’t able to cope with the surge in demand and, as supply-demand conditions tightened, rates soared even after netting out fuel surcharges.
Specifically, from a nadir on May 10, 2020 to the peak in January this year, dry van rates ex-surcharges soared from about $0.87 per mile to a peak of about $2.26 – that’s about a 160% increase over less than two years.
However, since late January the turn has been dramatic – dry van rates have collapsed about 30%, declining for 10 straight weeks through April 10, 2022 (this index is published weekly on Sundays).
Here’s why rates are falling:
Source: Bloomberg; Truckstop.com
As you can see, demand for trucks went parabolic in the spring and summer of 2020, remained high though most of 2021 and spiked late in the year through the Christmas shopping season.
However, since January demand has collapsed and is returning to the 2021 lows.
In short, falling trucking rates are not simply the result of easing truck supply and more plentiful labor; demand for trucking services has clearly slumped over the past three months and trucking companies are losing pricing power.
I’d posit this reflects at least two important trends. First, this may reflect a slowdown in e-commerce sales in the US. That, in turn, could be due to several factors including that with coronavirus fading as a driver, consumers are choosing to spend more money buying goods in-store. More importantly, there’s a shift away from goods spending (buying “stuff”) in favor of spending money on services such as air travel, dining out and hotels.
Second, and I’d argue more important, a decline in trucking rates of this magnitude likely reflects a significant slowdown in the US economy. Back in 2018, falling truck rates were an early indicator of the “growth scare” that ultimately resulted in a near 20% decline in the S&P 500 in late 2018 and an about-face in Fed plans to raise rates.
Bottom line: Right now the market is focused on inflation and the Federal Reserve, but I’d expect that to shift later this year to a growth scare and rising risk of a recession starting in 2023.
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