Overcapacity continues to suppress the freight market, holding down rates — but are we nearing the long-awaited uptick in the cycle? Most of the analysts think so, but there’s little agreement on how soon it will happen. Despite the evidence that there are still too many trucks available to haul the freight being offered, new trucks are selling.
“Class 8 tractor backlogs are thinning, but retail sales remain above replacement, more than two years after the spot market turned down,” said Tim Denoyer, vice president and senior analyst at ACT Research.
Dean Croke, principal analyst for DAT IQ, had a slightly different view.
“I’m seeing an exodus of capacity from the market,” Croke said. “New trucks are still selling, but much of the sales activity is from private fleets, including dedicated fleets at some carriers.
Private fleets are a hedge against higher freight rates. Manufacturers that depended on the spot freight market to move their products were severely impacted by the record spot rates reached in the waning days of the COVID-19 pandemic. Increased shipping costs ate into corporate profits. In response, manufacturers increased the size of their private fleets so they could deliver more of their own product.
In some cases, the costs associated with operating a private fleet exceed those of a for-hire carrier, especially when freight rates are so low. However, those costs are more acceptable when compared with market shipping expenses when rates are high.
Larger private fleets harm the spot market in two ways. First, the freight that manufacturers used to send to the spot market is now being hauled on their own trucks. Second, some of those fleets look to increase the efficiency of their trucking operations by picking up backhauls from the spot market.
Another reason new truck sales remain strong is the current equipment pre-buy. As the 2027 model-year approaches, more carriers are buying trucks now to avoid buying the 2027 models. The cost of a new Class 8 tractor is expected to rise $25,000-$30,000 due to the newer technology and government-mandated longer warranty periods.
Buyers might be willing to spend more if they’re guaranteed that repairs made necessary by the new technology will be covered under warranty, but there’s still the issue of down time while waiting for those repairs. New trucks are expected to use larger amounts of diesel exhaust fluid (DEF), which has been shown to leave deposits in the exhaust system. Cylinder deactivation may be used to increase fuel mileage.
“I get nervous any time you talk about cylinder deactivation and DEF fluid,” Croke said. “I own a Caterpillar engine, and heat is a problem.”
Whatever the reasons for buying, the more trucks that are sold, the longer freight rates will take to recover.
The June Cass Freight Index for Shipments showed a decline of 1.8% from May levels, while expenditures for shipping dropped 3% for the same time period. Compared to June 2023, shipments were down 6% and expenditures down 9.4%. The Cass indexes are compiled using payment data from Cass customers.
“Owner-operators ae as resilient as ever, but ongoing private fleet capacity additions are putting less freight into the for-hire market in a slowing economy,” explained ACT’s Tim Denoyer, who writes for the Cass index.
Expectations in the Motive Monthly Economic Report were more positive. The software distributor compiles market information based on GPS and other data that tracks visits to warehouses of the top 50 U.S. retailers. Motive’s Big Box Retail Index jumped 10.8% over May and rose 16% over July 2023.
“We’re seeing particularly strong momentum in brick-and-mortar retail as these stores anticipate a very strong summer peak season,” Hamish Woodrow, head of strategic analytics for Motive, wrote in the report. “For example, department stores, electronics, and apparel retailers with brick-and-mortar locations saw a 13.8% jump heading into July, representing a 33% YoY (year over year) climb.”
The largest retail gains were in department stores, apparel and electronics and in home improvement, according to the Motive release. Woodrow summarizes the report by saying, “Rising trucking rates, trucking transportation job stability, and what we predict to be a very strong July across retail sales, especially brick and mortar, are all pointing to a rebounding freight market. We predict this momentum will continue through the summer.”
As the 2024 holiday season approaches, analysts predict retailers will need to increase inventories in preparation. Doing so will be more expensive if freight rates rise before orders are placed.
Other factors that could impact freight markets are delays in the Red Sea, potential labor troubles at East Coast and Gulf ports, and the predicted active hurricane season.
Houthi rebels continue to harass shipping in the Red Sea, which is on the route to and from the Suez Canal. A disabled ship completely blocked the canal in 2021. Shippers concerned about potential loss due to rebel activity are re-routing ships, resulting in longer transit times.
The International Longshoremen’s Association, which represents 45,000 dockworkers at seaports from Maine to Texas, has threatened to strike if a new deal isn’t reached by the expiration of the current contract on September 30. A strike would cause major disruptions to trucking in and out of the ports, as well as down-line destinations served by rail.
The National Oceanic and Atmospheric Administration (NOAA) has predicted an above-normal hurricane season in the Atlantic due to La Nina and warmer ocean temperatures. One major hurricane has already made its impact felt, reaching Category 5 status before weakening due to wind shear and striking the Yucatan Peninsula as a Category 2 hurricane. The same storm made landfall near Matagorda, Texas and slowly weakened as it moved all the way to Ontario. The outer bands of the storm spawned tornadoes in Texas, Arkansas, Kentucky, Indiana, New York and Ontario.
Carriers that depend on the spot market for their revenue should pay close attention to rate fluctuations in different regions, as there may be opportunities to book higher rates when markets are impacted by outside forces. Overall, however, it will be more of the same as the trucking industry continues to wait for better days.
Cliff Abbott is an experienced commercial vehicle driver and owner-operator who still holds a CDL in his home state of Alabama. In nearly 40 years in trucking, he’s been an instructor and trainer and has managed safety and recruiting operations for several carriers. Having never lost his love of the road, Cliff has written a book and hundreds of songs and has been writing for The Trucker for more than a decade.
