Industry Update - December 2022

Welcome to the December 2022 GEODIS Industry Update digest

Our monthly Industry Update provides the latest nationwide economic data, fuel-related concerns, modal rate outlooks, indexes as well as a variety of additional statistics and news items to provide a broad overview of what’s impacting the U.S. transportation industry nationally and globally.

Economic Overview

GDP 

The U.S. economy grew an annualized 2.9% on quarter in Q3 2022, better than an initial estimate of 2.6%, and beating forecasts of 2.7% reflecting upward revisions to consumer and business spending and net trade. The biggest positive contribution came from net trade (2.93 pp vs 2.77 pp in the advance estimate), as imports sank more (-7.3% vs -6.9%) while exports rose more (15.3% vs 14.4%). At the same time, consumer spending rose more than anticipated (1.7% vs 1.4%), as growth in health care and "other" services partially offset a decrease in spending on goods, namely motor vehicles and food and beverages.

U.S. Trade Deficit (December 2022)

October exports were $256.6 billion, $1.9 billion less than September exports. October imports were $334.8 billion, $2.2 billion more than September imports. The October increase in the goods and services deficit reflected an increase in the goods deficit of $6.1 billion to $99.6 billion and an increase in the services surplus of $2.1 billion to $21.4 billion. Year-to-date, the goods and services deficit increased $136.9 billion, or 19.9 percent, from the same period in 2021. Exports increased $415.3 billion or 19.8 percent. Imports increased $552.2 billion or 19.8 percent.

Manufacturing

The ISM manufacturing index in October fell to 50.2, which is the slowest rate since the lockdown phase of the pandemic. However, components most closely associated with freight demand improved. New orders increased 2.1 points to 49.2, which is still in contraction territory but only slightly so. Production increased 1.7 points to 52.3. Industrial production increased 0.4% in September, the first positive reading in four months. Manufacturing rose 0.4%, matching August’s increase. The report suggests that industrial activity is slowing but not yet in recession. This slower rate of expansion likely will continue into 2023.

Consumer

Retail sales were flat in September following a modest upward revision to August sales, which rose 0.4%. A 1.4% decline in gasoline sales and a 0.4% drop in auto sales prevented sales from being positive. Excluding those sectors, sales rose 0.3%. Inflation and the shift from goods to services are clouding the analysis. Adjusting for inflation, retail sales declined 0.4% in September. Consumer spending on goods is slowing but not collapsing. The consumer has been resilient but, with a low savings rate, the twin burdens of inflation and high interest rates could lead to a recession.

Residential Construction

Housing starts fell 8.1% in September, a partial reversal of August’s unexpected 13.7% increase. Single-family starts declined 4.7%; the multi-family sector fell 13.2%. Total permits surprised to the upside, rising 1.4% in September. The increase was driven by the multi-family sector which rose 7.8%, more than offsetting a 3.1% decline in single-family permits. With mortgage rates now around 7%, housing activity clearly will return to a more consistent downward trend. For perspective, starts are still stronger than the pace averaged in 2019, so the level of activity remains decent.

Unemployment Rate

Total nonfarm payroll employment increased by 263,000 in November, and the unemployment rate was unchanged at 3.7 percent, the U.S. Bureau of Labor Statistics reported. Notable job gains occurred in leisure and hospitality, health care, and government. Employment declined in retail trade and in transportation and warehousing.

Labor Participation Rate

The labor force participation rate in the U.S edged down to a four-month low of 62.1 percent in November 2022 from 62.2 percent in the previous month. It remained 1.3 percentage points below its value in February 2020, prior to the coronavirus (COVID-19) pandemic.

Fuel Forecasts and Trends

FTR Fuel Outlook

Diesel prices nationwide have fallen more than 37 cents since the mid-October spike. Prices only recently have eased in the East as tight inventories kept prices rising until late November. Recent price relief appears to be based on a combination of slightly lower crude prices and rising distillate stocks.

U.S refinery utilization in our forecast remains near its five-year average through 2023. We expect the combination of a slight contraction in the U.S. economy and refinery maximization of distillate fuel production will reduce distillate prices in 1H23. We forecast U.S. diesel refining margins will fall by 19% in 2023 compared with 2022. However, the EU’s ban on seaborne imports of petroleum products from Russia creates supply and price uncertainty for distillate markets in early 2023.

Global oil inventories in our forecast fall by 0.2 million barrels per day (b/d) in the first half of 2023 (1H23) before rising by almost 0.7 million b/d in 2H23. This forecast leaves global oil inventories higher at the end of 2023 than we had forecast in the November STEO, which results in our Brent crude oil price forecast averaging $92 per barrel (b) in 2023, $3/b less than we had forecast last month.

Modal Updates

Logistics News Flash:

Railroads Focus on Stabilizing Workforce After Strike Is Averted

President Biden signed a bill Friday restricting rail workers from striking, but the industry is still struggling with a big problem: having enough staff to handle customer demand.

The largest U.S. freight railroads have reported strong profits in recent years, helped by higher prices and steady business in transporting everything from automobiles to fertilizer. Export demand for coal and grain, stemming from disruptions in supply chains in Europe after Russia invaded Ukraine, bolstered freight volumes this year, railroads said.

At the same time, railroads continue to face disruptions tied to having a shortage of workers. This year, Union Pacific Corp. and BNSF Railway have issued more embargoes—restrictions placed on the amount of cargo that can be transported—than in previous years. Railroads issue embargoes as a way to control traffic movements when service is disrupted due to a disaster or to ease congestion.

From January to Nov. 25, freight railroads issued 1,486 embargoes, up from 945 and 641 recorded in 2021 and 2020, respectively, according to data compiled by analysts at JPMorgan.

Congress passed legislation averting a massive strike and ending more than two years of labor negotiations between freight railroads and unions that represent rail workers. WSJ breaks down how Washington intervened. Illustration: Madeline Marshall

Railroad operators said they have had insufficient numbers of train and engine workers, though unions representing other types of railroad hands, such as signalmen and track workers, said they have shortages, too.

“Railroads said they’re all trying to grow, to add more head count, but ultimately, they can’t really create new demand. They’re just trying to match their plans, their assets, with what’s coming to the network. As you can imagine, it’s quite hard,” said Brian Ossenbeck, an analyst at JPMorgan.

Some freight railroad operators, such as Union Pacific and CSX Corp., CSX -2.75%decrease; red down pointing triangle said they have made progress on hiring and service levels since this past spring.

The most recent round of collective wage bargaining, affecting more than 115,000 workers, went on for more than two years and eventually required President Biden to intervene twice to break the stalemate and to enforce a resolution. Unions raised concerns about railroads being understaffed during negotiations, saying that their members are working irregular schedules more often and have less time off. They said that workers still need relief from having inadequate paid sick days stemming from railroads’ efforts at streamlining operations since 2017.

Source for full article: https://www.wsj.com/articles/railroads-focus-on-stabilizing-workforce-after-strike-is-averted-11670181672?mod=djemlogistics_h

Rate Outlook Updates: Contract LTL, Truckload and Intermodal

LTL rates are modestly stronger in the latest outlook with a larger 2022 increase and smaller 2023 decline. The forecast for LTL rates is stronger this month, says FTR/ Rates are forecasted at just under a 15% increase y/y in 2022, up more than a percentage point from the previous forecast. LTL rates are expected to decline 3% y/y in 2023, notably stronger than the 4.8% decrease previously.

Truckload rates continue to weaken in both spot and contract. Total rates are forecast at down 9.1% y/y, excluding fuel, in 2023 after easing 1.1% y/y in 2022.

A weakening truckload market will keep pressure on intermodal pricing into the peak season of 2023. It is now expected that intermodal rates will turn positive only toward the end of the year on a year-over-year basis. Carriers will be pressured also by weaker volumes.

Morgan Stanley Index

Morgan Stanley has updated their QURE model for the month of December. Morgan Stanley new base case prediction is that truck rates will move to $1.55 in 6 months (currently $1.77) and move to $1.90 in 12 months. Morgan Stanley TLFI continued its upward trend and outperformed seasonality for the second update in a row. Similarly, to our last update, the underlying demand and supply components both outperformed typical seasonality, coming in ~1,040 bps above and ~260 bps better, respectively. The demand component outperformed by the largest magnitude since mid-July. Morgan Stanley index still remains below its LT averages (as it has since mid-August), but is more closely approaching LT average trends and continues to outperform seasonality.

Cass TL Linehaul Index (December 2022)

The Cass Truckload Linehaul Index®, which measures changes in truckload linehaul rates, reports that the downtrend in truckload linehaul rates completed its sixth month in November, as the Cass Truckload Linehaul Index slowed to a 1.7% y/y increase from a 2.0% in October. On a m/m basis, the Cass Truckload Linehaul Index fell 1.2% after a 1.5% decline in October. The index seems likely to stay positive on a y/y basis in December but will likely start declining in January. As a broad market indicator, this index includes both spot and contract freight, and with spot rates already down significantly, the larger contract market is likely to continue adjusting down more gradually but in the same direction.

Parcel Update:

FedEx, UPS shippers face 8%-10% price hikes in 2023, consultancy says

TransImpact says there will be virtually no difference in rates in 2023 between FedEx and UPS. Shippers using FedEx Corp. and UPS Inc. can expect 8% to 10% price increases in 2023 once rate and various “accessorial,” or add-on, charges are factored in, according to an annual forecast published Monday by consultancy TransImpact LLC.

Though the rates will differ depending on specific products, the all-in result is there will be virtually no discrepancy between the carriers, the consultancy said. Both have announced record 6.9% general rate increases (GRIs) for 2023. However, virtually all parcel traffic moves under contract.

For example, UPS’ (NYSE: UPS) rates for three-day deliveries will be about 15% below those of FedEx, (NYSE: FDX) as has been the case for years. UPS will also underprice FedEx on second-day morning service in the U.S. and on most international routes.

FedEx will underprice UPS on the carriers’ slowest and least expensive ground services, TransImpact said. UPS’ SurePost service is managed in conjunction with the U.S. Postal Service, which delivers UPS’ parcels the last mile to residences. FedEx, which once had a similar service called SmartPost, took that business in-house to form a service called Ground Economy. FedEx’s pricing advantage on the product — which focuses on parcels weighing 1 to 13 pounds — will be the most significant that FedEx holds among all the offerings of both carriers, TransImpact said.

FedEx will also come in cheaper on its next-morning and next-afternoon deliveries, though the differential shrinks at higher weight breaks, TransImpact said. FedEx will also have lower domestic minimum charges than UPS.

Source for full article: https://www.freightwaves.com/news/fedex-ups-shippers-face-8-10-prices-hikes-in-2023-consultancy-says

Current Truckload Market:

LTL industry taking rate increases as volumes drop

Old Dominion Freight Line (NASDAQ: ODFL) said Thursday it will implement a 4.9% general rate increase (GRI) to class tariffs beginning Jan. 3. The size and timing of the carrier’s rate hike are in line with the GRI it issued last year.

“The general rate increase is based on the Company’s economic forecast and expectations for the operating environment,” Todd Polen, VP of pricing, stated in a news release. “We must continue enhancing our high-quality service network and systems to meet and exceed our customers’ expectations and deliver on our promises.”

Old Dominion’s customers will also see “a nominal increase in minimum charges with respect to intrastate, interstate and cross border lanes.” Across the industry, GRIs are coming in level or a little light of last year’s increases as freight demand has moderated from the all-time highs that extended into early 2022. Recent updates from carriers show that year-over-year tonnage declines accelerated during November. Old Dominion and Saia (NASDAQ: SAIA) reported high-single-digit declines while Forward Air (NASDAQ: FWRD) and Yellow (NASDAQ: YELL) recorded declines of roughly 20% or more during the month.

The LTL industry is highly consolidated with the top 10 carriers generating approximately 75% of the revenue. High barriers to entry requiring large capital commitments — a network of terminals, multiple equipment types, technology and operational expertise — keep new entrants at bay, allowing incumbents to remain price disciplined.

Even though the industry has seen demand pull back, many GRIs are still coming in ahead of the traditional first-quarter implementation. ArcBest (NASDAQ: ARCB) installed a 5.9% GRI effective Nov. 7. The headline number was 1 percentage point light of the rate increase taken around the same time last year. Yellow’s recent 5.9% GRI was in line with last year’s increase but the Oct. 3 implementation was a month earlier.

Source for full article: https://www.freightwaves.com/news/ltl-industry-taking-rate-increases-as-volumes-drop

Carriers punt on rest of 2022, hopeful for market normalization in ’23

Carriers are covering everything they can under contracted rate agreements, leaving the spot market a barren wasteland for freight.

The national Outbound Tender Reject Index (OTRI) barely responded to Thanksgiving this year, increasing from 3.99% to 4.46% in the week leading into the holiday before falling to its lowest value of the year of 3.83% on Dec, 12. Last year, rejection rates increased from 19.3% to 20.6% over the same period. In 2019, a pre-COVID-19 year, OTRI jumped from 5% to over 8%.

Spot rates measured by the National Truckload Index (NTI) hit an annual low on Nov. 17 before jumping 5% over the next two and a half weeks. As of Dec. 15, they had already retreated 3.4%. The lack of response from the OTRI suggested any spot rate increase would be short-lived.

The OTRI measures the average tender rejection rate of shippers requesting truckload capacity from their existing contracted carriers — basically how effective contract rates are at securing capacity. During COVID, they were about 75%-80% effective. Currently, they are around 96% effective.

Contracts in trucking are previously agreed upon rates the carrier agrees to honor if they have availability to cover the shipment — this is not dedicated service. Unlike the spot market, they are negotiated about once a year in general as opposed to an as-needed basis. Normally, These agreements make costs more predictable and capacity more available. The longer-term cycles make contract rates slower to respond to market conditions.

As of Dec. 1, FreightWaves spot rates excluding estimated fuel costs (NTIL12) are roughly 25% lower than contract rates for dry van capacity on average. The relationship between the contract and spot market has flipped since the early part of 2022. Shippers were desperate to get trucks to show up in January. Now carriers are desperate to find freight to move, using the spot market as a last resort for utilization as their services carry higher premiums under contracted rate agreements.

Source for full article: https://www.freightwaves.com/news/carriers-punt-on-rest-of-2022-hopeful-for-market-normalization-in-23

DAT Hot States: Vans, Flatbeds and Reefers

DAT Hot States for vans, flatbeds and reefers uses the MCI cool to hot, or -100 to +100, scale for measuring market temperature.

On the following U.S. maps, when the market is cool (darker blue areas), capacity is loose and in the negative range. When the market is hot (darker red areas), capacity is tight and in the positive range. The lighter colored areas (including yellow) capacity is more neutral.

Vans – November 2022

Flatbeds – November 2022

Reefers – November 2022

The load to truck ratio from DAT is a strong indicator of the balance between demand and capacity. Changes in the ratio could mean changes in rates. The higher the ratio, the tighter the capacity is for a particular state. As of December 12, 2022, DAT Hot States, the state with the highest load to truck ratio was Idaho (12.55) with New Hampshire (0.67) the lowest for the month.

Rate Outlook and Regulatory Update

Trucking braces for new heavy-duty engine emission standards

The Biden administration will soon issue new tailpipe emissions standards for trucks that most truckers — from single owner-operators to owners of large fleets — warn could place heavy cost burdens onto the U.S. economy as a recession already looms. As proposed by the U.S. Environmental Protection Agency in March, the new nitrous oxide (NOx) emissions standards for heavy-duty truck engines will be either a two- or one-step process. The two-step process, Option 1, would set a stringency increase first in model year (MY) 2027 and a second increase in MY 2031. The one-step process, Option 2, would immediately jump to full implementation of a NOx standard in model year 2027.

The 2031 standards under Option 1 would lower truck emissions by 90% compared to current norms, and EPA estimates that NOx emissions from the total fleet of heavy-duty trucks on the road in 2045 would decrease by as much as 60%. Option 2 would achieve less overall NOx emissions reductions than Option 1, according to EPA. In addition, EPA is proposing longer emissions warranty periods that would increase the number of useful life miles covered under warranty, as well as making improvements to engine serviceability.

Because transportation-related NOx emissions are a major contributor to air pollution, the Biden administration estimates the rule could provide as much as $250 billion in public health benefits. But the trucking industry maintains those benefits would be outweighed by other costs if the rule as proposed is finalized, based on comments filed after the proposal was announced in March. “If the proposed rule, either option, is adopted, many if not most carriers and truckers will opt to keep the vehicle(s) they have for longer than they otherwise would have,” stated David Owen, president of the National Association of Small Trucking Companies (NASTC), whose members own an average of 10 trucks.

“Small-business truckers in general cannot afford to buy brand-new power units, which today cost around $140,000. New vehicles complying with the proposed rule as of MY 27 will cost significantly more — reflecting the sophisticated new technologies that enable their engines to meet the new standards and requirements, a period of inflation-fed cost increases and new technologically complex systems still working out the bugs. So, for the large percentage of carriers having 20 or fewer trucks, the new vehicles will be even less of an option; these carriers will remain in the used heavy-duty truck market.”

Source for full article: https://www.freightwaves.com/news/trucking-braces-for-new-heavy-duty-engine-emission-standards

Closing Thoughts

Economy

GDP growth has started to slow in the early part of December. Economists are predicting a relatively mild recession at the turn of the year and extending through Q3 of 2023. With the previous rise in fuel, food and other basic items as well as increased interest rates on credit cards, mortgages and cars having emptied consumers wallets ahead of the retail season many consumers did not spend on holiday shopping as forecasted.

Demand/Supply

For the first time since pre-pandemic, we are starting to see a greater supply of trucks than loads needing to be covered. The truckload market has loosened, and GEODIS is seeing this in many recent bids that have been completed in the last few months. During the pandemic, there was an increase in owner operators that were leaving larger carriers to run for themselves. We have started to see that trend reverse as many of these owner operators have not been able to sustain operations with fuel increases and lower linehaul rates.

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