Industry Update - November 2022
Welcome to the November 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 2.6% on quarter in Q3 2022, beating forecasts of a 2.4% rise and rebounding from a contraction in the first half of the year. The biggest positive contribution came from net trade (2.77 pp vs 1.16 pp in Q2), as the trade gap narrowed. Imports sank 6.9% (vs +2.2%) while exports were up 14.4% (vs 13.8%), led by petroleum products, nonautomotive capital goods, and financial services. At the same time, nonresidential investment jumped 3.7% (vs 0.1%), boosted by increases in equipment and intellectual property.
U.S. Trade Deficit (November 2022)
September exports were $258.0 billion, $2.8 billion less than August exports. September imports were $331.3 billion, $4.8 billion more than August imports.
The September increase in the goods and services deficit reflected an increase in the goods deficit of $6.6 billion to $92.7 billion and a decrease in the services surplus of $1.0 billion to $19.5 billion. Year-to-date, the goods and services deficit increased $125.6 billion, or 20.2 percent, from the same period in 2021. Exports increased $378.1 billion or 20.2 percent. Imports increased $503.6 billion or 20.2 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 261,000 in October, and the unemployment rate rose to 3.7 percent, the U.S. Bureau of Labor Statistics reported. Notable job gains occurred in health care, professional and technical services, and manufacturing.
Labor Participation Rate
The labor force participation rate in the U.S. edged down to 62.2 percent in October 2022 from 62.3 percent in the previous month. It remained 1.2 percentage points below its value in February 2020, prior to the coronavirus (COVID-19) pandemic.
Fuel Forecasts and Trends
FTR Fuel Outlook
We forecast OPEC crude oil production will fall in November and December. Annual OPEC production averages 28.9 million barrels per day (b/d) in 2023, up by 0.3 million b/d from 2022. Growth in OPEC and non-OPEC oil production — most notably production in the U.S. — keeps the Brent crude oil price in our forecast lower on an annual average basis in 2023 than in 2022. However, we expect the Brent crude oil price will begin rising in 2023.
Retail heating oil and diesel prices will continue to average more than $5 per gallon for the rest of 4Q22. We expect a slightly contracting U.S. economy will reduce distillate prices in the first half of 2023 (1H23). However, the EU’s ban on seaborne imports of petroleum products from Russia creates supply uncertainty for distillate markets in early 2023.
Modal Updates
Logistics News Flash:
Logistics Companies Are Reversing Their Hiring Binge
The hiring frenzy in logistics driven by pandemic-fueled shopping appears to be cooling off.
Operators of warehouses, trucking fleets and other freight businesses say they are paring their payroll growth as the supply-chain disruptions that led to tens of thousands of new jobs recede. Several freight executives say they expect to reduce staff by attrition, though some suggest layoffs could come as their companies cut costs.
“We got ahead of ourselves in terms of head count,” said Bob Biesterfeld, chief executive of C.H. Robinson Worldwide Inc., the largest freight broker in the U.S. by revenue. “We certainly did not expect that the market was going to come down as rapidly as it did.”
“As supply chains ease, it’ll allow us and afford us the opportunity to make some difficult personnel decisions there in order to take cost out of the model,” Mr. Biesterfeld said, speaking on an earnings conference call Wednesday.
Warehousing and storage companies, which added more than 400,000 jobs in two years through the end of 2021, dropped 20,000 jobs from September to October, according to the Bureau of Labor Statistics seasonally-adjusted preliminary monthly employment report released Friday.
It was the fourth straight monthly pullback in payrolls and the largest since the sector lost 75,000 jobs in April 2020 as pandemic lockdowns took hold.
“We’ve had over two years of exceptional growth in supply chain and demand for goods,” said Cathy Roberson, president of research and consulting firm Logistics Trends & Insights LLC. “Companies had to scale up as best as they could by hiring workers to help with that increase in demand and such, and now that things are beginning to ease off, normalize, there’s not the need for as many workers.”
Employment in the warehousing and storage sector has fallen by nearly 50,000 jobs since June, according to the BLS data.
Nick Bunker, economic research director for North America at job-search marketplace Indeed.com, said demand for warehouse workers has ebbed as consumers have turned from spending on goods to services.
Source for full article: https://www.wsj.com/articles/logistics-companies-are-reversing-their-hiring-binge-11667590612
Rate Outlook Updates: Contract LTL, Truckload and Intermodal
LTL rates are forecast at up 13.8% y/y this year, down from 14.2% previously. The 2023 outlook is a 4.8% decline, down from 4.0% in the prior forecast.
The 2022 truckload rate outlook is firming. Spot rates are expected to be down nearly 15% y/y, excluding fuel. Contract rates are forecast at more than 8% higher y/y. The 2023 outlook also is little changed at down nearly 13% y/y for spot and down nearly 5% for contract.
Intermodal rates are expected to decline later this year and in the early part of 2023 before increasing during next year’s peak season. Unfortunately for shippers, the declines will be short-lived and of a much smaller magnitude than recent gains.
Morgan Stanley Index
MS TLFI continued its downward trend for the third update in a row and slightly underperformed seasonality. In a reversal from the last update, the underlying demand component greatly underperformed typical seasonality, coming in ~930 bps below, while the supply components continued to underperform typical seasonality, coming in ~250 bps worse. Our index remains below its LT averages (as it has since mid-August) and underperformed seasonality for the second update in a row, although the performance was more in line with seasonality than the last update. Our Reefer and Flatbed indices both declined sequentially, although the Reefer index underperformed seasonality while our Flatbed Index continued to outperform. Our most recent TLSS saw sentiment underperform across all segments aligning with the sequential decline and seasonal underperformance in all our indices (excl. Flatbed).
Cass TL Linehaul Index (October 2022)
The Cass Truckload Linehaul Index®, which measures changes in truckload linehaul rates, slowed to a 2.0% y/y increase in October after rising 3.9 y/y in September. On a m/m basis, the Cass Truckload Linehaul Index fell 1.5% after a 2.2% decline in September. As a broad market indicator this index includes both spot and contract freight, and with spot rates already down significantly, it’s only a matter of time until the index begins to decline on a y/y basis (December is not out of the question). Similar to what has occurred in the spot market, the recent resurgence of fuel costs, which are excluded from this index, will also likely act as a brake on linehaul rates.
Parcel Update:
Postal Service takes ‘measured’ approach in ’23 parcel rate change proposals
The U.S. Postal Service said it will leave 2023 shipping rates unchanged for two of its products but raise rates significantly on one product where it effectively has no competition.
Under the proposal, which would take effect Jan. 22 pending approval by postal regulators, the Postal Service will not raise rates on its Parcel Select Ground service, where it delivers shipments weighing up to 70 pounds within two to five days. It will also keep rates unchanged on its Connect Local service, where it provides same-day or next-day deliveries depending on the distance.
Under Connect Local, users are required to drop off parcels at shipping docks or designated locations. In return, they have access to rates generally available only to high-volume shippers.
On the other end of the spectrum, the Postal Service proposed a 7.8% increase on its First-Class Package Service (FCPS), which applies to parcels weighing less than 1 pound. Prices on Priority Mail, a two- to three-day delivery service, will rise by 5.5%. Rates on the agency’s Priority Express Mail next-day delivery service will increase by 6.6%.
Gordon Glazer, who runs the postal practice at consultancy Shipware LLC, said that at first glance the Postal Service is taking a “measured approach” to 2023 pricing on its so-called competitive products where it does not have a monopoly. The Postal Service is limiting increases on products like Parcel Select Ground, where it has a fair amount of competition, Glazer said in an email.
However, it is raising rates aggressively on FCPS because the product’s low margins relative to heavier shipments keep competitors away, he added.
Source for full article: https://www.freightwaves.com/news/postal-service-takes-measured-approach-in-23-parcel-rate-change-proposals
FedEx Freight enacts furloughs as it faces volume decline
FedEx Freight confirmed Saturday it is enacting furloughs in some U.S. markets. The move is due “to current business conditions impacting volumes,” the LTL said in an emailed statement. “The company will continue to evaluate the environment and bring back furloughed employees as business circumstances allow.”
FedEx Freight employed approximately 47,000 people as of May 31. The company said furloughed employees will maintain health benefits, and the company also said it would provide other financial incentives for them but didn’t provide specifics.
The LTL said it expects “many employees will volunteer to participate in the program.” It will also offer permanent transfer opportunities for eligible employees to other markets with hiring needs.
Parent company FedEx has been cutting costs in anticipation of reduced demand for the next several quarters.
Source for full article: https://www.transportdive.com/news/fedex-freight-ltl-furloughs-some-markets-volume-decline/636436/
Current Truckload Market:
Carriers punt on rest of 2022, hopeful for market normalization in ’23
Large carriers have given up on any material improvement in freight demand for the rest of the year. However, some are beginning to call for normal seasonality in 2023 with market tightening as soon as the middle of the year.
Appearing at Baird’s annual global industrial conference in Chicago, management from J.B. Hunt (NASDAQ: JBHT) said an inventory correction is continuing to play out throughout its customer book. An extant overhang of merchandise was exacerbated as some shippers pulled forward orders early this year to avoid the supply chain bottlenecks seen last year.
“2022 so far is … the most muted version of peak season that I can recall in my career. We just don’t have a significant surge in demand,” said Darren Field, who runs the company’s intermodal segment. Schneider National (NYSE: SNDR) CFO Steve Bruffett said volumes have been moving sideways for a few weeks now without a normal seasonal uptick. He said Schneider is accepting the majority of the loads tendered to it daily compared to only a 50% acceptance rate this time a year ago.
The company is planning for more of the same for the rest of the year with the expectation that more normal seasonal patterns take hold in early 2023. Bruffett believes conditions will improve in the second half of the year and is holding out for a favorable inflection point as early as the spring. Noting difficult year-over-year (y/y) comps in the fourth and first quarters, Werner Enterprises’ (NASDAQ: WERN) leader also expects more typical seasonal trends next year.
“Peak is certainly muted right now compared to what we’ve seen in prior years. There’s no debate about that really at this point,” Derek Leathers, Werner’s chairman, president and CEO, told investors on Wednesday.
Leathers said normal peak and project opportunities are down 70% compared to 2021. However, demand for its dedicated and other contractual business is holding up well. The company is highly exposed to freight in the discount retail, home improvement and food and beverage sectors, which tend to remain firm in downturns. “From my perspective, it’s a very painful time to be a small carrier,” Leathers said. Spot market dependent carriers have seen rates drop 40% (excluding fuel) since a February peak. Over the same time, most expense lines have continued to increase.
“Over the last several years, [small carriers] went out and paid too much for their equipment, at a time now when interest rates are rising, at a time when fuel is higher than it’s been ever before and the efficiency of their equipment, because of its age, is not really competitive,” Leathers continued. “The insurance line isn’t getting any better, and they did all that wrapped inside of a pursuit of the spot market.”
He pointed to more than 10,000 net deactivations of operating authorities over the last five weeks as evidence that cost inflation is quickly forcing carriers out of business. He also said the company’s power-only brokerage offering has seen an increase in driver interest over the same time.
Bruffett said he’s seeing some carriers leave the market but nothing material yet. “I wouldn’t call it overwhelming evidence of an exiting of small carrier capacity,” he said. However, Bruffett noted some carriers are trying to “tough it out” through year end, awaiting signs of potential market improvement, before deciding. He too sees cost inflation next year but likely at a more subdued pace.
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 – October 2022
Flatbeds – October 2022
Reefers – October 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 November 14, 2022, DAT Hot States, the state with the highest load to truck ratio was Idaho (7.33) with New Hampshire (1.30) the lowest for the month.
Rate Outlook and Regulatory Update
IKEA Profit Halves Amid Rampant Cost Inflation
IKEA reported a sharp fall in annual profit as ballooning costs offset record sales, and said it expected shoppers to rein in spending in the coming months.
Inter IKEA Holding BV on Thursday said net profit fell by half to 710 million euros, equivalent to $701 million, in the year to the end of August, down from €1.43 billion in the previous 12 months, as the surging cost of raw materials and transportation ate into margins.
Inter IKEA owns the IKEA brand, develops its products and manages its supply chain. Its revenue—generated mainly through the sale of products to the dozen franchisees that operate IKEA stores globally—increased 7.7% from a year earlier to €27.6 billion.
To retain shoppers and protect its franchisees, Inter IKEA needs to play the role of a “shock absorber” at times of economic turmoil, Chief Financial Officer Martin van Dam said in an interview, so neither group bears the full brunt of rising costs. IKEA’s sales rose last year in value terms but declined by volume. His comments come as companies across various industries grapple with how much they can raise prices to recoup rising costs without losing customers.
The cost of materials—everything from metal and glass, to wood and plastic—had spiraled beyond Inter IKEA’s worst expectations during 2022, Mr. van Dam said, while logistical costs, chiefly in the U.S. and Europe, were also severely inflated. “We keep on accumulating too much cost,” Mr. van Dam said. While the costs of some raw materials appear to be topping out, they remain unsustainably high, he added, meaning that profit margins will remain squeezed in the months ahead.
Inter IKEA did increase the prices it charges franchisees but absorbed most cost increases itself, resulting in lower profit, Mr. van Dam said. While sales rose last year in value terms, they declined by volume, partly because of the company’s decision to close IKEA’s 17 stores in Russia in the wake of Moscow’s invasion of Ukraine, he said. Another factor has been the growth of online sales, which accounted for nearly a quarter of sales last year, up from just 7% before the pandemic. Online shoppers are more likely to buy one or two expensive items, like a sofa, Mr. van Dam said, whereas in-store shoppers are more inclined to browse and buy a higher number of smaller products.
Source for full article: https://www.wsj.com/articles/ikea-profit-halves-amid-rampant-cost-inflation-11667480402?mod=djemlogistics_h
Machinist Union Members Approve Revised Railroad Labor Deal
Members of a labor union for machinists narrowly approved an agreement on wages and work conditions with large freight railroads, after rejecting an earlier proposal. The International Association of Machinists and Aerospace Workers District 19 said Saturday that its members voted to ratify a revised agreement that its leaders had negotiated with the railroads. The IAM members had voted to reject the original contract on Sept. 14, a day before the White House brokered a deal between the companies and three other unions.
Union Pacific Corp., UNP -1.15% decrease; red down pointing triangle CSX Corp. CSX -0.93% decrease; red down pointing triangle and other U.S. freight railroads have been in negotiations with a dozen labor unions representing about 115,000 workers.
President Biden appointed an emergency panel over the summer to propose a compromise and avert the first national strike in two decades. So far, members at seven unions, including IAM, have ratified the deal but two others haven’t. The unions have agreed to standstill agreements that would delay any strike until other unions have cast
Two large unions, the Brotherhood of Locomotive Engineers and Trainmen as well as the transportation division of the International Association of Sheet Metal, Air, Rail and Transportation Workers, are still in the process of voting. They are expected to announce results around Nov. 21.
Retail and chemical-industry trade associations have called for the White House to intervene to broker another deal between the two sides if needed to prevent rail-service disruptions. Congress could also intervene to impose terms on both sides and avoid a strike under the Railway Labor Act of 1926.
Source for full article: https://www.wsj.com/articles/machinist-union-members-approve-revised-railroad-labor-deal-11667671667?mod=djemlogistics_h
Closing Thoughts
Economy
GDP grew for the first time in 2022. After seeing a decrease in the first half of the year, Q3 of 2022 showed a promising increase. We continue to see inflation rise as well as the cost of goods. This is continuing to slow down spending in some sectors. With the Federal Reserve increasing mortgage rates again, we are beginning to see the housing market start to slow down, further causing concern of a recession. We are closely monitoring how all this affects the transportation market rates even as they continue to drop.
Demand/Supply
There are many reports out there that have caused concern for transportation providers around peak season volumes being less than projected. This is also cause for concern as many warehouses have already or are starting to reach their capacity. Many retailers are still hopeful for large sales numbers to help move some of this inventory around and get things back on track. As we gear up for the holiday season, we expect to see carrier capacity tighten slightly but not to the extreme that it has been in the past.
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