Industry Update - October 2022

Welcome to the October 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 contracted an annualized 0.6% on quarter in Q2 2022, matching the second estimate, and confirming the economy technically entered a recession, following a 1.6% drop in Q1. Private inventories and fixed investment were the main draggers in Q2. At the same time, an upward revision to consumer spending was offset by a downward revision to exports. Meanwhile, GDP growth rate for 2021 was revised higher to 5.9% compared to an initial 5.7%. Also, the economy contracted 2.8% in 2020, less than an initial 3.4% drop. For 2022 however, the Fed recently forecasted a meagre 0.2% expansion, as the strong interest rate hikes are expected to trigger a big downturn in economic activity.

U.S. Trade Deficit (October 2022)

August exports were $258.9 billion, $0.7 billion less than July exports. August imports were $326.3 billion, $3.7 billion less than July imports. The August decrease in the goods and services deficit reflected a decrease in the goods deficit of $3.4 billion to $87.6 billion and a decrease in the services surplus of $0.4 billion to $20.2 billion. Year-to-date, the goods and services deficit increased $132.3 billion, or 24.4 percent, from the same period in 2021. Exports increased $329.8 billion or 19.9 percent. Imports increased $462.1 billion or 21.0 percent.

Manufacturing

The ISM manufacturing index fell 1.9 points in September to 50.9, which is the lowest reading since May 2020 and indicates that the sector is barely growing overall. New orders fell more than 4 points to 47.1, and new export orders also fell. Production edged up slightly to 50.6. Manufacturers are adjusting to softening demand. Industrial production decreased 0.2% in August, following a 0.6% advance in July. Manufacturing gained 0.1%. Demand drivers are slowing, allowing supply chains to improve. Price pressures are easing. The outlook remains positive, but there are downside risks.

Consumer

Retail sales rose 0.3% in August following a downwardly revised 0.4% decline in July. Year-over-year sales were up 9.3% for total and 7.6% for core sales. The data suggests that consumers are still inclined to spend even in the face of inflation and higher interest rates. Sales remain above trend, but inflation is boosting the numbers significantly. Real retail sales were barely positive in August and have been basically trending flat since 2021. With growing pressure on the consumer from higher rates and inflation, the outlook for consumer spending increasingly is uncertain.

Residential Construction

Housing starts unexpectedly surged 12.2% in August. The sharp gain in August was driven mostly by the multifamily sector, which rose 28.6% to 621,000 annualized – the highest level since 1986. Limited affordability for single -family homes is driving demand for apartment buildings. Single-family starts rose 3.4% to 935,000 annualized. August’s strength likely will be short lived as rising mortgage rates and high prices are hitting demand. Permits fell 10%. With mortgage rates nearing 7% and rising, the outlook for housing is not good. Low inventories and pent-up demand should stave off a collapse, however.

Unemployment Rate

The U.S Bureau of Labor Statistics reported that nonfarm payroll increased by 263,000 in September, and the unemployment rate edged down to 3.5 percent, the U.S. Bureau of Labor Statistics reported. Notable job gains occurred in leisure and hospitality and in health care.

Labor Participation Rate

The labor force participation rate in the U.S. edged down to 62.3 percent in September 2022 from 62.4 percent in the previous month. It remained 1.1 percentage points below its value in February 2020, prior to the coronavirus (COVID-19) pandemic.

Fuel Forecasts and Trends

FTR Fuel Outlook

As of early October, diesel prices had fallen in 14 of the last 15 weeks and were about 97 cents below June’s all time high. Crude prices had been hovering around $80 a barrel but moved higher in early October.

The Brent crude oil spot price in our forecast averages $93 per barrel (b) in the fourth quarter of 2022 (4Q22) and $95/b in 2023. Potential petroleum supply disruptions and slower-than-expected crude oil production growth could lead to higher oil prices, while the possibility of slower-than-forecast economic growth may contribute to lower prices.

U.S. retail gasoline prices in our forecast average $3.80 per gallon (gal) in 4Q22 and $3.57/gal in 2023. Retail diesel prices average $4.86/gal in 4Q22 and $4.29/gal in 2023. We expect U.S. gasoline consumption in 2022 to average 8.8 million b/d, down 40,000 b/d from 2021, and we expect it to stay near that level in 2023, with rising fuel efficiency offsetting price- and economy-driven increases in transportation demand.

Modal Updates

Logistics News Flash:

Cargo Shipowners Cancel Sailings as Global Trade Flips From Backlogs to Empty Containers

Ocean carriers are canceling dozens of sailings on the world’s busiest routes during what is normally their peak season, the latest sign of the economic whiplash hitting companies as inflation weighs on global trade and consumer spending.

The October cancellations are a sharp reversal from just a few months ago, when scarce shipping space pushed freight rates higher and carriers’ profits to record levels. Last October, companies like Walmart Inc. and Home Depot Inc. were chartering their own ships to get around bottlenecks at ports to meet a surge in demand for imports.

Trans-Pacific shipping rates have plummeted roughly 75% from year-ago levels. The transportation industry is grappling with weaker demand as big retailers cancel orders with vendors and step-up efforts to cut inventories. FedEx Corp. recently said it would cancel flights and park cargo planes because of a sharp drop in shipping volumes. On Thursday, Nike Inc. said it was sitting on 65% more inventory in North America than a year earlier and would resort to markdowns.

The erosion in global economic conditions, from the war in Ukraine to factory shutdowns in China, have dealt heavy blows to trade activity. The International Monetary Fund has cut its forecast for global growth in gross domestic product multiple times this year. Consumer prices are rising at the fastest rates in years in the U.S., countries in Europe and other parts of the world.

One response to the melting demand has been to reduce sailing trips. In September, container capacity offered by ship operators in the Pacific was down 13%, dropping the equivalent of 21 ships that can each move 8,000 containers in a single voyage, from a year earlier, according to shipping-data providers Xeneta and Sea-Intelligence.

For the two weeks starting Oct. 3, a total of about 40 scheduled sailings to the U.S. West Coast from Asia and 21 sailings to the East Coast from Asia have been scrapped, according to the data companies as well as customer advisories viewed by The Wall Street Journal. Typically, at this time of year, an average of two to four sailings a week are blanked, the industry’s term for canceled sailings.

Carriers also are increasingly canceling trips along key Asia-to-Europe routes, the data providers said.

Source for full article: https://www.wsj.com/articles/cargo-shipowners-cancel-sailings-as-global-trade-flips-from-backlogs-to-empty-containers-11664681947?mod=djemlogistics_h

Rate Outlook Updates: Contract LTL, Truckload and Intermodal

The LTL rate outlook continues to strengthen slightly. The outlook for LTL rates continues to firm incrementally. The 2022 forecast is +14.2% y/y, up from +13.9%. The 2023 forecast is -4.0%, stronger than -4.6% previously.

The outlook for truckload rates continues to weaken for this year and next. The revised 2022 forecast for total rates is -0.6% y/y, excluding fuel, as spot declines deepen. The 2023 forecast is -7.4% y/y. Total spot volume in trucking is still running at or slightly below comparable five-year average levels. FTR’s outlook for truck loadings growth continues to weaken, especially in the flatbed and bulk segments.

Intermodal rate increases are declining and are expected to continue to decline for the next several months before holding at slightly negative levels for much of the first half of next year. Intermodal volumes have not bounced back from the uncertainty surrounding a possible rail strike but look to return to normal growth rates next year.

Morgan Stanley Index

MS has updated our QURE model for the month of October. MS new base case prediction is that truck rates will move to $1.75 in 6 months (currently $1.86) and move to $1.80 in 12 months. MS TLFI ended its upward trend after two updates of increases with a slight sequential decline and performance ~inline with typical seasonality. For the first time in several updates, the underlying demand components outperformed typical seasonality, coming in ~830 bps above, while the supply components underperformed typical seasonality, coming in ~100 bps worse. Similar to the last couple of updates, our index remains below its LT averages and continues to perform ~inline with typical seasonality for the second update in a row. MS Reefer and Flatbed both decreased sequentially, performing inline and underperforming normal seasonality this update, respectively. The sequential decrease in our TLFI aligns with a slight reversal in sentiment in our most recent TLSS which saw slightly more negative commentary, especially amongst shippers.

Cass TL Linehaul Index (September 2022)

The Cass Truckload Linehaul Index®, which measures changes in truckload linehaul rates, slowed to a 3.9% y/y increase in September after rising 7.4% y/y in August. On a m/m basis, the Cass Truckload Linehaul Index fell 2.2% larger than the 1.8 m/m declines of the past three months. 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 (projected for January ‘23 in the ACT Freight Forecast). 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:

Peak parcel surcharges likely to stick despite slowing demand, carrier overcapacity

The past two peak seasons for parcel delivery services were cut and dried affairs. Parcel carriers-imposed delivery surcharges almost at will. Shippers, knowing their service options were limited during an unprecedented period of pandemic-related demand, mostly absorbed the levies.

This year’s peak season, which starts in earnest at the end of October, will be a different beast. Shipper activity has slowed as inflation, higher interest rates and recession concerns have curbed consumer spending. Many shippers already hold too much inventory or have moved holiday traffic into their networks due to ongoing concerns about supply chain disruptions. Quotas, or caps, that carriers imposed on big shippers during the last two peak seasons to mitigate the effect of huge demand spikes are a nonfactor this year except perhaps for the very largest of shippers.

Carriers that have ramped up labor and infrastructure capacity in anticipation of stronger demand may find themselves scrambling to pull in business to justify their investments. FedEx Ground, the ground delivery unit of FedEx Corp. (NYSE: FDX) and the unit that delivers most of FedEx’s holiday volumes, has already warned about lower peak traffic than it originally projected.

But the shifting macro landscape won’t impact the slew of peak-season surcharges that are now in place, most analysts said. Barring the unlikely scenario of one carrier taking the initiative to undercut the other, FedEx and rival UPS Inc. (NYSE: UPS) are unlikely to budge on their respective surcharges, especially at this late date.

Both carriers are being pressured to make margin in the face of rising costs. As a result, they will resist downshifting on surcharge levels even in the face of punk demand, overcapacity and shipper resistance, they said. “We’d be very surprised if national parcel carriers blink on this year’s peak surcharges,” said Bascome Majors, transport analyst for Susquehanna Investment Group. “Inflation is still rampant even if the peak proves weak.” The 2023 holiday season could be a different story, Majors said. However, those issues are months in the future, Majors said.

Nate Skiver, founder and president of LPF Spend Management, a consulting firm, said that any breaks on peak surcharges, if they have occurred at all, has already taken place. Any surcharge reductions would have been reserved only for those shippers whose year-round revenue and margins are materially important to the carriers., Skiver said.

Source for full article: https://www.freightwaves.com/news/despite-slowing-demand-peak-parcel-surcharges-arent-going-anywhere

FedEx announces largest general rate increase in its history

FedEx Corp. announced a 6.9% general rate increase (GRI) for 2023, the largest year-over-year increase in its history.

The increase will apply to all FedEx (NYSE: FDX) services except for its less-than-truckload service, FedEx Freight. Increases there will range between 6.9% and 7.9%, depending on the customer’s transportation rate scale, the company said.

Typically, FedEx raises its annual tariff rates between 4.9% and 5.9%. Analysts were expecting a 2023 GRI increase of 6% or more to offset the impact of cost inflation.

On one level, GRIs, which apply to noncontract shipments, are symbolic because virtually all parcel deliveries move under contract. However, the level of contract rate increases, and the discounts granted from those increases, are pegged to actions that parcel carriers take with their GRIs. As a result, GRIs are a key barometer on what rates and discounts that shippers can expect in their contracts.

Along with the GRI increase, FedEx said it plans to save between $2.2 billion and $2.7 billion during the current 2023 fiscal year through cost reductions at its FedEx Express air and international unit and its FedEx Ground U.S. delivery unit. The company said it would reduce the number of FedEx Express flights and temporarily park an undetermined number of aircraft. Those moves will save between $1.5 billion and $1.7 billion, the company said.

FedEx said it will save $300 million to $500 million at its FedEx Ground unit by closing certain sortation operations and suspending some Sunday delivery operations. It did not shutter virtually all of its costly Sunday delivery network as some have advised.

Source for full article: https://www.freightwaves.com/news/fedex-announces-largest-general-rate-increase-in-its-history

Current LTL Market:

Less-than-truckload rates continue to increase amid transportation downturn

The freight market has been in a tailspin since the spring, but the less-than-truckload carriers are still increasing rates. Dry van truckload contract rates have fallen ~7% since June, according to FreightWaves invoice data. The same database shows about a 2% increase in LTL prices over the same time. Why do LTL carriers appear to be more insulated, and will the market eventually catch up to them?

The LTL sector typically enjoys freight market upswings for longer stretches than its larger truckload cousin thanks to the lack of a strong spot market, annualized bid cycles and lack of fragmentation. While contract rates fell for truckload carriers in 2019, LTL carriers continued to garner strong increases until the market caught up with them later in the year.

Chart of the Week: Van Contract initial report base rate per mile, LTL Contract initial report average base rate per hundredweight – USA SONAR: VCRPM1.USA, LCWT1.USA

While LTL represents half of the revenue of the truckload sector, the total volume handled is four to six times less. Truckload is like buying in bulk and has fewer touch points compared to LTL shipping, which inherently carries more cost and liability.

While the spot market tends to have a strong visible influence on truckload contract prices, LTL’s version is much smaller and less transparent, so it does not weigh heavily on long-term rate agreements. Truckload spot rates can be an effective predictor of LTL rate changes over time.

Spot rates excluding fuel costs above $1.20 per gallon (NTIL12) from dry van truckloads have fallen 27% since February, while contract rates have only declined 7% in comparison, flatlining from March through June. Long-term pricing is done with less frequency by nature and therefore moves more slowly, but many shippers shortened their bid cycles during 2020-21 due to low levels of contract compliance.

Source for full article: https://www.freightwaves.com/news/nothing-less-about-less-than-truckload-rates

Current Truckload Market:

Freight Operators’ Peak Shipping Season Is Crumbling

The peak shipping season is fizzling as overstocked retailers cancel overseas orders and freight companies scale back expectations for heavy freight volumes heading into the holidays.

Typically, in the last quarter of the year, cargo carriers from container lines to parcel operators bulk up their profits on strong demand. But a range of measures of shipping demand across the U.S. are sliding, freight rates are falling as a result, leading carriers to pull back capacity amid concerns a deeper downturn is coming.

The rapid reversal in a freight market that was booming earlier in the year, when tight capacity and rising shipping prices brought big profits to the transport and logistics sector, will loom over earnings starting this week. Operators are set to begin reporting results based on growth that is already showing signs of hitting the brakes.

Trucking bellwether J.B. Hunt Transport Services Inc. on Tuesday evening reported that revenue remained flat in the third quarter compared with the prior quarter at $3.84 billion and that the company anticipates a weakened peak season. Warehousing giant Prologis Inc. is expected to report earnings on Wednesday.

“The growth in U.S. import volume has run out of steam, especially for cargo from Asia,” said Ben Hackett, founder of Hackett Associates and the author of the Global Port Tracker report issued by the National Retail Federation. “Recent cuts in carrier shipping capacity reflect falling demand for merchandise from well-stocked retailers, even as consumers continue to spend.”

The NRF report is one of several measures showing shipping volumes slowing sharply from August to September, signaling waning demand rippling through supply chains even as retailers are lining up goods for the traditional sales season.

The Global Port Tracker report projects that import into major U.S. seaports will be down 4% in the second half of the year after expanding 5.5% year-over-over in the first six months of 2022. Descartes Datamyne, a data analysis group owned by supply-chain software company Descartes Systems Group Inc., suggests an even steeper decline based on its tracking of inbound trade volumes.

Their report earlier this month said September container imports, measured in 20-foot-equivalent units, were down 11% year-over-year and were off 12.4% from August, an unusually sharp falloff in the months considered the height of the peak shipping season. Container imports from China, where manufacturers of goods including furniture, toys and electronics stuff boxes bound for U.S. retailers, tumbled 18.3% from August to September.

Source for full article: https://www.wsj.com/articles/freight-operators-peak-shipping-season-is-crumbling-11666118281

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 October 17, 2022, DAT Hot States, the state with the highest load to truck ratio was Vermont (6.32) with Florida (1.36) the lowest for the month.

Rate Outlook and Regulatory Update

Rail Union Rejects Biden-Backed Deal, Reviving Strike Risk

A majority of almost 12,000 unionized railroad workers voted to reject a tentative labor agreement brokered in part last month by President Joe Biden, the first dismissal by members of a dozen labor groups that must accept the deal or risk a strike.

More than 6,600 members of the Brotherhood of Maintenance of Way Employees voted against the tentative agreement compared to 5,100 votes in favor, the division of the International Brotherhood of Teamsters said in a statement Monday.

The vote results in a “status quo” period in which no strike can take place while the union resumes bargaining with freight railroads, according to the statement. No “self-help” may occur until after Nov. 19 at the earliest, it said.

Closing Thoughts

Economy

Recent reports from Bloomberg, also point to a higher likelihood of a recession in the next 6 – 12 months. Should this happen, you can expect retail spending to continue to drop. This is being driven by a reported U.S. core inflation hitting a 40 – year high according to Bloomberg. Another point to note, many companies are still increasing the cost of most products in the U.S. These companies are in no rush to turn the dropping transportation costs into savings for their customers as they try to recover from increased rates over the last two years.

Demand/Supply

As we look toward Q4, Wall Street Journal reports U.S. retail spending has remained flat. This could mean that typical peak retail freight volumes will not be as available to carriers in the following months. With that in mind, we expect to see continued decreases in rates and more capacity from carriers. GEODIS is seeing many carriers reaching out trying to get increased volume due to them not receiving the typical peak volume increases in the retail sector.

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