After more than two years of supply chain fluctuation, the freight industry is slowing down. With lessening demand, freight companies and independent drivers are adjusting their contracts and pricing structures to remain competitive and keep their fleets operational.
Anthony Smith is the Chief Economist for Freight Waves, a leader in global supply chain market intelligence. With experience in forestry, technology, commercialization, economic consulting, media and building products, Smith heads the company’s macroeconomic outlook and trends forecasting initiatives.
In our most recent Discerning Distributor podcast, Smith joined host Alex Chausovsky to discuss the current state of the freight industry, and the steps distributors and manufacturers should take to plan for 2023 and beyond.
Alex Chausovsky: There’s a debate about whether we’re in a recession or are headed for one in the future. What factors do you look at in terms of determining where we’re headed? And what is your personal opinion about whether we are in a recession or not?
Anthony Smith: I’m a little old school, so when I look at GDP for two quarters, and it’s declining back to back, I’d say we’re in a recession. But, I think there is an excellent case for the argument that the GDP may not be the best measure of overall U.S. growth.
Another big thing is that, as you know, many different sectors can be in a technical recession or a down business cycle while others are thriving. So I think that’s where a lot of the debate comes from because we’re seeing growth in some areas and perceived contraction in others.
If we see upward momentum in the third quarter, I would say that we’re probably not in a recession. But I still don’t think we’re out of the woodwork just yet. I believe we’re currently in the early stages of a freight recession which I think will be more pronounced and apparent to everyday consumers and those operating outside of the supply chain than the freight recession in 2019.
Chausovsky: When talking about freight, do you mean business to consumer? Or B2B?
Smith: When we look at freight, we’re looking at volumes. We’ve seen that buy-ins on a year-to-year basis are down over 20%. That doesn’t seem too out of the world, seeing how we had such a ramp-up throughout the pandemic with stimulus packages raising demand. There was a huge demand for goods coming through, which led to a rise in freight rates.
Because of that, we’ve seen many people entering the logistics market. Whether they decided to join a carrier, start their own brokerage or launch a freight tech solution to ease the supply chain bottlenecks, with so many entrants in the market, transportation capacity has skyrocketed, and rates are plummeting. So now we’re seeing the seesaw effect of oversupply of transportation.
Contract rates are starting to ease down, along with spot rates. So, I wouldn’t say that’s a leading indicator of macroeconomic growth, but I think this time, a freight recession will be more pronounced in the economy.
Chausovsky: What are you seeing with other types of freight besides trucking? Are you seeing anything different with ship and airborne freight? What about international versus domestic trends?
Smith: We cover trucking, intermodal rail and international freight. Over the past month, we’ve seen that there have been no shortages or challenges in the ocean container market. There’s been a decline in container demand across most major trade lanes on the international side, and that’s helped to reduce spot rates and improve certain carrier-related services and metrics.
There’s a substantial downward movement and demand on the international side of ocean freight. We’re seeing that downward trend before anything even gets into the country, so I think that is very telling.
Chausovsky: We’ve heard that the housing market is entering a severe downturn due to the rising interest rate policy. On the commodity side, is there anything you see within your data that indicates a substantial slowdown within steel, aluminum, copper or other products?
Smith: We have a platform called Sonar, built around freight logistics. It gives us data for hundreds of trucking lanes in near real-time. It gives us a leg up on forecasting compared to working with data from a month or a quarter ago.
Within rail there has definitely been a downshift in transport of commodities. Carloads for lumber have been down, and there has also been downward movement in steel. Our flatbed outbound tinder rejection index is still historically elevated at double-digit levels. But we are seeing that substantially easing from record highs. There’s more capacity growing for flatbed trailers, and commodities moving by rail are easing weekly.
So that tells us that upstream activity for manufacturing is slowing.
Chausovsky: Looking forward to the fall and 2023, what is your advice regarding expectations for shipping and logistics costs? What is your outlook on pricing on the shipping side?
Smith: Throughout the pandemic, power was in the hands of the carriers while the shippers and producers were left saying, “I’ll pay whatever it is, just make sure my product gets where it needs to be somewhere around the right time.”
Now, the pendulum is swinging back into the hands of the shippers. As a shipper, producer, or manufacturer, you will be able to get more competitive with driving those rates down. With the opening up of capacity, many smaller, mid-size carriers and fleets will be scratching for more business just to keep trucks running. The last thing these carriers want to do is just idle and burn money.
Our audience is going to have a better time negotiating lower rates. If you are in some type of contract that was established during the pandemic, you will have much more pricing power on your side than you had over the past couple of years.
Chausovsky: What do you see from Mexico? Are freight volumes from Mexico increasing?
Smith: I haven’t seen anything substantial just yet, but we are seeing a fair amount of investment going on, especially in the automotive space. There’s also a fair amount of ecommerce happening in Mexico, and we’re starting to see substantial investment in cross-border infrastructure.
Chausovsky: We are seeing companies looking to draw down inventories anticipating weaker demand. They don’t want to have high inventory holding costs, so they’re looking to sell more stock rather than continuing to resupply. Is there anything you can talk about either on the inventory or investment side that stands out from the data you track?
Smith: Certainly. At our platform, we’re thankful to have a lot of great partners. One of which is Dr. Zach Rogers, a professor at Colorado State University. He helps us put together an index called the Logistics Managers Index that we have in Sonar. It is broken down as the LMI. It’s a monthly index similar to the PMI, where anything over 50% is indicative of expansion, and anything below 50% indicates contraction.
We’ve seen that inventory levels within the index are at 67.6%, which is very much above the 50% threshold for growth. There is an ongoing expansion in inventory levels, and we’re starting to see inventory holding prices decrease ever so slightly. Those prices, on a scale for the LMI, are at 75%, so they are still elevated well above that 50% threshold. Inventory levels are still indeed growing, and warehouse prices are still elevated.
This is where it gets tricky because you don’t want to draw down all of your inventory and be stuck in that bullwhip effect where you don’t have the goods you need to operate.
One of the interesting things we saw on the PMI report was respondents saying they are pulling goods forward, which made me curious about how much of a pull is happening in capital investment because of the expectation that interest rates will keep going up. If you’re not going to buy with cash and leverage credit, should you make these investments in Capex before it gets more expensive?
Chausovsky: We all wish we knew how high the government will raise interest rates. If you look at the pundits, the consensus opinion is that we’re not quite done yet. Depending on who you listen to, they seem to think that rates will increase another 0.75% or even as much as 1.25%. That leaves a lot of businesses to wonder whether they should take advantage of rates now before they get even higher or pull back instead of moving forward with expensive long-term Capex projects. What are your thoughts on that?
Smith: That’s the tricky part. Some companies have to get really specific about how they’ll plan around the demand for certain machinery and things like that. Our thought is that we have to be careful around that pull forward of inventory because within the supply chain, these wild swings are always late to react.
For instance, we saw so many people enter the market during the pandemic because they saw that the need for transportation was skyrocketing. So there will be more entrants into the market until nothing is left to be had.
So I think it’ll be more advantageous if you aren’t as aggressive with that scarcity mindset as if we were still in the midst of the pandemic. I think a lot of distributors and those looking to make Capex investments won’t have the same issues trying to pull forward certain orders. There are still going to be backlogs and delays and things like that, but I think we’re a far cry from where we were two years ago.
Chausovsky: One of the major issues distributors are currently facing is warehousing costs. Is there anything you see on that front that might provide some insights for our audience?
Smith: Warehousing is tricky because, as we mentioned earlier, it’s still very elevated. If we look at things from the LMI perspective, the future expectations from respondents suggest that there will be a continued growth rate of around 70.8%. The index shows a slight downward shift, but warehousing may still be very elevated over the next 12 months.
One thing we noticed on the index is that we’re seeing warehousing increase faster on the upstream side versus the downstream, upstream being more wholesalers and distributors and downstream being closer to the retail market. So we’re seeing that warehouse prices are going up and are increasing at a faster level upstream than downstream.
Alex Chausovsky is a highly experienced market researcher and analyst with more than 20 years of expertise across economics, industrial manufacturing, automation, talent and workforce issues, and advanced technology trends. For the past two decades, he has consulted and advised companies throughout the U.S. and Canada, Europe, South America and Asia.
Alex has delivered hundreds of keynote presentations and webinars to small businesses, trade associations and Fortune 500 companies across a spectrum of industries. He is currently overseeing a suite of analytics products focused on talent for the Miller Resource Group. Alex is also consulting with companies to help them become better at attracting, hiring, and retaining the impact players in their industry.