US trucking recession: what if the canary in the mine doesn't chirp? - Tennders

Some say a recession is looming in the US trucking sector. Will it spread to the broader economic system?

US trucking recession: what if the canary in the mine doesn't chirp? - Tennders
Truck driving in a warehouse

Some say a recession is looming in the US trucking sector. Will it spread to the broader economic system?

Container imports to the US have fallen by more than 36% since 24 May. While fuel prices are at a record high, both spot rates and contracted cargoes have fallen. Fewer contracts have been tendered in May than in the last 12 months. Spot market carriers will be hit the hardest.

Freightwaves, an observatory and specialised media and industry benchmark in the US, has been predicting a possible economic recession for months. From the lack of drivers last year to an already entrenched monetary inflation in 2022, they are now addressing gloomy thoughts for the trucking industry on the other side of the pond. So it is worth looking at what has happened to reflect: is it an endemic problem or a bad time for everyone?

2 years of lurches and shifts in the US trucking industry

High consumption peaks during the pandemic led US retailers to stockpile a lot of inventory, and demand for trucking services soared. For this reason, small owner-operators and self-employed truckers energised a market with high spot volumes and soaring auctions of used trucks in the absence of new ones.

Rob Slavin, a pricing analyst at Ritchie Bros, witnessed how "A used 2016 truck that would have cost around $32,000, by the end of 2020 would be auctioned for $75,000. And, at a dealership, where trucks are reconditioned before they are sold, that truck would go for as much as $90,000." Slavin told Freightwaves.

Auctioneer Taylor & Martin admitted that "they were attracting 600-700 people before the pandemic, and a couple of hundred of those people were attending virtually. But after the arrival of Covid, the number of attendees shot up from 1,200 to 1,600. Most of them were virtual." Mainly from small and medium-sized transport companies.

There is hardly any difference between buying from one place or another. The price is practically the same. However, although prices are still high (and covid disruptions in supply chains are still being felt in some sectors, such as microprocessors), the bubble is deflating. Second-hand trucks auctioned in the second quarter of 2022 are already 20% cheaper than those sold in the first quarter of this year.

Things are getting ugly, and the smaller ones must prepare for battle.

After months of unprecedented increases, US-bound container imports have fallen by more than 36% since 24 May. The CEO of Freightwaves, Craig Fuller, announced a week ago the drop in both spot market rates and tendered contracts. Fewer contracts have been tendered in May than in the last 12 months.

Steve Urbish, a New Jersey dispatcher who works mostly with owner-operators, already noted how falling rates affected his drivers in April. A dry truck service transporting bottled water from the Philadelphia suburbs to the warehouse giant Carlise, Pennsylvania, paid $1200 last December. As of May, it was paying $756.

Big retailers like Walmart and Target assume that consumers are returning to pre-Covid levels. But they have too much-stockpiled inventory and will probably have to cut back on trucking service significantly. Target said a few days ago that it was "cancelling shipping containers and would work to dramatically reduce its inventory, which is 43% above the prior-year period."

Speaking of giants, Amazon also acknowledges it has more storage capacity than demand. That is why the US marketplace will rent part of its warehouses to compensate for the global drop in online sales.  A decision was taken after the company reported quarterly losses for the first time since 2015 and its shares fell by 12%.

The worse is yet to come for medium and small businesses and self-employed drivers who don't have the capacity or experience to cope with a recession. It will be those same drivers who were chasing high spot volumes which will find fewer and fewer opportunities. They will either leave the trucking market or join bigger companies, and bigger fleets better equiped to handle the volatility of the market.

Is road freight transport an ominous bird, or are analysts exaggerating?

Transport moves everything. It is the backbone of the economic system of any country. Some US economists see trucking as a key indicator of the macroeconomic situation. Aaron Terrazas, director of economic research at trucking brokerage Convoy, analysed in 2019 that 6 of the 12 trucking recessions preceded macroeconomic recessions. So for some, trucking is the canary in the coal mine.

Not everyone has the same pessimism and still hears the canary singing. Thus, Jason Miller, a professor at Michigan State University's Eli Broad College of Business, commented on Linkedin that "Ltd Carriers, which I see as the canary in the coal mine given their exposure to durable goods manufacturing, have reported strong volumes in April and May, suggesting that we are not seeing a slowdown in freight volumes."

A few months earlier, Uber Freight opined that rates are not as low as claimed compared to other months in 2021. They pointed to current bias as the culprit for the perceived market weakness in March.

But back to the observatory, Freightwaves, they already analysed in April that trends in the road transport industry will evolve in a K-shape:

There will be an upward or stable trend among large trucking companies. They have maintained and will keep long-term contracts with their customers. Moreover, they will come out ahead even with falling contract rates because they primarily did not raise prices during the explosion of spot rates until the end of 2020 and 2021.

On the other hand, there will be a negative trend among the most vulnerable part of the market: small businesses and the self-employed. The hardest hit will be those who have been in the sector for a short time and do not have the experience of facing savage tariff cuts with cost increases.

Cautious views from Europe

From Spain, it is pointed out that inflation has become entrenched in the US. Some economists are already predicting what they call second-round effects, i.e. contagion to the economy as a whole. It was hoped that inflation would start to ease, but it continues to set historical records, and few would dare to say that it will not rise again. Even less so when the Federal Reserve has already raised interest rates twice, the May hike being the largest in 22 years, and when the central bank confirms that two more increases of half a point are on the horizon.

The Fed's challenge is finding a suitable mechanism to reduce inflation without triggering a recession. As the road transport sector finds itself, can it be considered to have arrived too late? Or does the US have the foundations solid enough to weather the storm?

Some people seem to think that "neither yes nor no". For example, Luca Paolini, chief strategist at Pictet AM, believes that the market is "overly pessimistic". They are convinced that companies and households still have solid balance sheets.

The asset manager of this Swiss private banking group is betting that there is a 30%-40% chance of only a mild recession because of sure signs (moderating transport costs or reduced goods delivery times) that inflationary pressures seem to be easing.

For what may happen, if you have to invest in the stock market, they recommend betting on healthcare and commodity-related companies. Given the risk of the US going into recession in 2023, you'd be on the safe side.

So, is this an endemic problem to the EEUU, has it started manifesting in the global economy, or people are being too pessimistic?

However, it is common in times of recession for companies to cut costs. But today that will not be sustainable, even if short-term results can be seen. The key is to optimise costs, recession or no recession. Only technology and digitalisation can provide the right tools to garantee you remain competitive.

Rosa Medina

Rosa Medina

Communications Specialist at Tennders