How Shippers, Carriers, and Brokers Can Adapt to a Loosening Market
By Alex Riemersma, Ally Logistics Pricing Analyst
To understand the current conditions facing the many nuanced supply chains throughout the United States, the recent history of the American economy must be observed.
2021, a Year of Growth
According to the Bureau of Economic Analysis, real GDP increased 5.7% in 2021. During the October-through-December period, gross domestic product increased at a 6.9% annualized pace (Department of Commerce), the fastest rate since 1984. The reason for this economic growth can be traced back to consumer fiscal support by way of government stimulus checks.
Q1 2021 saw a third round of stimulus checks being mailed out to Americans. Amidst COVID-prevention measures, consumer spending on services (restaurants, sporting events, concerts) forcibly dwindled, and demand shifted towards big-ticket retail goods like furniture and online electronics. Suppliers and their supply chains strained themselves to meet this record-high consumer demand causing the truckload market to tighten dramatically. One year later, COVID restrictions have loosened, and stimulus checks have stopped arriving.
US Inflation, Conflict Abroad, and Weakened Consumer Demand
The United States is experiencing an annual inflation rate of 7.9%, the highest since 1982. The Federal Reserve is threatening to raise interest rates to curb this inflation which will likely slow economic growth to a crawl.
Abroad, severe headwinds are impacting global supply chains. A decrease in Chinese exports due to a resurgence of COVID-19, as well as the geopolitical crisis caused by Russia’s invasion of Ukraine are causing rippling effects on the American truckload market.
In addition to a broader shift in spending from goods to services, consumers must divert more of their non-stimulus boosted incomes to inelastic goods such as gas and groceries. The impact of weakened consumer demand is evidenced through a 22.48% year-over-year decrease in the outbound tender volume index (OTVI), a measure of electronically tendered freight, provided by FreightWaves SONAR, in the United States.
Outbound Tender Rejection Rates
Outbound tender rejection rates, tender rejection percentages organized by origin market, are down from about 27% in April of 2021, to about 11% in April of 2022. This decrease can be attributed to record high contract rates being divvied out by shippers, an influx of new carriers entering the market, and the aforementioned weakening of consumer demand.
The culmination of these decreasing trends is reflected in the 64 cent per mile (20.25%) decrease in the national dry van per mile spot rate since January 2022. Strain on supply chains is easing, and the truckload market is loosening.
The Fragility of the Truckload Market
January and February of 2022 offered a continuation of the previous year’s market conditions for carriers across the country. Tender volume remained elevated and spot rates climbed daily.
In March, tender volume plateaued, then dropped. The fragility of the truckload market can be observed through the quick pendulum swing away from the historic highs that had incentivized so many new carriers to enter the market over the course of 2021.
Looking ahead to Q2 2022, a reduction in retail spending, and in turn, tender volume, is likely if not inevitable. The flood of new entrants into the truckload market will foster increased competition for this softening volume and spot rates will continue to fall. The downward trend in spot rates should be a major red flag to carriers, particularly to those who have recently established themselves by means of profiting on spot freight. Rising fuel, insurance, equipment, and maintenance costs paired with shrinking margins on spot freight may spell the end for many of the smaller carriers who do not have access to contracted freight.
How the Truckload Market’s Players Can Adapt
The truckload market faces a tough outlook for carriers as volumes and rates fall while operating expenses rise. Now that revenue numbers are likely to decrease, carriers must lean on established relationships to mitigate predictable losses.
Contract rates are sitting at all-time highs, a reaction by shippers to last year’s massively inflated spot rates. Servicing contract freight will alleviate some of the lost revenue earned through last year’s robust spot market. Planning efficient routes, minimizing increasingly expensive deadhead miles, and strategically positioning drivers in comparatively tight markets are other variables to consider when attempting to recoup lost revenue.
For shippers, a loosening market means an easier time getting loads covered.
Increased competition for loads will incentivize carriers to remain compliant with contracts, newfound negotiating power will provide leverage to push for lower contract rates as they come up for renewals, and CPGs (consumer packaged goods) will once again become carriers’ preferred business sector.
Weakened consumer demand will negatively impact the volume of elastic goods such as electronics and products that are sensitive to rising interest rates, but since demand for groceries is largely inelastic, carriers will seek regular, efficient routes from manufacturing facilities to distribution centers. A looser freight market will help alleviate one inflationary line-item expense on the supplier balance sheet. If these loosening trends persist, shippers will be able to shift attention away from managing their supply chains towards the bigger picture that is the contracting American economy.
Shifting Focus and Moving Forward
Tightness within the truckload market impresses several challenges on brokers, most prominently difficulty to cover loads. Sourcing capacity for never-before-seen levels of volume forced brokers to take massive losses to provide promised services on contracted freight. Many brokers pivoted their focus towards securing high-paying spot freight to assuage the sting of losses felt in the contract sector. The outlook for Q2 2022 is very different. Brokers who stayed the course and serviced contracted freight at a loss in 2021 will welcome a loose market where coverage will be easier to come by. For the market’s new entrants and brokers who expanded operations on the presumption of sustained spot freight profitability, the outlook isn’t so rosy.
As loosening trends continue, shifting focus from covering freight at any cost to repairing relationships with shippers and carriers alike will serve to benefit all parties within the truckload market.