The topic of recessions—both for the general United States economy and the freight economy—was a key theme in a webcast hosted earlier this month by Jeff Tucker, president of Haddonfield, N.J.-based Tucker Worldwide, the nation’s oldest freight brokerage, which featured Lee Klaskow, Senior Global Transportation & Logistics Analyst and Sector Head, for Bloomberg Intelligence, a division of Bloomberg LP.
Klaskow explained that based on Bloomberg estimates the probability of the United States economy going into recession stands at 65%.
“I think there's a pretty good chance that it happens. I do think that it's going to be pretty shallow and quick,” he said.
As for a freight recession, though, he noted that the freight markets are already in a recession, driven by low volumes, high inventory levels, and difficult annual comparisons.
“It's not necessarily that volume is bad,” said Klaskow. “It's just not as good as it was last year. And you have those two things, and they are really [impacting] rates, pretty much across the board. Specifically on the truckload side, you have spot rates down around 20%...it feels to us that we're bouncing around the bottom of that. We don't think that it's going to get much worse on the spot market on the truckload side. And the reason for that is that capacity is starting to leave the market.”
Citing data from Werner Enterprises Chairman, President, and CEO Derek Leathers on the company’s first quarter earnings call, which indicated that spot market rates are currently around 13%-to-17% below operating costs, for owner-operators, Klaskow said that carriers cannot operate in that type of environment, adding it could lead to an acceleration of capacity leaving the market. But the flip side to that, he observed is that could help to rebalance things, as the market heads into a more seasonally stronger environment, as the beverage season approaches, which is a positive for trucking demand, coupled with the holiday Peak Season following, with both events able to withstand a mild recession.”
“You could then see spot rates start to [increase] in the second half of the year,” he said. “That would be very beneficial for the large publicly traded companies are well-capitalized and strong balance sheets have plenty of cash on hand to weather, the current storms. And a lot of those large, large companies have over the years have been diversifying into less volatile markets, whether it's going into the brokerage business or whether it's going like a Knight-Swift into the LTL (less-than-truckload) business, which tends to be not as cyclical, or as volatile, as the truckload market.”
As for what may be in store over the second half of the year, the Bloomberg analyst said there could be a better trucking environment, driven by a more consistent spot market that can help support contract rates. Those rates, he said, may not rise significantly but could increase enough to ostensibly counteract the inflationary pressures many carriers are facing, for major line items’ such as labor, insurance, or maintenance.
Tucker observed that based on Morgan Stanley data current market conditions are in line with the industry average over the last 10 years, despite the issues and fluctuations caused by the pandemic.
Klaskow replied by noting that “peak earnings,” for motor carriers and logistics services providers, was in 2021 and 2022, with the caveat that it will take a long time to get back to those levels for many companies.
“That was once in a lifetime environment for a lot of operators,” he said. “Spot rates are still above 2019 and 2018 levels, so we're still we're not in a horrible place. The problem is that a lot of higher capacity entered the market. Those people can't make money, and if you drive a truck, you probably want to make money. You can only operate for cash flow for so long to pay your lease payment or loan payment and that will lead to a lot of capacity leaving the market.
Peak Season outlook: When asked about the prospects for the 2023 Peak Season, Klaskow said he expects it to be “more normal” than it was in 2022, despite not expecting a major increase in demand but more of a gradual increase in demand levels. In our view, that is going to be driven by the ability of retailers to take down their inventories, and they have been doing that for about a year now. I think inventory levels are in a much better position, and I don't think they are where they need to be, they are heading in that direction.”
As for when inventories may return to more typical levels, Klaskow said that it could be over the second half of the year, explaining that people have to remember inventory levels are high, not necessarily because consumers were spending a lot, but also because companies and retailers bought too much because supply chains were so clogged up.
“They were having stock outs where they couldn't manufacture things,” he said. “So, as soon as something was [sellable], consumers were just gobbling things up, and then all of a sudden, demand stopped, or slowed down, considerably and so people are just stuck with that inventory and they're just working through it.”