Breakthrough’s Chief Economist addresses impact of Q3 GDP reading on logistics and shippers’ strategies

Logistics Management (LM) Group News Editor Jeff Berman recently spoke with Matt Muenster, Chief Economist for Green Bay, Wisc.-based Breakthrough, an innovator in transportation management, dedicated to creating transparent and fair strategies for the world’s leading shippers. Muenster provided Berman with an overview of the impact of the recently-issued third quarter GDP estimate and its impact on logistics and supply chain strategies. He also discussed other freight-related and marcoeconomic topics, including: inflation, inventoryies, energy prices, and rates, among others. Their conversation follows below. 

Logistics Management (LM): How should shippers be viewing the recently-issued third quarter advance estimate of 4.9%, as it relates to their supply chain strategies?

Matt Muenster: The GDP figure was a surprise. It overshot estimates. And the other thing that it did was, it showed, at least in some capacity, that consumer resilience was continuing into the third quarter. So, a couple of major contributors to the overall growth of 4.9% were spending on both goods and services. Consumer spending remains strong. I think breaking these numbers down is interesting.

LM: In what ways?

Muenster: There is some resilience of just consumer spending, both on goods and non-durable goods. On consumer spending on services, the categories that consumers saw robust spending—including household utilities, healthcare, insurance—are not things that move a lot of freight, generally speaking, and, so, some of this robust growth and consumer spending is taken with a grain of salt. The reason for that is because in terms of the freight market, some of it is not representative of contributing a lot more freight into the market. There's a mixed review here in terms of the overall impact [of this GDP reading] in the freight markets. I will say I don't think the single quarter pop in GDP necessarily is changing [shipper] strategies. However, I do think it's giving more confidence to the market that a soft landing is still achievable or this idea that we can add inflation without falling into recession is still achievable, generally speaking.

LM: Are there other ways in which the GDP reading may not impact shipper strategies, in your opinion?

Muenster: There are still a number of headwinds present in the market. So, student loan repayment has happened. We've experienced a lot of labor disruption, whether we're looking at the UAW strikes, some of the labor disruptions that occurred in freight markets, we still have uncertainty about a potential government lockdown. And we know that rates are going to be elevated. So, the Federal Reserve is communicating a general holding pattern right now on debt that we're going to maintain the federal funds rate between 5.25%-to-5.5%. This puts mortgage rates up near 8% in some instances…obviously, there's a lot of factors into what kind of rate you'd have with a mortgage. This also increases auto rates and credit card rates. There are a lot of headwinds that continue to face the market going into 2024. We also know from places like the National Retail Federation, with its numbers really focused from 2019 as a baseline, which is fair enough due to the changes in the market since then. We know that consumer habits are changing. We're spending earlier in the holiday season and spending less later on, so a lot of holiday spending has started, or started in October, and will continue in November. But the full holiday outlay isn't going to happen in the fourth quarter. And so having understood that some of it has already been realized, there's some caution that comes with the expectation of what's to come from consumers in the fourth quarter. On the upside, you do see that inventories are normalizing and that a lot of inventories, as we think about industry-to-industry have progressed toward normalization.

LM: Can you please provide some examples of that?

Muenster: Inventories across industries have normalized, which is very positive. One reason why 2023’s freight market was so slow and why we experienced a pretty lackadaisical Peak Season this year is because we spent much of the year rebalancing inventories. That was especially a trend early on in Q1. Back then, you couldn't read an earnings report of someone who's manufacturing something without some statement on their inventories being out of sync. And it might have been a little bit different for some industries, like auto manufacturing, in which they couldn't get enough new inventory onto the lot. They were really far behind because of disruptions related to the pandemic. But when we're talking about general merchandise stores, department stores, they all had excess inventory. With that glut clearing, that should be a positive for the broader freight market, in terms of total traffic that we're experiencing. Whether it's truckload, intermodal, or ocean freight, perhaps in 2024, we get back to a more normal kind of Peak Season shipping experience. That's the upside. There's a lot of risk, and we balanced the downside risks and consumer health, whether it can really hold up with the high-rate environment, knowing that inflation has been sticky but going down and then counter that with “Hey, we had this really abnormal inventory experience a year ago that's been corrected.”

LM: While one quarter does not make a trend, do you think this GDP reading helps to lend credence to the thesis that perhaps the freight recession may be abating or lessening?

Muenster: That is a good question. Our own take is that the freight market is still in a soft place until the second quarter of next year. That's just by our forecast. To your point. I do think we're coming up from a trough that the bottom likely happened, with the caveat that one quarter makes it difficult to rush to any firm conclusions. The second quarter was really soft. And what we're seeing in the rate environment also supports this. You do have some capacity that exits to the market that may also begin to support rates, even if freight volumes aren't returning. But we have generally seen signals that, at worst, we're in the trough. To your point, the expectation is to come out of it in the coming quarters.

LM: You had noted that inflation, while going down, remains sticky. Do you see that trend persisting into Q2 2024, being somewhat in tune with things getting back to a more normal flow, or cadence, in terms of goods movement?

Muenster: When I say inflation is sticky, my expectations remain elevated, because we have a really tight labor market and that the cost of operating in a number of industries remain elevated because cost of labor remain elevated and have gone up substantially in a short period of time. Wages have increased substantially for a lot of professions in a short period of time. We're also experiencing elevated costs elsewhere. Healthcare is one of those industries that we're seeing cost tick up again. And, so, my expectations and maybe this is more general, but in terms of if we were to interview a broad swath of economists right now, are that inflation moderates over a period of years, continuing through 2024, but into 2025 Before it would approach the Fed’s target of 2% longer term. The risks here that continue are concerns over energy prices. We have seen demand slump and so has gasoline demand, with the month of September hitting a 25-year low.

LM: What are some other things to think about in regards to energy prices?

Muenster: All the concerns just geopolitically with energy producers being either directly involved like the Russia-Ukraine conflict war, or being tangentially involved…countries like Iran and Saudi Arabia, potentially in the Middle East. That's probably the biggest concern on the supply side for energy. So, energy shocks can still have a lot to say about how this inflation story plays out. But generally speaking, echoing the sentiment of the Fed, if we're focusing on a soft landing, then still the expectation would be that inflation moderates, but it's going to take longer than 2024 for that.

LM: How do you view the impact of the housing market on GDP, especially for shippers selling into, and with major exposure to the housing market? A recent statistic noted that 80% of U.S. homes have mortgages locked in at 5% or less. That seems to highlight the current challenges in the market, in terms of limited homes for sale.

Muenster: I think it suggests that homeowners will be staying put. There's going to be a lot of reluctance to move because of the difference in the rate that, obviously, you'll give up should you move. Certainly, for home improvement stores, that represents some dramatic headwinds.

LM: As the effects of the pandemic began to subside, there was an expected shift to services spending, from goods spending, which remains intact today. That resulted in lower freight volumes across various modes, and, of course higher inventories. How do you think the shift to services spending impacts both GDP and shipper strategies?

Muenster: That's exactly right. And in terms of contributions to GDP growth, services were up and had a larger impact this quarter than goods. That's where the trend has gone, especially over 2023 that we've seen, a return to spending and services. Now, I will say services are far more expensive in 2023. Prices have gone up dramatically. We don't need to just be talking about Taylor Swift concert tickets. But a couple things to keep in mind here if this momentum can continue are headwinds to personal savings. The personal savings rate as a percent of disposable income decreased to just 3.8% in the third quarter. Over the longer term, we'd expect that that trend to be more like double that, and it continues a trend downward from like really significant heights during some fiscal stimulus outlays during the pandemic. But there's also been a lot of commentary out in the marketplace that the excessive savings that were that had been gained over the course of the pandemic had basically run their course and that the expectation was excess savings, or the savings accumulated from pre-pandemic levels through the pandemic have basically been spared—and that we're back to a level of savings essentially that that we had prior to the pandemic. There are a couple headwinds here on the consumer that, yes, the spending has been really robust and the return to services have been strong, but disposable income is taking a hit, and it remains constrained from inflation. Ultimately, this growth rate likely can’t persist forever and that something's got to give. We're going to see the growth in the use of credit cards and other avenues to supplement consumer spending, but it can't be supported strictly from wage growth.

LM: In the most recent Council of Supply Chain Management Professionals State of Logistics Report, it noted that in 2022, logistics costs accounted for 9.1% of total U.S. GDP. That number was down compared to 2021, due largely to freight tonnage and volume declines. Should things rebound on that front in 2024, do you think logistics total percentage of GDP will also head up?

Muenster: Thinking about the rate market experience, I would say there would be a big leg in the logistics costs as a percentage of GDP, in that first we would see the increase in logistics costs, just thinking about the nature and relationship of contract versus spot rates. We are seeing from shippers in our ecosystem, generally a 70% to 30% split so they're using contract rates about 70% of the time even now in this low-rate environment. Shippers have locked in lower rates are happy with them. And even though the spot rate has been lower for a period of time, they haven't all simply abandoned their contracted rates or didn't see the market coming down in 2022 and just decide to abandon contract rates altogether and move all their freight on to the spot market. That just hasn't happened. The spot market has been low. It hasn't returned from its trough just yet or is kind of lingering in a really low place, in that we have to see some upside in freight demand or see even more capacity, leave the market to provide that kind of upward price pressure and moving first spot rates above the contract rate and ultimately move the contract rate, especially in the first quarter and the second quarter when those RFPs tend to happen.