DAT executives provide insights on myriad market trends

Logistics Management Group News Editor Jeff Berman recently spoke with Ken Adamo, Chief of Analytics at DAT Freight & Analytics, the operator of the largest truckload freight marketplace in North America, and Chris Caplice, executive director of the Massachusetts Institute of Technology’s Center for Transportation & Logistics (CTL), and also DAT Chief Scientist, about various topics, including: the possibilty of a freight recession, contract and spot rates, fuel, and inflation, among other subjects. Their conversation follows below. 

LM: How do you define a freight recession?

Chris Caplice: A freight recession, to me, is any time when the spot rate, as we measure by the shippers, drops below the contract rate. That is a freight recession, because it tells me that contract rates are theoretically underwater. The last time we saw this in a severe way was in 2019 and also a blip in the second quarter of 2022, which did not last very long. 2019 was the last real freight recession. There are recessions and then there are” recessions.” I think what we are seeing now is a reinstatement, or a settlement, not a full-blown recession. I am not quite seeing it yet.

Ken Adamo: I think the classic economic definition is two consecutive quarters of declining GDP. That is way too long of a time horizon for our market. The average freight cycle is shortening. Historically-speaking, it was 18-to-24 months. I would say now most people put it at 18-to-24 months. So, if you are putting a six-month window on declaring something a recession, you are halfway through the cycle. In my opinion, it is probably six-to-eight weeks, where rates remain below year-over-year comparisons. I think, to me, that is one of the better ways to track it, which would closely align with what Chris is talking about in pretty much all instances but this, where this time last year rates were absolutely insane and so much higher than two years ago. We are studying year-over-year and year-over-two-year comparisons.

LM: Why do you look at it that way?

Adamo: If you look at year-over-year, we are negative, but year-over-two-year, we are still at around $0.50 for dry van, for spot, compared to where we were two years ago.

LM: How do you view things, in terms of rates and the market, compared to, say, the last two years?

Adamo: I think some of the freight recession narrative is being driven by people who know better and are only looking at the last four months-worth of data. If you look at just the last four months, it looks like you are skiing down a double black diamond trail in Tahoe. Over the last four months, we have experienced a pretty stark correction in the spot market; there is no doubt about that. And we continue to experience it.  We track this activity daily but don’t push it out daily, as it would cause confusion. Mid-last week [the week of April 4] was the first time since June 2020 that the daily spot rate was year-over-year negative. But, again, we are still not year-over-year-over-year negative, save for a very short term. It is really hard to think about what would have happened last year. In late February 2021, rates were correcting hard and then Texas froze and then the Delta variant hit in March 2021. There is a lot of seasonal pressure happening right now as well.

Caplice: Over the last two years, seasonality has been trumped by the market; it has just kind have been a mess throughout. I think the big thing that has happened over the last three months is that the cost basis for truckers has changed dramatically.

LM: In what ways?

Caplice: What has happened with fuel over the last month or so has been dramatic, for truckers and continues to have a huge impact for small carriers. But wages have been increasing, so the cost basis for the carriers is much higher, and insurance has still been climbing. I don’t think we are going to see a dramatic reduction in rates, because they can only go so far, in my opinion. So, I think what we are seeing now is a resettlement to a more historical inflation rate, which is usually 3.5% annual growth. I think it is going to be higher now. But I see it kind of leveling down. To use Ken’s analogy, we may be skiing down a double black diamond, but we have been climbing up for the last 1.5-to-2 years. There is a lot of room to go. Hopefully, carriers have not been buying outboard motors and trips to Disney World with all of the money they have been making hand over fist the last two years and they have been saving for this rainy day.

LM: What are some things that shippers can, or need, to do in order to manage these challenging market conditions?

Caplice: Looking at how shippers by, they need to be more strategic than they have been the last 20 years. We used to just put everything out to bid; that is the way it has been done. I have one load a year on a lane and put it out to bid to get a contract rate. That clogs the routing guide. We have done a lot of work and have identified the characteristics of a lane and the loads just don’t materialize, so you are wasting the shippers’ and the carriers’ time and you are clogging up the system. There is a better way to do that, and it is more dynamic. What we have been arguing is to do the RFP, which is really critical for a majority of your lanes that fit certain characteristics. But opening yourself to a more dynamic model, where you can operate off the spot, whether you go straight to a load board or a broker with an API, where you will automatically auto-tender…these are the things shippers need to open themselves up to. They have been hesitant, because that makes it tough to set a budget. One of the fallacies is that the output of an RFP, which is a routing guide, people think that is the budget, but it never happens. The whole idea of separating out and better segmenting how you procure transportation is one of the big things we are trying to push out, and that is why we have all the tools we have at DAT IQ, for the shipper, help them to do that. It is not that we are saying “don’t do RFPs,” it is just that be a little smarter. The other thing we are doing that is helping on the other side is helping brokers develop tools for brokers and carriers to respond to those RFPs. It makes sense for a big chunk of the market or another chunk should just go dynamic and not waste time putting a contract on something that does not materialize.

Adamo: We can spend a lot of time talking about the durability of contract rates, which Chris is speaking to. We have spent the better part of the last two years where they were not worth the paper they were printed on, and we are going to be in this happy medium now, for the next few months, where everything is nice and everyone is playing by the rules. But if rates are going to fall, let’s take an edge case scenario in which rates come down another $0.40 or $0.50 per mile. There is going to be rather immense pressure on the side of shippers to claw back some of that budget money and really renegotiate those rates. I agree with Chris in that having that middle ground between the pure spot market and this kind of happy go lucky of contract rates is going to be a benefit and also be a permanent outcome from Covid, too.

LM: What about some of the other dynamics that come into play?

Caplice: The other dynamics are dedicated and private [fleets]. Companies are usually pretty good at that and during Covid we saw more dedicated operations. I think in talking to carriers that was one of the biggest growth areas—dedicated operations for a shipper.

LM: Looking at dedicated, do you think that, for shippers that were not leveraging it prior to the pandemic, will stick with it?

Caplice: It really depends on how well you can keep it utilized. I think there are a lot of shippers that are doing it as “any port in a storm” and getting capacity so they will pay more for it. We will see if it sticks. It only makes sense to stick if you can utilize those trucks within your network efficiently.

LM: What about that from a broker perspective, with brokers keen to expand margins at a time when revenue per shipment is declining, coupled with brokers looking for solid pricing data? How do brokers line up the current market fundamentals in order to get the margin that they are looking for?

Adamo: It depends on if they are not paying attention to the market. The market does not really care if you are paying attention. Let’s look at the two main functions brokers look at when separating out pricing. If you run a pricing desk and are responding to RFPs—and on the other side of the conversation we just had—and are sitting in a room with no windows, you are probably really wondering why you are not winning any bids right now, when you were three or four months ago. What happens is, to me, one of the ultimate signs, if you are really talking to your customers, and things are starting to shift, is when they start bidding cheaper forward in the current market. Then what happens is if you are bidding and still think you are sitting on top of the mountain and that will continue on forever, you will be losing bids right now.

LM: Why is that the case?

Adamo: The smart, sophisticated, and savvy brokers are starting to bid lower forward than the prices are currently, because they know the market is on the way down, not on an extremist level; they are just bidding in. Markets work by price exploration so they might bid 5% cheaper and the shipper agrees. They might start to get some resistance and they bid 10% cheaper. That is how the market ultimately finds its bottom. That is one function. If you are on the floor and are still paying January rates, your margins are going to get blown out the window, because most of these brokers have adopted a split model, where the person covering the freight is not the person who booked the freight. There is not as much money in the load as there was three months ago. They are being forced down and down. Where they can make up some of that is with the contract shipments that come in that they are able to cover at a much lower price. The simple formula they are looking for is that they are able to get more margin per shipment to equally offset the reduced revenue per shipment they are getting. That is like the magic balance here over the next few months.

Caplice: There is probably a window where that can happen, because shippers will react, I think, a little slower than carriers.

Adamo: Yes, that is why it is short-term margin expansion. It is a fallacy that brokers just pocket all of this margin in perpetuity when rates are down. That is not the case. They will recognize it on the spot market a lot faster but eventually if rates remain depressed, they will re-bid, especially with brokers. There is a lot less to lose to have a broker re-price their contract than kind of a long-term contractual relationship with the carrier.

Caplice: There is another early warning sign, which is the acceptance ratio. Shippers know this when carriers stop calling them to complain about the need to raise rates. That is an early sign. When acceptance ratio rates start creeping from 85 to the high 90s, that is another sign that maybe you can get lower rates. In a mini-bid, your rates can start coming under, which is nice. The new rate differential, which we like to call it, if that starts turning negative, that is another sign. People are saying that they have had their highest acceptance ratios in two years, because it is starting to happen as things are starting to thaw.

LM: How would you assess where things stand in the market and how they may play out in the coming months, based on the past few months, given things like seasonality and rate fluctuation and demand levers?

Caplice: There is not going to be a sudden or dramatic drop for contract rates. We are seeing the spot rates drop, which have a lag effect on contract rates. I think contract rates will drop to some degree, but substantially. They are mellowing out. That is what I think is still happening. I have not seen any signs to the contrary besides some very inflammatory articles from other people.

Adamo: I largely agree with Chris. I mean this is what we thought was going to happen post-fourth of July. I think it is happening a little sooner. I think we will continue to see another few weeks of declining spot rates before seasonality puts a backstop in place. July 4 is the second-biggest seasonal event of the year and is kind of a culminating point. If you look at any year-over-year price graph, you will be able to pick out July 4 and Black Friday on the spot market. I think you will see some seasonal uptick there. To me, the big question is what happens after July 4? The third quarter is going to be a litmus test for what this correction, or down cycle, looks like. Most freight market analysts, whether it is Wall Street or us in industry, are looking at where does this correction bottom out at? I think it is very unreasonable to expect that it bottoms out at 2019 levels. That would be catastrophic for the industry, given what has happened to costs since then. Where this bottoms out is going to be a very important thing to keep an eye on. There is this very false thought that the floor for prices is operating costs, and that may be true and probably is true over a long arc of time. I have never seen that pressure provide that adequate backstop to how low rates can go. If that were true, no carrier would ever go bankrupt.

LM: How do you view the impact of things like inflation on market conditions?

Caplice: Inflation is dampening demand so we are seeing supply get [affected] a little bit by higher fuel prices. And, anecdotally, shippers are being much more efficient on what they can do for utilization. If they are shipping a truck 75% full, they may wait a little longer and, have it filled if the OTIF (on-time in full) ratios change. Shifting to intermodal, I have not seen that. Usually, fuel goes up and shippers go to intermodal but intermodal has been a mess.

Adamo: That intermodal volume will get repatriated in the order that you would traditionally expect, where the big LTL and truckload carriers and big shippers that go direct are going to get that room before your average small shipper or broker. Right now, they are still catching up.

LM: With signs of consumers spending less on goods and more on services, what does that mean from a rates and volume perspective?

Caplice: We are going to see lower shipping volume. That should naturally follow, but I don’t know what the lag will be for that. I also think we will see more bidding going on.

Adamo: The 30-year mortgage rate just topped 5% and is almost certainly heading to 6% by July 4. That is going to slow down an entire sector that has just been whipping this market into a frenzy for the last two years. It has not just been flatbeds delivering lumber, doors, and windows. The home improvement stores have been driving massive amounts of volume, and that is going to slow down remodeling projects. Lumber prices are still relatively high while not at historic highs. Inflation is very real, and it slows economic activity. It remains to be seen how this Administration and Fed board handle inflation like we have not seen since the 1980s. Studying markets in a condition that essentially has not been present for the entire life of deregulation is a bit of a greenfield, if you will.