In mid-March, many less-than-truckload carriers reported quarter-to-date tonnage and yield results that had volumes down about 6.2%, below expectations.
While the gross of fuel yields are up about 6.2%, roughly in line with our view, we thought it would be helpful to discuss various volume lead indicators for trucking as a whole. Given the uncertainty in the larger economy, what are these numbers telling us?
Volumes were slightly above expectations in January and below expectations in February, which we attribute to better-than-expected winter weather across much of the country in January. Cass shipments declined 3.2% in January from the previous month, but normal December-to-January drops are about 8% — so shipments improved versus normal seasonality.
Meanwhile, spot truck rates were relatively stable, even as winter came back with a fury on the West Coast and the northern states.
Rail volumes have been a tale of two cities, with commodity volumes (excluding coal, grain and intermodal) showing surprising strength (up 2.3% through February). But intermodal volumes were down about 8.2% year-to-date, owing largely to the inventory-reduction efforts going on with retailers. We also have seen weakness in chemical volumes on inventory destocking (although that is improving in recent weeks), lumber (on housing), corrugated boxes (destocking) and coal (warmer winter).
We believe much of what we have seen so far is not the weakening economy, but a meaningful inventory destocking of the large inventory builds a year ago.
So, what should the go-forward view be? Normally, March makes the first quarter. This year, the drop in inbound container shipments (down 25% in February) is likely to leave that push lacking.
Nonetheless, many retailers have been reporting that their inventory adjustments are close to complete, and some of the retail-facing trucking companies we speak with believe more normal seasonality will begin to kick in sometime during the second quarter.
In our view, we haven’t really seen a meaningful slowdown in the economy yet related to the Fed’s interest rate increases. Is that still ahead of us?
The Purchasing Managers’ Index from the Institute of Supply Management, while not a perfect correlation, tends to lead truck tonnage in a fairly accurate direction. We get a similar graph if looking at the leading economic indicator index or the Cass Shipment Index. However, the PMI tends to lead truck tonnage with the greatest predictive value. The continued weakening of this index suggests that we could be in for slower truck tonnage in the quarters ahead.
Meanwhile, although the retail destocking may be nearing an equilibrium, manufacturing inventories overall remain bloated. We are starting to see layoff announcements beginning in industries other than technology.
Lower Demand, Lower Rates
Along with this, we expect to see a further weakening in used-vehicle prices as truck OEMs ramp up new-truck production. ACT Research says used Class 8 vehicle prices could weaken another 40% this year. This means buyers of truck equipment won’t have as much in collateral to trade, in addition to facing rising interest rates.
The point is, despite retail reports that we could be getting closer to the end of the big inventory destocking, these lead indicators for truck volumes continue to predict lower demand. And lower freight rates indicate that demand has not yet recovered.
In our view, growth risk remains to the downside, as the Federal Reserve continues to raise rates to battle inflation and the cost of equipment continues to rise. We expect comparisons to improve from destocking-related weak levels, but perhaps the weaker economy remains ahead of us.
This analysis appears in the April 2023 issue of Heavy Duty Trucking.