Lee Klaskow, senior global transportation and logistics analyst at Bloomberg Intelligence, recently provided a comprehensive analysis of these critical questions during a webinar hosted by Tucker Company Worldwide. His insights offer valuable perspective on the current state and future trajectory of the U.S. freight market.
Assessing the Risk of Economic Recession
Klaskow noted that according to Bloomberg's predictive models, there's a 65% probability the U.S. economy will enter a recession in the near future. However, he suggested that even if a recession occurs, it would likely be relatively mild and short-lived. This assessment is based on a comprehensive evaluation of current economic structures and potential recovery drivers.
For the freight market specifically, Klaskow's analysis was more direct: the freight market is already in recession. This conclusion isn't drawn arbitrarily but is supported by observations of multiple key indicators in the current freight market.
Signs of Freight Market Recession
Klaskow identified declining freight volumes, high inventory levels, and challenging year-over-year comparisons as the primary factors driving the freight market recession. He emphasized that current freight volumes aren't objectively "bad" but represent a decline from last year's peak levels. This relative decrease, combined with inventory pressures, has created significant downward pressure on freight rates.
In the trucking sector specifically, spot market rates have fallen approximately 20%.
Potential for Rate Recovery
Despite the significant drop in spot market rates, Klaskow suggested the market may be bottoming out. He predicted that further substantial declines in spot market rates are unlikely. This assessment hinges on the observation that transportation capacity is beginning to decrease.
He referenced data from Derek Leathers, chairman, president and CEO of Werner Enterprises, who noted during the company's first-quarter earnings call that current spot market rates are about 13% to 17% below independent operators' operating costs. Under these conditions, carriers struggle to maintain operations, which will accelerate capacity exiting the market.
This reduction in capacity could help rebalance the market, particularly as seasonal demand increases. With beverage season approaching followed by the holiday shipping season, trucking demand may receive a boost. Even in a mild recession scenario, these seasonal factors could provide some market support.
Klaskow predicted spot market rates might begin rising in the second half of the year. This would be welcome news for large publicly traded carriers, which typically have strong balance sheets and sufficient cash reserves to weather current challenges. Many large carriers have also been diversifying into less volatile markets, such as freight brokerage or, like Knight-Swift, into less-than-truckload (LTL) shipping, which tends to be less cyclical than truckload shipping.
Second Half Market Outlook
Looking ahead to the second half of the year, Klaskow suggested the trucking environment may improve. A more stable spot market would help support contract rates. While contract rates might not increase substantially, they should be sufficient to offset inflationary pressures carriers face in key cost areas like labor, insurance, and maintenance.
Current Market Compared to Historical Trends
Tucker noted that according to Morgan Stanley data, despite pandemic impacts, current market conditions are largely consistent with the industry's 10-year average. Klaskow agreed, pointing out that transportation companies and logistics providers saw peak profitability in 2021 and 2022. However, he cautioned that many companies will need considerable time to return to those profit levels.
"For many operators, that was a once-in-a-lifetime environment," he said. "Spot rates remain above 2019 and 2018 levels, so we're not in terrible shape. The issue is all the additional capacity that entered the market. These operators can't turn a profit, and if you're a trucker, you need to earn money. When you're just covering expenses with cash flow to pay rent or loans, that will push significant capacity out of the market."
2023 Peak Season Outlook
When asked about prospects for the 2023 peak season, Klaskow said he expects this year's peak will be "more normal" than 2022's, though he anticipates demand increasing gradually rather than dramatically. He attributes this primarily to retailers' success in reducing inventory levels, an effort they've been pursuing for about a year. He believes inventory positions have improved, though not yet reached ideal levels.
Timeline for Inventory Normalization
Regarding when inventories might return to more typical levels, Klaskow suggested this could occur in the second half of 2023. He explained that current high inventory levels resulted not from extraordinary consumer spending but from companies and retailers over-purchasing goods amid severe supply chain disruptions.
"They faced stockouts and couldn't get products," he said. "Once goods became available, consumers rushed to buy, then suddenly demand stopped or slowed dramatically. Now businesses are stuck working through that inventory."
Conclusion
Klaskow's analysis paints a nuanced picture of the U.S. freight market. While facing recession risks and freight volume declines, the market shows potential for recovery. Capacity reductions, seasonal demand patterns, and retailers' inventory reduction efforts could all contribute to positive market changes. For freight companies, adapting to market shifts, optimizing operational efficiency, and pursuing business diversification will be key to navigating current economic challenges successfully.