High fuel and equipment prices, labor concerns, shipping rates, inflation, talks of a recession, and other economic factors have followed trucking into what is a historically quiet season for imports and consumer demand at the start of a new year. Because of these lingering headwinds, for the first quarter, carriers are likely concerned about a decrease in rates due to an oversupply of capacity built up from 2021. But it’s not all bad news for the transportation equipment markets.
“I think this year we will see a lot more normality in the market or a lot more seasonality,” explained Dean Croke, principal analyst at DAT Freight & Analytics. “From the time of the pandemic through the end of [2022], we saw little seasonality in the market. There were hints of seasonality, so you saw a little bit of a bump in rates because of the building season in the spring, but the whole peak season never materialized.
“I think seasonality will emerge this year, but the overarching economic factor right now is higher interest rates and talk of a recession or whether we may already be in one,” Croke added, noting the industry may have already gone through a freight recession of sorts.
Although Croke and the team at DAT forecast that the first quarter of 2023 will be particularly tough for trucking because of waning consumer demand and lower import volumes, the top 50 lanes in DAT’s network are averaging about $2.30 a mile, with most carriers operating above break even.
Currently, costs for a long-haul small-fleet carrier or owner-operator are between $1.70 per mile and $2.05 per mile, depending on the length of time in the industry, equity levels, and insurance costs, according to DAT’s 2023 Freight Focus market update.
Still, the Fed’s campaign to bring inflation under control may be “bearing fruit,” and the need for further interest rate increases may be limited, noted ACT Research in the latest North American Commercial Vehicle OUTLOOK. That, combined with the supply chain challenges that moderated an otherwise hot transportation equipment market through 2022, means fleets will be playing catch-up this year, with replacement purchases to sustain the market above those seasonally soft freight levels.
“The critical factor in forecasting 2023 is identifying the point at which lower freight volumes and rates, coupled with higher borrowing costs compress carrier profits sufficiently to end the cycle. Our current thinking is the negatives begin to weigh on orders as soon as 1H’23, and more meaningfully by 2H’23,” Kenny Vieth, ACT president and senior analyst, said. “However, with healthy backlogs, early 2023 carrier profitability strength, and the potential for a CARB-induced prebuy in California, there is a compelling case to be made for production volumes to be sustained at end-of-2022 levels through all of 2023.”
There are also potential boons to look forward to due to anticipated increases in infrastructure spending this year.
On Jan. 4, the U.S. Department of Transportation’s Federal Highway Administration announced its first round of large bridge project grants from President Biden’s infrastructure law’s bridge investment program.
This program is one piece of the administration’s investment in highway bridges and invests nearly $40 billion over five years to help repair or rebuild 10 of the “most economically significant bridges in the country along with thousands of bridges across the country,” according to the administration.
“When they start building and the ground thaws in the top half of the country, you’ll see a lot more materials move related to infrastructure spending,” Croke said. “That eventually flows over into long-haul trucking and flatbed, but also short-haul trucking for things like aggregate, gravel, steel, concrete, and asphalt, which will require a lot of petroleum products to help build the roads and bridges.”
“If you’re a short-haul, regional carrier, I think it’s going to be a wonderful year, as it is every year because that market doesn’t really change,” Croke added.
But what about those high operating costs?
The newly released Bureau of Labor Statistics 2022 Transportation Statistics Annual Report details trends commercial trucking companies have been experiencing for nearly two years now. In 2021, the costs for rail, truck, and water transportation services reached their all-time high level, suggesting an increase in the costs businesses face for providing these services.
Truck transportation service saw the largest price increase of 12.8% from 2020 to 2021, followed by water (7.5%) and rail (4.9%), the report points out.
Inflation remained persistently high at 8.2% year-over-year in September, dropping slightly in October. In addition, diesel prices dropped in late summer but stayed above $5 per gallon throughout fall. The Fed raised interest rates for the sixth consecutive time in November, marking the fourth time the hike was 0.75%.
“This suggests that there will be a recession of some degree in 2023,” according to DAT’s market update.
After steadily increasing since June 2020 to reach a new high in June 2022, the seasonally adjusted transportation CPI began to decline in June 2022—falling for three consecutive months before increasing slightly in October 2022. That decline brought transportation’s contribution to year-over-year price increases in all goods and services down, reaching its lowest share since February 2021 in September 2022, according to BTS.
In addition, the transportation industry’s contribution reached a high of 58.6% in June 2021 due to high fuel prices and supply chain issues that drove up the cost of used vehicles, which are expected to moderate in 2023.
“For-hire will traditionally pass down those costs where they can, but fixed contracts might present problems in doing that,” noted Brian Holland, CEO of Fleet Advantage. “Typically, a fixed contract will allow for surcharges and fuel, whereas the spot market may not. Because of the softening in demand, some of the smaller fleets focusing on that spot market are getting hurt by that.”
“On the other hand, private fleets generally are absorbing those costs,” Holland added. “That’s challenging for them from a P&L perspective. It’s always a good opportunity to look at fleet practices, to examine the manner in which they are operating, and look for best practices to not only improve their performance but reduce their cost.”
In its report, DAT also pointed out that carriers operating in the spot market have felt “more pain than most.” Further, long-haul carriers wrestled with diesel prices that rose 42% in the first 11 months of 2022, with the national average above $5 per gallon for 33 weeks.
“There should be some relief on the revenue side of the ledger by mid-year, but the focus will be on the expense side of the books in 2023,” DAT’s report advised. “With thinner margins, carriers will need maximum asset utilization. That means reducing empty miles, emphasizing fuel economy, and coordinating with their customers to reduce dwell times as much as possible.”
The good news is that the long-term U.S. Energy Information Administration forecast has diesel prices coming down to about $4.30 a gallon by mid-year, DAT’s Croke said.
“Some experts think there is still room for diesel prices to continue dropping, so I think the general consensus is that diesel prices will continue to come down,” Croke said. “I think the wild card, though, is winter. We’ve had a very mild winter in the Northeast, and it could push up the national average. A colder winter or a cold snap could change that equation.”