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This year’s slide back to normal from a record 2021 has been painful for many carriers.
During a recent CCJ webinar sponsored by Bestpass, Jason Miller, associate professor of supply chain management at Michigan State University, and research president and senior analyst Kenny Vieth of ACT discussed market forces, business conditions and supply chain issues that will impact carrier operations in 2023.
While the likelihood of an economic recession in 2023 is high—if not certain—it doesn’t necessarily mean widespread economic ruin is just over the horizon. And while it may be the first economic concern, Miller said that an impending recession is not necessarily inevitable.
“The strongest predictor of a real recession is how the labor market behaves,” Miller said. “Until we start to see signs that job openings are falling sharply, layoffs are falling sharply, and wage growth is stopping, I don’t see us in a recession.”
Consumer spending is still high, Miller said, noting that retailers carried holiday season inventory earlier than normal, which has dampened what is historically a peak season for merchandise.
“One thing we’ve seen,” he said, “is that credit card debt has increased substantially, but it’s not quite where it was in 2019.”
While credit card debt has increased, Miller said there hasn’t been a corresponding increase in delinquencies, adding, “we’re actually still below pre-COVID levels, as hard as that is to believe.”
Vieth was more bearish on the potential for an economic recession, noting that he “believes a recession is coming.” However, echoing many of Miller’s positive indicators, Vieth said it could be “the best recession ever”, adding that a strong US balance sheet creates a mild recession in 2023 with recovery in 2024 and 2025.
Impact on transportation
Real manufacturing output, which makes up about 57% of truckload origination tons, is up 4.6% year over year and is close to its 2018 peak, Miller said. The wholesale, which makes up most of the budget, is growing by 2% year on year and by 10% from 2019.
“Truck demand today is higher than it was in 2018, but that’s only half the picture,” Miller said. “Wages are sustainable. In 2019, we started to see a decline in seasonal employment, and we are not at that point yet.”
Vieth noted that labor is still scarce, and likely needs to see sustained job growth below 200,000 to ease wage inflation. From 2011 to 2019, job growth was about 196,000 per month. Last month it was 261,000, bringing the three-month average to 289,000.
Truck profitability is at near-record levels, but has declined each of the past two quarters. Net income among the largest publicly traded carriers, Vieth said, is expected to grow 15% this year versus last, with the group generating $3.5 billion in cash. Vieth expects that to drop — the biggest annual drop in history, he said — next year to $2.5 billion, a 27% drop.
The ACT Research Driver Availability Index in January moved to 44, a level proportional to November 2018.
“Once you get to that 44, it really suggests that the (trucker) supply/demand balance is really starting to come into its own,” Vieth said, adding that the reading has been around 50 in recent four months, suggesting that “the supply of drivers in terms of the amount of work to be done is in balance”.
That balance could be short-lived as Vieth predicts the workforce approaching retirement will increase in 2025, and the population of early-age drivers will shrink through 2029.
“It will be even more difficult to find pilots as we go into the recovery period (2024 and 2025),” he said. “If there’s a silver lining here it’s that the U.S. economy doesn’t function without trucks.”
Historically, there is a difference of 18 cents per mile between contract rates and spot rates, but Vieth said it went up 66 cents in October. Spot rates have been in free fall since January, and while contract rates are still high, they are starting to follow a similar trend line. Vieth said he expects contract rates to be down about 14% early to mid next year.
Spot rates could recover by the end of 2023, depending on driver availability and the upward trend until 2024.
Miller expressed concern about the start of new housing in 2023, which would have an impact on the volume of transportation, and single-family homes pegged as his biggest concern in 2023. While the government is ready to pour billions of dollars into infrastructure improvements, Miller. he said it would be unlikely to offset any potential losses from housing starts.
“There will probably be a replacement,” he said, “but the nature of these charges will differ dramatically and probably won’t be in the same geographic regions.”
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