Dry van truckload pricing shows no signs of significant improvement

Almost 6 months ago I wrote about how various indicators suggested the dry van truckload (TL) market was poised for a weak market during the start of 2024. Unfortunately for dry van TL carriers, that prediction has come to pass as evidenced by weak earnings of large public dry van TL carriers in Q1 2024.

I wanted to provide an update looking at the second half of 2024. With substantial economic uncertainty based on the upcoming presidential election, I will not make predictions for 2025. Unfortunately, for dry van TL carriers, various data does not point to a demonstrable improvement in market conditions over the coming months, especially as it pertains to the pricing environment. This forecast is based on four reasons:

Reason 1: Dry van truckload market conditions continue to remain weak

Focusing on dry van truckload spot rates, which are a powerful predictor of subsequent changes in dry van contract prices that govern what shippers pay for most dry van TL movements, the market remains weak. Focusing on data from DAT Freight & Analytics  updated as of the last week of May, dry van TL spot rates including fuel were $2.02 per mile, which is down $0.04 per mile year-over-year. As shown in the first figure, dry van TL spot rates have been effectively flat for a year; they increased in January 2024 due to the polar vortex but subsequently fell to a nadir in April 2024. 

 

Dry van TL spot rates by themselves are meaningful, but stronger insight can be derived by comparing these data to broker buy contract rates. The difference between DAT’s broker buy contract prices and dry van TL spot prices (including fuel for both) divided by the average of the two series results in a metric I call the dry van spot market cycle indicator (DVSMCI). As shown in the second figure, when DVSMCI moves below 10%, we tend to see a bull market from a pricing standpoint. In contrast, when it is above 15%, we tend to be in a bear market (with both dry van TL and broker buy contract prices either declining or stagnant). May 2024’s reading of 19% remains solidly in bear market territory. Referring to the first figure, we can see that each time the DVSMCI has entered a bull market (i.e., < 10%), it has been driven by an upward increase in dry van TL spot prices. Thus, history suggests we are unlikely to enter a bull market from a pricing standpoint unless we see a sharp increase in dry van TL spot rates.

Reason 2: Demand for for-hire truck transportation remains muted

My preferred approach for measuring demand for truck transportation is the for-hire trucking ton-mile index (TTMI), produced by Yem Bolumole (University of Tennessee Knoxville) and I. This index captures implied ton-miles of trucking demand based on output from the 41 freight-generating industries (mining/quarrying, manufacturing, wholesaling, retailing, and warehousing) as captured by the Census Bureau and Bureau of Transportation Statistics. The seasonally adjusted version of that index, which peaked in March 2022, has fallen 5% from this peak to the current trough in January 2024. The most recent reading from March 2024 continues to show muted freight demand on a seasonally adjusted basis.

Reason 3: Few demand catalysts are likely to materialize in the second half of 2024 

Some key sectors of the economy that generate demand for freight from domestic manufacturing plants and wholesalers (selling both domestic and imported goods) are (i) existing single-family home sales; (ii) investment in residential structures (explained shortly); and (iii) drilling of oil and gas wells. Regarding the former two sectors, the hesitancy of the Federal Open Market Committee (FOMC) to lower interest rates is likely to serve as a headwind on activity for the remainder of 2024. As an example, existing single-family home sales are hovering around 4.2 million units on a seasonally adjusted annual basis. This is down substantially from the 5.4 million observed from 2016 –2019 and the ~6.1 million observed from the 2nd half of 2020 through Q1 2022. Another measure of inflation-adjusted investment in residential structures that includes home improvements, construction of new single-family houses, and construction of multifamily structures like apartments and condominiums, while recovering from early 2023 lows, remains around early 2019 levels and down 16% from the Q1 2021 peak. Given the FOMC is unlikely to cut interest rates meaningfully in 2024, it is unlikely we will see substantial increases in existing single-family home sales or investment in residential structures.

Turning to hydraulic fracking, data from the Federal Reserve Board shows weak activity in this sector, which is likely to continue given West Texas Intermediary crude oil prices have been hovering between $75 and $90 a barrel for an extended period. This contrasts sharply with what was observed in 2017-2018 where fracking activity increased 65% over this period. Weak fracking activity suggests weaker demand for machinery, which is currently being observed in the form of declining domestic machinery manufacturing output and rising inventories to sales ratios for machinery wholesalers.   

Two other key freight generating sectors for manufacturing that continue to perform poorly are food manufacturing (which accounts for ~15% of for-hire trucking demand as measured on a ton-mile basis) and nonmetallic mineral product manufacturing (e.g., bricks, concrete blocks, etc.) (which accounts for ~5% of for-hire trucking demand as measured on a ton-mile basis). Seasonally adjusted domestic food production fell roughly 2% since the second quarter of 2023 and has yet to recover, which is unusual for a sector that has historically shown a steady increase in production. Seasonally adjusted output from nonmetallic mineral product plants, after rising sharply in 2021 and 2022 has fallen steadily since early 2023 and is now flat with 2019 levels. Reduced output in these sectors will create more headwinds for freight volumes.   

 

 

Reason 4: Excess capacity remains and isn’t exiting rapidly

The best measure for up-to-date trucking capacity across the entire industry is payroll data from the Bureau of Labor Statistics for all individuals employed in truck transportation (NAICS 484). On a seasonally adjusted basis, payrolls have declined just 2% as of April 2024 relative to the peak in July 2022. This contrasts with a 15% decline observed between the January 2007 peak and March 2010. Moreover, since the failure of Yellow Corp (which caused the steep drop between July and August 2023), seasonally adjusted payrolls have increased. I believe two key factors are at work explaining why capacity has not exited more rapidly. First, data from the Service Annual Survey indicates that the incredibly strong freight rate environment in 2021 and the first half of 2022 allowed truck firms to accrue excess profits (i.e., profits above and beyond normal operating conditions) for those two years that were as large as all profits earned in 2018 (the previously most profitable year for trucking in the last decade). These excess profits allowed many carriers to pay down debts and accumulate savings that have allowed them to remain viable as going concerns as demand fell through 2023 along with freight rates. Second, the increased secular penetration of freight brokerages has allowed small, young trucking firms (which are very vulnerable to exiting the market) to find enough freight to stay in business. Previously, the fact small carriers were so reliant on a small number of core ‘anchor’ shippers made them more vulnerable to changes in the fortunes of their key shippers.

 

What to expect in the second half of 2024 from a freight rate standpoint

From a freight rate standpoint, the primary service producer price index for the general freight trucking, long-distance, truckload (NAICS 484121) sector—the government’s industry code that most closely corresponds to dry van TL operations—has been flat since June 2023 (it was down 4.4% year-over-year for the most recent reading from April 2024). Given the dynamics described earlier, unless there is a surge in diesel prices (which are included in the producer price index), I expect the PPI to remain relatively flat through 2024, with a standard seasonal increase in the 4th quarter during the holiday season. Consequently, while I expect that dry van TL freight rates have found a bottom, I’m not encouraged about their prospects for the rest of this year.

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About the author:

Jason Miller is the interim chairperson and Eli Broad Professor of Supply Chain Management in the Department of Supply Chain Management of the Eli Broad College of Business at Michigan State University.

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