Truckload spot rates fall, contract rates to follow suit, report shows

U.S. spot rates are expected to continue to fall in the third quarter amid weakening consumer demand and high inflation, according to a recent report.

The FreightWaves Q3 Shipper Rate Report shows that recent market conditions should lead spot rates to fall in the quarter by low-single-digit percentages. Meanwhile, contract rates are expected to decline as shippers look to negotiate for lower rates.

According to DAT Freight & Analytics, dry van spot rates declined by 4.2% in August, from July. The August rates were down 8.1% from the same month in 2021.

According to the FreightWaves report, freight volumes are expected to remain stable in the third quarter, with the possibility of a slight decline. Multiple headwinds, including a decrease in sentiment among consumers and manufacturers, could contribute to a decline in freight volumes. However, the volumes could rise amid restocking for back-to-school and holiday shopping seasons.

According to the U.S. Bank National Spend Index, freight spending rose in the second quarter largely because of an increase in diesel prices. In the third quarter, the spending is expected to decrease slightly from the previous period. Crude oil prices have decreased from recent highs, and diesel prices are following the decline. The drop in spot rates also is expected to contribute to the third-quarter spending decrease. Still, inflation is expected to keep the spending at higher levels than in the same period in 2021.

The FreightWaves report shows that “inflation has drained the wallets of consumers,” and they are adjusting their budgets for necessities, such as groceries, shelter and gasoline.

“A worrisome trend is taking form wherein the total amount of revolving credit (i.e. credit card debt) outstanding has not only skyrocketed at a blistering rate but has exceeded its pre-pandemic high,” the report shows. “This data implies that consumers are putting more of their day-to-day expenses on credit, diminishing their appetite for retail goods even further.”

In the second quarter, freight capacity loosened amid falling spot rates and rising contract rates, according to the report. At the same time, the tender rejection rate decreased, and shippers were able to move their spot market freight at a lower rate. According to the report, tender rejection rates fell to 9.23% in the second quarter, from 24.65% in the same period in 2021, as freight volumes in the spot market declined and carriers began to comply with contracted freight.

According to a June survey by FreightWaves, shippers are prepared to move up to one-fifth of their freight to the spot market if the rates are 11% to 20% below contract rates for one to three months. The report shows that contract rates were more than 2% higher than spot rates.

Also, the report noted a “flood of drivers” that have entered the industry, and if independent contractors are unable to earn a profit in the existing market, they likely will leave the industry or join a larger carrier. May data from the Federal Motor Carrier Safety Administration shows net revocations of trucking authority reached a record high, signaling that drivers are exiting the market. In California, a law is expected to reclassify independent contractors as full-time employees, entitling them to salaries and benefits. The cost is expected to be passed on to shippers and brokers.

If independent contractors were to exit the market, capacity would tighten, and spot rates would rise, according to the report. But if they were absorbed by larger carriers, this would increase carrier pricing power amid fewer competitors.

Still, the truckload market is cyclical, and independent contractors likely would return to the market if they were to leave. But if they do, shippers will struggle with spot market capacity in the short term.