Shipper rates to moderate in first quarter, capacity loose

Shippers can expect spot and contract rates to decline in the first quarter as capacity remains easier to find, according to recent research. Still, spot rates are unlikely to decline much further.

FreightWaves’ Q1 Shipper Rate Report shows spot rates are expected to fall by 6% to 8% in the first quarter. However, the rates “are running out of room to fall, as many smaller carriers are operating with razor-thin (if not negative) margins. We also expect to see a significant drop in contract rates during the quarter, given the abundance of pricing power now in the possession of shippers.”

According to DAT Freight & Analytics, van (truckload) spot rates fell by 5.2% in February, from January. The February rates were down by 26.9% from the same month in 2022. The rates for the week ending March 5, were narrowly up from the previous week.

According to the FreightWaves report, freight shipments are expected to decline in the first quarter, which is historically when the volumes are lowest for truckload markets. The first-quarter comparison to the same period in 2022 will be “unfavorable given the breakneck, unseasonal growth witnessed in (the first quarter of 2022).”

Freight spending also is expected to decline in the first quarter. However, the first-quarter comparison to the same period in 2022 will likely remain positive until the second quarter of 2023. In the second quarter of 2022, “the economy reached an inflection point triggered by Russia’s invasion of Ukraine,” according to the report. “Contract rates are expected to suffer further decline in the first quarter, as the majority of shippers’ bid cycles align with one another.”

FreightWaves projected contract rates to fall by 7% to 9% in the first quarter. The decline would affect large carriers’ earnings “and solidify agreement that the truckload industry is in a recession,” according to the report. “While shippers might choose to prioritize service and reward carriers with higher-paying contracts than could be offered, we believe shippers will instead attempt to minimize their transportation spend in order to counterbalance losses from broader economic pressures.”

According to the report, retail spending is expected to be impacted by “the depressive macroeconomic environment, which should be rocked further when the full effects of the Federal Reserve’s interest-rate hikes are seen in the next two quarters. While the housing market began to suffer from these rate increases in early 2022, manufacturing output just started to see a decline midway through (the fourth quarter).”

The report also highlighted the challenges trucking companies have faced in sourcing new trucks, leading to a rise in used truck prices. The prices have since fallen as have spot rates that attracted new entrants to the market. And, the entrants who purchased used trucks at the elevated prices “are desperate to tread water and remain solvent for as long as possible, as they are thus willing to move freight with thinner margins,” the report shows. “In the longer term, the inevitable swell of bankruptcies will eventually bring about another capacity crunch. That crunch could be worse than those of previous cycles, given that vehicle manufacturers are unlikely to remedy their chip shortages before a new wave of carriers decide to enter (or reenter) the market.”

Though owner-operators are expected to return to the truckload market if they exit it in the downturn, shippers should find that capacity is easy to secure in the coming quarters.

According to Coyote Logistics’ first-quarter Truckload Market Forecast, market conditions, including a soft spot market and loose capacity, are expected to remain in place over the period as the market might have reached a deflationary inflection point in the fourth quarter of 2022.

“Continued strength in class 8 truckload orders, dropping diesel prices and still-growing trucking employment all point toward a market that may yet be in search of the bottom,” according to Coyote, a UPS company. “As 2023 contract rates start settling in by the end of (the first quarter), this added pressure should be the turn of the tide.

“We think we’ll see real upward movement in (the second quarter) and a (year-over-year) inflationary environment by (the third quarter). In short, we expect 2023 to be a tale of two halves.”