Analysts: Freight recession about 40% complete

Industry leaders had expected an economic recession in the first half of this year, but they got a freight recession instead. Freight demand remains soft, and capacity is loose. According to analysts, the weak market might be here to stay for the rest of the year.

During a recent Bank of America conference, Lowell-based carrier J.B. Hunt Transport Services Inc. “highlighted the ongoing freight recession as it warned there are no green shoots in demand nor changes in its record low bid compliance levels,” according to Seeking Alpha. In J.B. Hunt’s first-quarter earnings call in April, President Shelley Simpson said the market was in a recession and was cautious about the outlook for 2023.

According to Business Insider, a freight recession means fewer trucks are delivering goods across the United States. An abundance of retail inventory contributed to the freight recession. The slump has resulted in lower diesel prices.

As of May 29, the U.S. average for diesel has fallen $1.68 to $3.85 a gallon from $5.53 per gallon on May 30, 2022, according to the U.S. Energy Information Administration. The average price was largely over $5 per gallon between March and November 2022. The price fell below $4 per gallon in early May.

In a recent industry report, senior research analyst Garrett Holland and research analyst Joseph Higgins, both of Baird, said, “the next few quarters are likely to reflect an extended bottoming process as we grind through the trough of the cycle.” They added that the second quarter looks “much like the difficult Q1.” Still, “investors should not lose focus on an early-cycle inflection into 2024.”

The analysts noted demand remained soft in May, with double-digit declines in intermodal volumes dragging down overall rail volumes and load-to-truck ratios also down by double digits. Spot rates continued to fall.

According to DAT Freight & Analytics, dry van spot rates declined by 0.6% in May from April. The May rates are down 23.9% from the same month in 2022.

“The pace of capacity exiting the market is accelerating with small carrier profitability under growing pressure,” the Baird analysts said. “Given the historically wide spread between spot and contract rates, contract pricing has continued to deteriorate through the end of the bid season. Implementation of the latest bids represents a clear headwind in both Q2 and Q3.”

In a separate report on freight recessions, Holland and Higgins said the freight recession is about 40% completed, and the odds for an economic recession are about 70% over the next 12 months.

“Freight recessions that coincide with broader U.S. downturns are notably worse with respect to degree/duration and implies we are likely less than halfway through this freight cycle contraction,” said the analysts, identifying a freight recession as a “significant decline in activity” or “successive quarters of contracting freight volume.”

According to American Trucking Associations, the For-Hire Truck Tonnage Index fell by 1.7% in April from March. The April index declined by 3.4% from the same month in 2022. It was the largest year-over-year decline since February 2021.

“While the broader economy continues to surprise and thus far stave off an expected recession, the freight economy is starkly different,” said ATA Chief Economist Bob Costello. “The goods portion of the economy is soft, and as a result, even contract truck freight is now falling, albeit not nearly as much as the spot market. The tonnage index hit the lowest level since September 2021 in April and has now fallen on a year-over-year basis for two straight months.”

The index fell by 2.4% in March from the same month in 2022. Also in March, the index declined by 2.8% from February.