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By Dean Croke, Principal Analyst,
DAT Freight & Analytics
It’s a standard road trip refrain and one of the most frequent questions I get at DAT Freight & Analytics: Are we there yet?
Of course, these days, no one is talking about the next rest stop. Everyone wants to know when the freight market will turn.
If you’re a freight broker or truckload carrier, low rates have been dragging on far too long. On the other hand, shippers are on a roll. They’ve enjoyed pricing power over their transportation providers for 18 months and counting and continue to benefit from lower contract rates based on recent RFPs (requests for proposals).
How did we get here?
Freight rates are a product of supply and demand, and the wave of truckload capacity that entered the high-rate environment of 2021 and 2022 is dissipating fast. Most of these carriers are small fleets and single-truck owner-operators who start out hauling loads on the spot market. They use load boards to look for freight posted by brokers, and the rates they negotiate are “all-in,” meaning they don’t include a separate fuel surcharge.
The monthly average diesel price has been above $4 a gallon for all but three months since February 2022, when Russia invaded Ukraine.
Carriers respond to high fuel costs by operating more efficiently. They get selective about the loads they accept, especially if they involve facilities that are out of the way or notorious for delays at gates or docks. They avoid lanes into markets where freight is scarce.
However, it’s hard for a long-haul trucker to be selective when rates are this low for this long.
The monthly average spot van rate is down from $3.09 to $2.09 a mile since February 2022. That’s a steep cut precisely when your No. 1 operating cost is at historic levels.
Contract rates are weaker as well. DAT monitors contract replacement rates—the difference in the rate when one contract ends and another begins. The latest data shows contract replacement rates down an average of 4% for van freight and 1% for refrigerated freight. Shippers are exerting themselves more effectively as they negotiate new contracts.
Fewer truckers
This extended slow market has been grinding away at the trucker population. The long-haul truckload sector has been losing around 10,000 carriers every month since July as truckers escape from 2019-level spot rates (2019 was a lousy year for carriers) and soft demand for their services.
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This exodus could accelerate, judging by the number of trucks sold at auction. According to J.D. Power, sales of sleeper-equipped Class-8 tractors (three to seven years old) at the country’s two largest non-reserve auctions almost doubled in September from the month before.
Since February 2022, when spot rates began to decline and fuel prices started to spike, the volume of trucks sold at auction each month has almost quadrupled. For context, auction sales in September were around 12% higher than the worst month in 2019, a year that saw a record number of motor carrier bankruptcies amidst an over-supplied and soft freight market.
Demand remains sluggish
A factory ramping up, a bumper crop, a bad storm—any of these things can generate “exception” freight that a shipper will give to a broker to post on the spot market. Shippers will undoubtedly need more van and refrigerated truckload capacity to move retail goods and groceries ahead of the holidays.
However, freight volumes almost always drop off in Q1, and spot rates decline unless a widespread event like a winter storm disrupts supply chains. Of course, a “disruption” doesn’t bring sustained increases in freight volume, truck demand, and rates.
A slow recovery
Jason Miller, supply chain professor at Michigan State University, summed up the truckload outlook best when he said a change in the freight cycle is barely a blip on the horizon.
“I believe we will exit this freight recession in a much slower, more progressive manner than the past two cycles (which saw the balance of supply and demand turn in just a few months),” he said. “Assuming the Federal Reserve’s Open Market Committee keeps interest rates elevated longer, we may look at a soft demand environment for at least nine more months.”
No, we’re not there yet.
Dean Croke is the principal analyst for DAT iQ, the freight data and analytics operation at DAT. He brings 35 years of experience in data science, supply chain management, logistics, risk management, and human performance.
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