Less-than-truckload carriers should hold off on any rate increases during 2023 because the pronounced weakness in the industrial market, LTL’s core segment, can’t justify it, industry executives said Monday.
Appearing on a panel at the SMC3 annual winter meeting in Atlanta, Todd Polen, vice president of pricing at LTL carrier Old Dominion Freight Line Inc. (NASDAQ: ODFL), said it would not be wise for carriers to impose general rate increases (GRIs) — tariff rates that have tended to stick — because end industrial demand does not support that step. Jason Bergman, chief commercial officer at Yellow Corp. (NASDAQ: YELL), agreed, saying carriers “need to be real careful” with pricing initiatives through the rest of the year.
LTL general rate increases have been commonplace in recent years as carriers exercised price discipline and capitalized on a concentrated market for their services. The top 10-15 carriers control about 70% of LTL freight. Some carriers, in fact, would hike their tariff rates twice in a year, but that was when industrial production was humming. That’s not the case today.
Last month, the Purchasing Managers’ Index (PMI), a broad and influential barometer of goods producing and buying activity, fell to 48.4, the second-lowest monthly reading in nearly seven years. Only numbers posted in April 2020 during the height of the COVID-19 pandemic were lower.
According to the PMI, both new orders and export orders continued to decline in January, while production fell below the neutral line into negative territory. Much of the decline was attributed to a continued shift in buying behavior from goods to services, as well as higher inflation and concerns about a possible recession.
The weakness in 2023 comes after LTL carriers experienced virtually no peak-season uptick last year.
Polen said the “terrible” condition of the industrial market will portend favorably for carriers in the second half of 2023 as buyers burn through their inventory and need to replenish. Bergman said industries like defense and automotive have faced chronic inventory issues due to parts shortages. Once those deficits ease, those companies will massively ramp up orders. In the meantime, a main impediment to new orders activity is many manufacturers still struggle to get raw materials for their products, according to Bergman.
One area of strength is existing residential housing. Older homes that require repair and renovation will support shipping activity. Despite concerns that higher mortgage rates will curtail home buying, the “fundamentals of the housing market are strong,” Bergman said.
Compounding the challenge for LTL carriers is they face rising costs on fuel, insurance, labor, equipment and land, a major obstacle to terminal network expansion. Carriers also continue to confront a tight labor market, with the pace of driver wage increases exceeding the inflation rate in one of the few industries to do so.
Government regulations such as California’s AB5, which may convert many transport contractors into company employees, and the Environmental Protection Agency’s tougher engine emissions standards, which were finalized in December, will further add to carrier costs, panelists said.
Carriers must also cope with the growing work-life demands of an emboldened driver workforce. “Our drivers have one run and they are happy with it,” said Polen. Predictable routes for drivers will be one feature that becomes a permanent part of Old Dominion’s landscape.
“Our increased costs of operating haven’t been reversed,” Bergman said. The one exception is the price of diesel fuel, which has come down from nosebleed levels last summer but still remains historically elevated. Carriers will need to be sensitive to convey to shippers and brokers that fuel surcharges accurately reflect the cost of buying and managing the commodity.
“There is nothing in the LTL market that’s getting cheaper,” Polen said.
Fed’s `measured’ pace
Appearing on the FreightWaves-moderated panel, Bob Costello, chief economist of the American Trucking Associations (ATA), said a recession that virtually everyone believes will happen should be relatively mild and short-lived. The freight economy is in worse shape because demand overshot so strongly in 2021 and parts of ’22. “We are on the flip side of all this,” Costello said.
Brent Hutto, chief relationship officer at truckload-market-focused Truckstop.com, said the current environment reflects a “corrective action” on the part of the market. “We ran up so high the past two years,” Hutto said.
Spot market rates, which soared in 2021 only to collapse in ’22, will hover around the current $2.47-per-mile area, according to data from FreightWaves SONAR, though they might go somewhat higher. There will be no return to the $2.20-per-mile level seen during the pandemic, according to Hutto.
The Federal Reserve, which raised interest rates seven times last year, will adopt a “measured pace” toward future increases, Costello said. The Fed, which conducts its next Federal Open Market Committee (FOMC) rate-setting meeting on Jan. 31 and Feb. 1, is widely expected to raise the federal funds rate by 25 basis points. That would be down from the last increase of 50 bps and still deeper below the repeated 75-bps hikes during 2022.
Blue-collar employment stands at its lowest levels in 50 years, even lower than white-collar employment, Costello said.