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Uber Freight expects ‘broad-based volume recession’ in 2023

Last week, Uber Freight, the logistics service provider arm of Uber (NYSE: UBER), issued a bearish first-quarter update on global freight markets. Capacity indices exceed demand indices in most modes of transportation, driving downward trends in rates that will get worse for carriers before they get better. 

In U.S. truckload, Uber Freight said that 2022’s “spot market recession” will transition into a “broad-based volume recession” in ’23 as ebbing consumer spending begins to be felt upstream and slows down inventory replenishment and ultimately manufacturing production. Citing FTR data, Uber Freight predicted lower truck utilization for longer, and that more capacity is on its way out of the market.

FreightWaves spoke to Mazen Danaf, senior economist at Uber Freight, about the report.

“If you look at 2022, we saw a recession mostly limited to the spot market,” Danaf said. “More volume was going from spot to contract, but the total size of pie was unchanged. But then the entire pie was getting smaller in the second half of [2022]. Several factors were driving that, starting with the inventory glut. Then in the third quarter, we saw a significant decrease in imports and in Q4 a decrease in manufacturing production and personal consumption. All of that was happening when the market was still really oversupplied.”

By considering Bureau of Labor Statistics (BLS) long-haul trucking employment data (up 9% year over year) alongside new authorities and revocations to capture the owner-operator population, Danaf argues the truckload industry in the United States is still oversupplied with capacity. Much of the newer small carrier capacity that came into the market in 2021 to take advantage of sky-high spot rates did so at the cost of expensive equipment, insurance and fuel — and those carriers are washing out of the market. That process is in full swing, represented by a net revocations number climbing higher and higher.

(Chart: Uber Freight)

Capacity remains loose

FreightWaves SONAR’s Outbound Tender Reject Index (OTRI), which measures the percentage of truckload shipments tendered by shippers and rejected by carriers, stands at a national average of 3.4%. Truckload carriers are taking almost everything they can get. A year ago, OTRI was at 18.9%. Now, to add to the downward pressure on rates, shippers are moving less volume, according to Danaf, although it varies by industry vertical.

“What we saw in the past year was that inventories across the board were up 10%-30% depending on the sector you’re looking at,” Danaf said. “The Census Bureau publishes different verticals, but one of the highest increases was motor vehicles and parts because of pent-up demand. There was a huge shortage of cars because of semiconductor shortages and other shortages, which bled into Class 8 trucks as well. In the past three to four months, retailers have been depleting their inventories and levels have decreased for two to three months from their record high across several sectors — general merchandise, department stores, furniture. But that didn’t happen in motor vehicles and parts because of this pent-up demand.”

That’s why shippers in many sectors are approaching inventory replenishment cautiously, keeping an eye on stretched consumer wallets.

“Demand volatility depends on the kind of shipper — there’s a huge variation,” Danaf said. “In consumer goods, especially in nondurable goods for everyday consumption like food and drinks, they’re barely seeing demand change and not seeing any recession in terms of volumes. But shippers exposed to the housing sector might see volume drop significantly. The whole housing sector has collapsed over the last few months. Many shippers have come to the conclusion that it’s hard to predict the future, and volatility might be here to stay.”

Danaf pointed out that shippers resigned to persistent volatility have increasingly adopted index-linked rates, or long-term rates that float according to an agreed-upon index, reducing service risk for shippers and volume risk for carriers.

Uber Freight’s market update called for a “strong period of normalization” on the ocean, predicting structural overcapacity issues, exacerbated by a large outstanding vessel orderbook, will keep rates low in 2023.

“Demand is falling for several reasons, including a global shift back to services and, for the U.S. specifically, nearshoring and reshoring trends that may diversify freight flows away from trans-Pacific and trans-Atlantic trade lanes,” Danaf said.

But this downturn won’t last forever, of course, and Uber Freight thinks that rock-bottom rates and a harsh business environment for small carriers could push enough capacity out of the industry to set it up for another tightening cycle in the second half of the year. There are multiple seasonal inflections that will have to play out favorably between now and then — produce harvests in the spring and summer holiday consumption — that make the fourth quarter difficult to see from here.

But Danaf believes that while relief isn’t likely to come from the demand side because there are so few positive trends, it’s  possible shippers will find themselves undersupplied before the year ends.

“It’s unlikely that potential tightness in 2H will be driven by demand,” he said. “Seasonally, in the second half of the year, we start seeing rates go up after June. The second factor could be a supply-driven tightening, especially when carriers realize they have overhired. They might reduce their capacity. Truckload employment in long distance is 9% above last year, according to BLS — that’s a huge increase. So this tightness might come from a supply reduction.

“We don’t just look at employment. We look at owner-operators. We look at new authorities and revocations and how many carriers leave because of insurance, low spot rates, high diesel costs. Every month there’s a new record high of revocations, and the net authorities — that net number of carrier population — is starting to decrease.”