October’s rate per mile rose to it’s highest level since June, coming in at $2.14 per mile. The question on everyone’s mind is, “Are we seeing the bottom on truckload rates?” Let’s see if we can make any sense out of the market with a breakdown on some of the other market indicators.
A recent headline from Transport Topics on class 8 truck sales shows a great deal of strength from asset carriers with September sales setting an all time high, and October reporting sales at 23,000 trucks. According to Don Acke, Vice President of Commercial Sales at FTR, a fleet transportation analysis firm, the replenishment rate for fleets today is 16,000 new trucks per month. The buying binge that began in late 2017 is still visible. The question is, “Are we at the end?”
The answer to that question is yes. As we back up into the order cycle to the production stage, ACT’s research illustrates Class 8 orders accelerating pull back in build rates through 2020. Aligning with ACT’s research, Navistar and Freightliner have announced Class 8 production cuts this fall. Order data is illustrating Class 8 orders in the 11,000 to 13,000 per month moving into 2020. Comparing monthly orders today to 2018 when orders surged to 42,000 in October of 2018, we can see that the Class 8 sales surge is winding down. Bottom line: Fleet investment in new equipment will be used for truck replacement rather than fleet growth which shows less trucks added to capacity.
ACT Research is reporting the 2020 gross domestic product growth in the U.S, Canada, and Mexico will fall below 2%. Overlaying U.S. factory orders can be tricky with the various industry sectors illustrating weakness and strength on a month by month basis. Especially considering that order indicators use the previous month, or the prior year, as its comparison to illustrate if orders are up or down. As the chart below indicates on a 5 year timeline, 2019 shows a great deal of strength. However, when viewed on a yearly basis, factory orders are down from 514.54B in September of 2018 to 499.76B in August 2019, a 2.9% decrease in orders. The one certainty we have, is that we are on a downward trend from 2018. The remaining question is, “Will we see the bottom in 2020?” Looming over the economy is trade. Unlike the progress made on the USMCA trade deal between the U.S., Canada and Mexico, the trade negotiations with China are still trying to get a phase 1 negotiated. The urgency for both countries is the December 15th tariffs that impact consumer goods.
Today, we have a multitude of data points to identify trends in capacity, and can convert those trends to formulations to forecast today’s, tomorrow’s and next month’s rate cost. Using these trends also creates pricing forecasts that we can then apply to our freight budgets for next year, and assist us with strategy development. Illustrated below is a snapshot of a key capacity indicator, tender rejects on contracted loads. This snapshot, courtesy of Rockfarm’s Supply Chain Glass, illustrates the number of tender rejects or tender expirations on contracted lanes. The trend in tender rejects historically aligned with the reality on the ground as we went through the first part of 2018, after ELD implementation, and as we went into summer this year.
We can clearly see tender reject percentage increasing as the holiday volume picks up. In conjunction with measurements of fleet count, spot market indexes, and other capacity data points, we can begin to forecast available capacity into 2020. Coupled with the economic measurements, we can predict capacity challenges will remain centered around seasonal volume versus economic growth.
One item that has been absent from any localized discussion on freight rates has been the ELD (Electronic Log Device) mandate that went into effect
in December of 2017. The ELD Mandate certainly had a big impact on rate increases in early 2018. The uncertainty of midsize and smaller fleets adapting their business to the Mandate coincided with winter weather and a surge in economic growth. In essence, we brewed up a perfect storm for higher freight rates. At this time we can surmise that fleets that were not in compliance prior to the effective date of the Mandate, have now conformed their business and rates to remain in compliance. Essentially, fleets are now operating profitably, and have removed the pricing hedge that was found in the market in early 2018.