From Surges to Slowdowns: Analyzing Freight Industry Shifts and Future Prospects

Where we are today and what lies ahead in the world of logistics??

The Supply Chain Logistics team at PwC closely monitors US logistics market conditions to assist stakeholders in responding to evolving trends and planning for contingencies. This analysis reveals a dynamic landscape characterized by fuel surcharge pressures, strong air cargo demand, an ongoing freight recession and the growth in logistics job market.?

Adapting to industry shifts: an ongoing freight recession, fuel surcharge pressures and growth in logistics job market?

LMI outlook: In April 2024, the Logistics Managers' Index (LMI) dropped to 52.9, a (-5.4)-point decrease from 58.3 the previous month, highlighting a deceleration in growth driven by a sharp 12.8-point fall in inventory expansion to a marginal 51.0 [3]. This inventory contraction has increased warehousing and transportation capacity, led to a slower rise in warehousing utilization, and notably, reduced transportation prices to 44.1 [3]. With the transportation capacity index now at 61.4, exceeding transportation prices by 17.3 points, the data indicates a deepening freight recession [3]. For shippers, this situation presents both challenges and opportunities. Reduced transportation costs and increased capacity create a buyer's market, offering more favorable shipping rates and options; however, given the market's volatility, particularly the contraction in rates, shippers need to adopt a proactive strategy by locking in favorable contract rates and preparing for possible service disruptions. The overall reduction in inventory levels also calls for a strategic reassessment of inventory management and distribution practices to provide for higher efficiency and seamless demand fulfillment.??

Strong and steady air cargo demand: Over the last month, the United States saw a steady increase in air cargo volume, indicating consistent growth in inbound air shipments in the US. In March 2024, there was a spike in inbound air cargo ton (IACT) – approximately 329,000 cargo ton-kilometers (CTKs) (a roughly 23% increase from February 2024) [3]. May is following suit, coming in at approximately 336,000 CTKs (+25% from February) [3]. The sharp increase in available tonnage capacity and continuation of these high levels suggests there is greater tonnage potential, and the demand for more cargo ground holding services will increase. The consistent increase and forecasted growth in air cargo volumes can impact logistics planning, necessitating adjustments in capacity and supply chain strategies to accommodate the growing cargo volumes. The growth in air cargo volumes might also reflect broader economic trends, such as increased trade activity or economic recovery, signaling a possibly strengthening economic environment in the US.?

Fuel surcharges ahead: Major parcel companies have recently implemented significant increases in domestic fuel surcharges, resulting in higher shipping costs for businesses. For instance, a $50 ground shipment with diesel at $3.40 per gallon now costs $57.50, reflecting the impact of these surcharge hikes. These changes, coupled with general rate increases and anticipated rises in per-package rates, may pose challenges such as truck shortages and elevated spot rates. Shippers are advised to address these cost increases by renegotiating contracts, exploring alternative options, or considering passing on some of the additional expenses to customers.?

Other developments in April?

Job market slows, but not for logistics: Within the transportation and warehousing sector, 22,000 jobs were added last month, indicating moderate growth in the logistics industry [4]. Seasonally adjusted, employment in the transportation and warehousing sector rose to 6,575,800 in April 2024 — up 0.3% from the previous month but down 0.1% from April 2023. Employment in transportation and warehousing grew 17.1% in April 2024 from the pre-pandemic April 2019 level of 5,617,200 [4]. One contributing factor to this slowdown is the high employment participation rate. Additionally, employers reported 8.5 million unfilled job openings at the end of March, which is the lowest number since early 2021 [4]. Despite the slight dip in job growth, the logistics industry continues to show signs of steady expansion, which bodes well for shippers and companies relying on efficient transportation and warehousing services to meet their supply chain needs.??

Pushing towards freight decarbonization: The US government announced a zero-emissions freight sector goal that includes adopting zero-emissions vehicles and allocating nearly $1.5 billion for vehicle replacements and charging infrastructure [5]. The largest piece of the plan comes from the Environmental Protection Agency (EPA), which will provide nearly $1 billion to replace Class 6 and Class 7 heavy-duty vehicles and develop infrastructure [5]. Trucking companies may need to adapt their operations and invest in new equipment to comply with these emission reduction efforts. While this transition may bring challenges, it also presents opportunities for companies to demonstrate their commitment to sustainability and participate in the growing market for zero-emissions transportation.??

What does the future look like??

The truckload market is witnessing a significant disparity between contract and spot rates, which could leave shippers without available trucks when the market shifts. Spot rates are already trending higher as capacity decreases, indicating that the spot market is the floor for pricing [6]. Shippers with rates based on the spot market are at risk for service failures as the market tightens. The recent International Roadcheck event that occurred May 14-16 caused a temporary reduction in capacity and an increase in spot rates (+7% over the week from 1.58 on May 9 to 1.69 on May 16) and tender rejection rates (3.1% to 4.1%) [3]. Looking ahead, the fourth quarter is expected to be a tighter environment, and companies that chased the lowest rates or relied on spot market prices may face significant challenges.??

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Sources:??

1. FreightWaves SONAR Platform (May 15, 2024) https://sonar.freightwaves.com/?

2. BLS (May 17,2024) https://www.bts.gov/newsroom/april-2024-us-transportation-sector-unemployment-47-rises-above-april-2023-level-38-and#:~:text=Seasonally%20adjusted%2C%20employment%20in%20the,April%202019%20level%20of%205%2C617%2C200.?

3. White House.Gov (April 24, 2024) https://www.whitehouse.gov/briefing-room/statements-releases/2024/04/24/fact-sheet-biden-harris-administration-sets-first-ever-national-goal-of-zero-emissions-freight-sector-announces-nearly-1-5-billion-to-support-transition-to-zero-emission-heavy-duty-vehicles/?

4. FreightWaves (May 18, 2024) https://www.freightwaves.com/news/historic-trucking-rate-disparity-could-cripple-service-in-late-24?

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Contacts:??

Bryan Gross, Principal?

+1 612-979-3902?

Minneapolis, MN?

Brett Cayot, Principal?

+1 312-371-5559?

Denver, CO?

Sean Centilli, Director?

+1 616-890-9475?

Grand Rapids, MI?

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