September Market Update

Thank you for reading the Produce Logistics Update, a comprehensive high level overview of the macro-economy as it impacts the full truckload freight market, and current produce transportation events and news. This is a monthly publication, be sure to subscribe to receive future monthly editions as they are published!

In October 2023, I had the opportunity to speak with Gad Levanon, Chief Economist of the Burning Glass Institute, on the Meet Me For Coffee podcast. During our conversation, I asked him, "Why are we so hyperfocused on 2% inflation?" His response was insightful: "I think where the FED is coming from is they want to maintain credibility… a lot of what determines inflation is inflation expectations, so to anchor those expectations, the FED has to protect that 2% target."

Looking at how 2024 has unfolded, it seems that protecting credibility and managing expectations has indeed been the priority.

Why do I say this? Economically speaking, we are in nearly the same position now as we were at the end of 2023. If rates weren’t cut then, there doesn’t seem to be a strong reason to cut them now—except for one key factor: public expectations and perceptions are shifting.

Last October, Gad accurately predicted a "no landing" scenario for 2024, with inflation closer to 3% than 2% (worth revisiting that episode, number 24). While inflation has cooled, it remains above the FED's 2% target. However, after maintaining tight monetary policy, we’re starting to see some softening in the labor market (though not significantly), and shifting national expectations seem to be setting the stage for the FED to cut rates on September 18th.

Angelo Kourkafas, one of my favorite writers for Edward Jones said,

Arguably the biggest macroeconomic development in August was the Fed's message at the annual Jackson Hole symposium that "the time has come for policy to adjust." After 16 months of rate increases and 13 months of holding rates in restrictive territory, policymakers are now prepping the ground for the first rate cut of this cycle in a couple of weeks when the Fed meets on September 18

But this graph by Matthew Klein at the Overshoot caught my attention. He says

if inflation is now slow enough to justify policy recalibration, then policy recalibration would also have been justified by the end of last year. And if prices were rising too fast then, they are still rising too fast now. I do not know what would be gained by squeezing the last percentage point or so of inflation out of the economy, especially if that came at the cost of impoverishing consumers and reducing business investment.

He wraps up his criticism of the Fed by saying,

Typically, Fed officials would be comfortable experimenting, potentially lowering rates more than necessary because they knew that they could reverse course quickly if it turned out that they had misjudged the situation. Unfortunately, officials seem to have rejected this approach, instead preferring to wait as long as possible before lowering rates, because they are afraid of appearing to have made a mistake. That needlessly raises the stakes of each meeting—and, ironically, increases the risk of actually making a mistake.

Given that by many metrics we are still in the same position as we were in late 2023, what has happened in 2024? Businesses have continued to make money, the economy has grown, consumers have kept spending, inflation has stayed at 2.6%, and the labor market has even added jobs. Yet, the freight market remains sluggish. Let's unpack that.

Regarding corporate profits in the S&P 500, Edward Jones noted

The upshot is that corporate profits remain on solid ground, providing ongoing support to the bull market despite periodic shifts in investor sentiment.

Recent second-quarter GDP revisions show that the economy has been growing faster than previously anticipated. Last month in the newsletter, I discussed the risk of a potential recession in 2024-2025, as recession concerns resurfaced following the August jobs data. However, just as quickly as the "R-word" reappeared, it seems to have faded again. Now, many economists and investors are placing their bets on the likelihood of a soft landing being achieved within the next 6-12 months. While we extensively discussed the possibility of a soft landing throughout 2023, it seems this outcome may simply be arriving later than most expected, with the current economic stalling lasting longer than anticipated. A soft landing refers to managing inflation without triggering a recession or harming the labor market.

What’s Driving Current Economic Growth?

A key factor supporting economic growth has been strong consumer spending. Real consumer spending is largely in line with expectations—slightly below on services but above expectations on goods. While spending on goods has slowed from pandemic highs, it hasn’t dropped below where it should be in a normalized economy.

In the freight industry, we often interpret volume declines as a sign of economic weakness. In reality, what we are seeing is a return to pre-pandemic norms—something many of us expected. Inflation has also contributed to the volume of goods moved, as the prices of those goods have increased. Additionally, the low personal savings rate suggests Americans are spending a larger share of their income rather than saving it.

Personal Savings and Inflation Impact

Stronger consumer spending, coupled with updated personal income data, has resulted in an unusually low personal savings rate. The portion of personal income not spent has fallen to 2.9%, the lowest level since 2008, aside from June 2022. Consumers appear to be spending more of their income to keep up with inflation, which has increased 2.7% year over year.

All this consumer spending has helped inventories stabilize, and we’re now seeing lean inventory-to-sales ratios. Retail inventories to sales are currently around 1.32, while a typical healthy balance is about 1.5 or just below. Interestingly, global economies that are struggling and not experiencing growth right now tend to have higher personal savings rates. In these countries, saving more and spending less has led to reduced economic stimulation. After the pandemic stimulus, U.S. consumers had over $2 trillion in excess savings, and the personal savings rate has yet to return to pre-pandemic norms.

However, it seems consumers are beginning to feel the strain. Inflation persists, savings rates remain low, and the labor market is cooling just enough to allow for slower economic growth. Looking ahead, we face two potential outcomes:

1. Fed rate cuts begin this month, and if everything goes as planned, we could achieve a soft landing. This will still feel like an economic slowdown—because it is—but it would prevent a recession.
2. Fed rate cuts begin this month, but if consumers react more strongly than expected, we could see inflation rise again. We’re currently sitting around 2.6% inflation, without consistent months of declining inflation to fully justify the September cuts. While everyone is ready for rate cuts, there’s still a chance it could be premature—though one could argue the cuts are overdue, given that this approach could have been tested last year.

Joyce Huang, Senior Client Portfolio Manager at American Century Investments said in their recent investment outlook webinar that

We expect to see a slow down in the US economy, we expect consumer spending to slow, that is going to cause overall US GDP growth to come down, and even if inflation comes down we think that we are starting to see signs of unemployment ticking up, jobs becoming harder to find, less job switching, and real wages are falling, all of this to us are signs that a slow down is the most likely scenario. Recession is one of the outcomes that is included with a slow down, but we assign a pretty small probability to actual recession… the more likely case is that we will get what we call a soft landing… It will feel almost recession like because we are coming off of pretty rapid growth.. So be prepared for that slow down feeling, we do expect inflation to moderate back to 2% but it’s going to be a rocky path, and we would not be surprised if headline inflation does not creep up a little bit over the course of the second half of the year…

So what does this mean for freight? A couple things. One, we have to pay attention to the continued weakness in domestic manufacturing. With ISM's index for new orders in August falling to 44.6, things continue to look bleak for the dry van TL market from a demand standpoint as we head towards Q4 2024.?This is visualized in the below chart by Jason Miller.

Outside of manufacturing, consumer demand is expected to weaken in the coming months as part of the engineered soft landing. The idea is that consumers will spend less, manufacturing will continue to experience weakness, and seasonal imports have already largely arrived, with increased West Coast intermodal volumes handling much of that movement.

But I’m not seeing it. The demand-side stimulus we need to pull the freight market out of its recession within the next six months just isn’t materializing—unless the second scenario occurs, where interest rate cuts have a greater and faster impact than we anticipate.

Rates

Supporting my concerns are the recent dry van and reefer spot and contract rates provided by DAT. The data shows that August brought no new improvements in spot or contract rates for either mode, and the gap between spot and contract rates remains much too wide to be nearing the next market cycle.

Produce Market Update

Weather Conditions ???

Disease pressures are starting to increase in lettuce and leafy greens across the Salinas Valley due to ongoing warm, humid overnight conditions. These conditions are ideal for the growth of mold, mildew, and various soil-borne fungi. While the current disease impact is less severe than last year, it is anticipated that pressures will rise as the warm weather continues.

In southern regions, particularly the desert areas and northern Mexico, extremely hot temperatures and strong winds have reduced green onion supplies, particularly from Mexicali. Recovery is expected to take weeks, impacting the market for the foreseeable future.

Potatoes!??

The Colorado potato harvest is in full swing, with production expected to match last year at about 14.8 hundredweight. Early rain and warm days have contributed to a strong crop outlook, with russets trending larger than usual and a promising yield of both organic and conventional varieties. Harvesting will continue through mid-October, ensuring a steady supply for customers across the U.S., with particular focus on yellow and russet potatoes.

From Tom Karst at The Packer,

New 2023 per capita availability numbers for fresh vegetables show year-over-year growth for cucumbers, romaine lettuce, onions, spinach and sweet corn and tomatoes. USDA numbers noted declines in U.S. per capita availability for artichokes, asparagus, green beans, broccoli, potatoes, celery, garlic, head lettuce, bell peppers, pumpkin, radishes and squash. Per capita availability numbers account for both domestic production and imports and are considered a measure of consumption. For 2023, the USDA reported that 35.2% of the U.S. fresh vegetable supply was provided by imports, down from 35.4% accounted for by imports in 2022 but up from the 32% import share in 2018.

Produce Spotlight: Apples!??

Many of you will flock to your local orchards to hand pick your own apples this fall as a much loved family tradition and outdoor fall activity. But for those of you who also prefer the ease of picking up an apple on a grocery store shelf, here’s the background on your apple origin story

?? Where Apples Are Grown

Did you know that apples are grown in nearly every state in the U.S? However, the top-producing states are Washington, New York, Michigan, Pennsylvania, and California. Washington alone accounts for over 65% of the country’s apple production!

?? Peak Harvest

Apple harvest season typically peaks from late August through October, making this the busiest time of year for apple shipments. With such a short window to move this seasonal favorite, our Pacific Northwest operations kick into high gear!?

?? Moving Millions of Apples

Each year, the U.S. produces around 11 billion pounds of apples. Transporting this enormous harvest is no small feat. Our team contributes to this massive endeavor, and ensures that apples make their journey from orchards to grocery stores and restaurants nationwide.?

Optimal Temperature: Apples should be transported at a consistent temperature of 30-32°F (-1 to 0°C) to maintain freshness. This helps to slow down the ripening process and extend shelf life.

Thank you for reading!

This update is produced by permission and in collaboration with Samantha Jones Consulting LLC, and uses reliable industry data sources. We do our best to advise on the market as we see it, and our hope is that this information can be considered as you formulate your own conclusions and business decisions. A&Z Trucking is proud to assist our clients in better understanding the markets around them, and providing industry leading transportation, warehousing and logistics services to our clients. If you would like to contact us about produce transportation, crossdocking and cold storage solutions, or any other full truckload transportation needs, please reach out to [email protected] with your questions and comments!

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