Why are Freight Rates Remaining Elevated Despite Sluggish Demand?
RedStone Resource
March 16, 2023
Inside This Edition
Producer Price Indexes for Transportation Modes Mixed
The truckload producer price index came in down 3.3% month-over-month (M/M) and was down 2.1% year-over-year (Y/Y). One of the stories that continues to be a factor within the PPI series is that the current index is still 33.9% higher than it was prior to the pandemic.
Cass Freight Data Shows Deceleration in February
Cass Information Systems data through February showed some of the sluggish volumes that the rest of the market is experiencing. Both the shipments and expenditures indexes were down 0.3% and 3.9% respectively month-over-month between January and February. Against February of 2022, shipments were down 0.3% and expenditures were down 9.7%.
Why are Freight Rates Remaining Elevated Despite Sluggish Demand?
One of the reasons for this is a sticky employment cost index (sticky in the sense that it is inflationary pressure that tends to ‘stick’ around) which remains at historic highs. It was still inflating at a rate of 4.7% in Q4 year-over-year at the end of 2022 and grew at a 5.4% annualized rate for all of 2022.
ECONOMIC BRIEFING
Baltic Dry Index Continues to Rebound; Signal that a Change is Occurring?
Similar to a recent post, the Baltic Dry Index (BDI) continues to build momentum going into Q2. The BDI measures the cost of moving raw materials and some food products in the world’s busiest maritime trade lanes. Typically, when the BDI is moving, global supply chain activity is 4-6 weeks behind it.
The latest data through March 4th showed that the index had touched 1,465 points, up 193.4% in the past thirty days off a low of 529 points hit in February. The index is still well off its peak hit in 2021 and is still 40.1% lower vs. March of 2022.
Several significant producer nations are beginning to build inventories of raw materials and manufacturing reports showed some improvements in output activity last month, a sign that the global industrial production complex is starting to ramp up for the second half of the year. This could be overly optimistic, but one way to read this data is to say that “someone, somewhere, is building raw material inventory for something”.
Producer Price Indexes for Transportation Modes Mixed
The Federal Reserve publishes monthly surveys of users and producers of certain products and services in a Producer Price Index (PPI). This set of indexes provides a good street level view of pricing activity across the country at a macro level. The latest indexes for LTL, TL, and freight rail showed some mixed results. The latest results are for surveys conducted through January.
The truckload producer price index came in down 3.3% month-over-month (M/M) and was down 2.1% year-over-year (Y/Y). One of the stories that continues to be a factor within the PPI series is that the current index is still 33.9% higher than it was prior to the pandemic.
Less-than-truckload (LTL) rates according to the PPI were 2.1% higher M/M and were 7% higher Y/Y. Much like the TL index, prices were still 23% higher than pre-pandemic levels.
Lastly, freight rail PPI readings were 0.6% higher M/M and were 8.0% higher Y/Y. Again, the PPI for freight rail was 16.8% higher verses pre-pandemic levels.
TRANSPORTATION BRIEFING
Cass Freight Data Shows Deceleration in February
Cass Information Systems data through February showed some of the sluggish volumes that the rest of the market is experiencing. Both the shipments and expenditures indexes were down 0.3% and 3.9% respectively month-over-month between January and February. Against February of 2022, shipments were down 0.3% and expenditures were down 9.7%.
Taking it all into perspective, the more important measure could be the two-year stacked change that Cass publishes. It showed the shipments index rising by 3.3% and expenditures still running 28.4% higher. This is the same phenomenon that is seen across many supply chain indexes at this time, that recent trends show deceleration in supply chain activity but relative to pre-pandemic levels, conditions remain much higher. This suggests that the “normalizing process” is still underway as the supply chain adjusts to higher inventory levels and the need to trim those volumes.
Why are Freight Rates Remaining Elevated Despite Sluggish Demand?
Comparisons between spot and contract rates in truckload show some softening year-over-year as one would expect, but contract rates are generally staying more elevated on a historical basis than perhaps they would have been in other economic cycles.
One of the reasons for this is a sticky employment cost index (sticky in the sense that it is inflationary pressure that tends to ‘stick’ around) which remains at historic highs. It was still inflating at a rate of 4.7% in Q4 year-over-year at the end of 2022 and grew at a 5.4% annualized rate for all of 2022. The cost of attracting, hiring, training, and retaining various types of talent continues to be high and companies are willing to hang on to this talent after working so hard to attract it. This keeps operating costs higher for a longer period.
