What Happens in LTL Now with the Yellow Closure?
RedStone Resource
August 1, 2023
Inside This Edition
Can the Economy Continue to Surprise Higher?
The current Q3 GDPNow estimate from the Atlanta Fed is showing growth of 3.5%. This could easily adjust downward throughout the quarter as new economic data is released, and Blue Chip Economist surveys show expectations for growth of just 0.5% for the month, largely because inventory building activity could be weaker than expected.
New Tentative Canadian Port Worker Deal Struck
After the last tentative deal was voted down by port workers in British Columbia, and work stoppages continued, a new tentative agreement was reportedly struck on Sunday, July 30th. If workers do not ratify this new deal, Canadian Federal Labor Minister Seamus O’Regan could intervene and direct the board to impose final binding arbitration to end possible disruptions in freight flows.
Intermodal Activity Still Sluggish, But Mexico Improves Among USMCA Partners
US intermodal activity was still 9.8% weaker YTD than last year according to the Association of American Railroads. Total intermodal volumes saw 6.8 million units processed YTD, approximately 235,000 a week. Compared to last year, week 29 (ending July 22nd) was 4.8% weaker than last year with 251,282 units processed.
ECONOMIC BRIEFING
What Happens in LTL Now with the Yellow Closure?
LTL carrier Yellow Freight officially shut down operations over the weekend creating the largest trucking bankruptcy in history. The question for most is what will happen in the LTL sector now? Analysis studying the closure of Consolidated Freightways in 2001 showed that prices in the LTL sector increased by 4-6% over the 12 months that followed. Analysts today believe that LTL prices could increase on average of 6% over the next year, depending on how quickly the US emerges out of its freight slowdown.
Perhaps the biggest challenge that could come as a result of Yellow’s closure is that every Yellow driver in its network was hazmat certified, and industries that relied on available hazmat capacity could face some challenges as capacity in that segment drops. This would include freight services for the Department of Defense.
Not all price increases for LTL shippers will be created equal. Prices for many shippers could inflate much more quickly. Some transportation managers enjoyed low rates for LTL because their shipment characteristics fit Yellow’s network very well, and created density in much needed lanes. Some customers in this situation could face price hikes of 15-20%, and some evidence suggests that many of the largest LTL carriers are scrutinizing how much of the $5 billion in Yellow revenue they are willing to take on.
Can the Economy Continue to Surprise Higher?
Supply chain managers are trying to understand what demand will look like through the final 5 months of the year, and how to manage inventories through the peak season. The current Q3 GDPNow estimate from the Atlanta Fed is showing growth of 3.5%. This could easily adjust downward throughout the quarter as new economic data is released, and Blue Chip Economist surveys show expectations for growth of just 0.5% for the month, largely because inventory building activity could be weaker than expected (based on current inventory to sales ratios showing 65% of the nation currently overstocked relative to the decade prior to the pandemic).
Consumer spending was decelerating slightly between Q1 and Q2 and is expected to run slightly weaker this year than last year’s volumes through Q3. But the job environment continues to remain stable for now, wages are still growing, and inflation has started to cool at a more rapid pace. This provides the mechanism to get inventories sold down, which will likely restart the supply chain for 2024 (new orders will increase for everything upstream including raw materials, energy, labor, transportation, and everything downstream for the movement of finished goods).
There are two headwinds to watch. The greatest headwind will continue to be the impact of higher interest rates on interest-bearing industries (pockets of construction, big-ticket durable goods, etc.). The second is the ending of student loan repayments in October. Estimates vary, but it could reduce consumer spending by nearly $9 million per month beginning late in Q4.
But overall, and barring anything unexpected, it appears as though the outlook for the rest of the year and into early 2024 could continue to be better than expected.
TRANSPORTATION BRIEFING
New Tentative Canadian Port Worker Deal Struck
After the last tentative deal was voted down by port workers in British Columbia, and work stoppages continued, a new tentative agreement was reportedly struck on Sunday, July 30th. If workers do not ratify this new deal, Canadian Federal Labor Minister Seamus O’Regan could intervene and direct the board to impose final binding arbitration to end possible disruptions in freight flows.
The strike that hit Canadian ports from July 1st to July 13th reportedly created a backup of ships that could take 3-6 weeks to clear by some estimates. Some mild diversion of freight to alterative ports has been reported, and more could follow this most recent challenge in getting a final deal ratified. The transportation sector is quickly going through a wave of labor negotiations that have disrupted the supply chain to one degree or another. But they come at a time when freight volumes are weaker and inventory levels have improved dramatically, which helps ease the impact of these disruptions. By early September, most of these negotiations should be finalized and the threat of supply chain disruptions should be low.
The New York Fed’s Global Supply Chain Pressure’s Index remains near all-time lows, showing that the global supply chain is largely back in cycle (fewer disruptions).
Intermodal Activity Still Sluggish, But Mexico Improves Among USMCA Partners
US intermodal activity was still 9.8% weaker YTD than last year according to the Association of American Railroads. Total intermodal volumes saw 6.8 million units processed YTD, approximately 235,000 a week. Compared to last year, week 29 (ending July 22nd) was 4.8% weaker than last year with 251,282 units processed. Forecasts from the National Retail Federation show the total 2023 intermodal industry likely processing roughly 22 million TEUs, similar to volumes from 2019 but more than 3 million weaker than last year.
Cross-border activity was also mixed. Mexico experienced an increase of 0.7% on 322,100 units moving on Mexican railroads. Recent trends show it decelerating, against week 29 of last year’s volumes were 3.3% lower.
Canadian volumes were slightly worse than those in the US, they were down 11.5% YTD vs. last year. The strikes at Canadian ports could easily be factoring into this measure, Canada had been experiencing parallel volumes to those hitting the United States prior to the July 1st strike at BC ports.
