Construction Spending in 2024 and Impact on Trucking
RedStone Resource
January 3, 2024
Inside This Edition
Red Sea Diversions to Continue Through Early January
More maritime carriers will continue to block transits through the Red Sea and the Suez Canal because of attacks on commercial ships in the region. Global capacity is expected to be cut by nearly 20% as the disruptions continue into the early part of next year. Second, this has added between 14-21 days of transit time to shipments, and companies around the world are working on adjusting order cycle times as a result. And lastly, those factors combined are leading to an increase in spot rates for maritime shipping.
Construction Spending in 2024 and Impact on Trucking
Construction spending in the US was still growing at more than 11.3% through the end of November. This included a 3.7% increase in residential and an 18.1% increase in nonresidential construction activity. Nonresidential construction spending was eclipsing the $1.1 trillion mark and showed no signs of slowing headed into the end of the year despite strong headwinds from higher interest rates and tightening bank credit.
Trucking Freight Prices Show Mixed Signals Headed into 2024
Through November, the truckload PPI showed a decline month-over-month (M/M) of 0.4% versus an increase of 1.2% between September and October. On a year-over-year (Y/Y) basis it was still 15.3% lower vs. November of last year. Rates in the truckload sector are roughly 16% higher than they were prior to the pandemic, almost in-line with where rates should be.
Economic Briefing
Global Economy Slows
The latest survey results from global PMIs show that the global economy is slowing. The US manufacturing PMI reported by S&P Global showed US manufacturing dipped in December. More troubling was a drop in new orders from both domestic demand and for export. Similar global reports showed areas in Europe and Asia diving deeper into contraction after they had responded positively in November.
On a global basis, the JP Morgan / S&P Global index for global manufacturing slipped marginally, falling from 49.3 in November to 49.0 in December and in mild contraction. Â Surprisingly for many, input prices also inched up in the month. Slowing growth but inflationary pressures can create mild stagflation conditions and is certainly something to watch in the coming months.
On a positive front, inventories for most manufacturers, their customers, and suppliers are back into a normal range. With this being the case, this will create more logistics activity in short order once reorders begin. It activates the entire supply chain from raw materials and energy inputs through finished goods and 360-degree logistics. In addition, with some of the global chokepoints creating transit time issues (primarily in the Red Sea), that may change order processes and how companies view inventory building activity in the coming two quarters (more willingness to stockpile once again). The result could be a more active global freight environment than expected, even if macroeconomic conditions were to remain sluggish.
Red Sea Diversions to Continue Through Early January
More maritime carriers will continue to block transits through the Red Sea and the Suez Canal because of attacks on commercial ships in the region. Despite efforts to provide escort assistance, carriers have decided not to take the risk. Most carriers will revisit the situation on a week-by-week basis but have notified shippers of their intent to generally avoid those transits through the first week of January, if not longer.
The impact is three-fold. First, global capacity is expected to be cut by nearly 20% as the disruptions continue into the early part of next year. Second, this has added between 14-21 days of transit time to shipments, and companies around the world are working on adjusting order cycle times as a result. And lastly, those factors combined are leading to an increase in spot rates for maritime shipping. Through December 21st, prices across many trade lanes were rising as a result. Weaker global demand for products will help minimize the overall impact, but shippers will need to adjust in the meantime. Risks also exist for further disruptions in the Black Sea near Odessa, off the coast of Guyana, and of course in some areas of the Persian Gulf.
TRANSPORTATION BRIEFING
Construction Spending in 2024 and Impact on Trucking
Construction spending in the US was still growing at more than 11.3% through the end of November. This included a 3.7% increase in residential and an 18.1% increase in nonresidential construction activity. Nonresidential construction spending was eclipsing the $1.1 trillion mark and showed no signs of slowing headed into the end of the year despite strong headwinds from higher interest rates and tightening bank credit.
As the nonresidential construction sector is growing, it is historically the number one competitor for CDL drivers in the country. Spending on construction activity in 2024 is expected to ramp up across many sectors. The CHIPS Act, Inflation Reduction Act (IRA) and year two of the Infrastructure Bill will throw billions of dollars of additional spending into the construction sector. In addition, individual private sectors such as manufacturing are still seeing a surge in spending. Construction of manufacturing facilities was up 59.1% Y/Y through November on more than $209 billion in spending (against an average year of about $60 billion). Reshoring trends and building supply chain capacity in the US are driving significant increases in activity.
If freight volumes pick up in 2024 as expected (a result of a successful inventory destocking trend in 2023 and stable economic growth in the latter part of 2024), capacity in the trucking industry could tighten much faster than in prior cycles primarily on the back of this trend in construction activity. Lastly, the residential sector was showing signs of acceleration toward the end of the year, and every new home creates an estimated 7 full truckloads of fixtures and materials (which further increases demand for capacity).
Trucking Freight Prices Show Mixed Signals Headed into 2024
The Producer Price Index is an interesting gauge of freight pricing. It includes both contract and spot rates and includes fuel impacts. From a market perspective, it helps understand a blended average for different modes. Through November, the truckload PPI showed a decline month-over-month (M/M) of 0.4% versus an increase of 1.2% between September and October. On a year-over-year (Y/Y) basis it was still 15.3% lower vs. November of last year. Rates in the truckload sector are roughly 16% higher than they were prior to the pandemic, almost in-line with where rates should be.
The same measure for LTL showed a drop of 1.4% M/M and a 0.6% decrease Y/Y. Obviously, the impact from Yellow leaving the industry was still weighing overall on freight prices. LTL prices are still running nearly 28% higher than they were pre-pandemic. But unlike the truckload pricing trends, if they had followed normal growth trends through the pandemic and post-pandemic period, they would be roughly 12-16% higher versus that period (not 10-12 percentage points higher). Again, a combination of an increase in e-commerce (running 60% higher vs. pre-pandemic levels) and the exit of a significant provider in the sector is keeping prices elevated.
