The Waiting Game: Forecasting a Potential Freight Recovery
In contrast to the dramatic spikes of the COVID era, a potential freight recovery is likely to happen in a more measured, gradual fashion and will likely extend into 2025. Eventually, the market will reach an inflection point in which the recovery kicks off in earnest.
If the sky-high freight rate increases of the pandemic era had asset- and non-asset-based carriers on a bender, the subsequent freight recession has proven to be a lasting hangover.
Based on the dictionary definition of a “negative trend for two consecutive quarters,” the freight recession began in the second half of 2022 and AFS’s data shows rates started to bump a bottom in the second quarter of 2023. Since then, truckload rates have held relatively steady, and more carriers find themselves hanging on with white knuckles, as speculation about the when and how of a rebound keeps getting louder.
Macroeconomic Signals Impact Truckload Freight
Of all modes of transportation, truckload freight is particularly sensitive to macroeconomic signals, and just as falling consumer demand can be a harbinger of doom, interest rate cuts can shift freight cycles in a positive direction as retailers grow inventories and consumers start to soak them up when discretionary income returns.
As the Federal Reserve kept its eye firmly on guiding the economy to a soft landing, tighter policies have kept consumer demand at a low simmer and inventories have burned off at a slower rate.
While that picture offers little relief for carriers, much-speculated interest rate cuts by the Fed could extend a lifeline. Multiple rate cuts are expected later in 2024, but when those cuts will finally materialize seems to be a moving target. According to 100 economists polled by Reuters, the Fed will wait until September to implement a rate cut, a change in outlook from the same survey a month earlier in which respondents expected a cut in June.
Whenever a rate cut does happen, the industry will experience immediate and longer-term effects. Trucking companies will get much-needed relief thanks to lower lending costs, but the broader effect of stimulating consumer demand – and ultimately addressing overcapacity in the freight market – will take longer to play out.
During the past two years, record-high inflation and 11 interest rate hikes have shaped consumer behavior in ways that are not quickly undone with a single rate cut. Not only do those consumption patterns take time to change, but bear in mind that the freight provider market is also in a state of overcapacity and underpricing while trying to cope with higher interest rates and the associated costs of financing equipment.
And, unfortunately, in our industry most freight rate recoveries are led by reductions in supply (read: carrier bankruptcies) and not by increases in demand (read: consumers buying more).
Freight Recovery: A Measured Pace
If the Fed does begin a cycle of rate increases later this year, expect a peak season more pronounced than last year, but muted compared to years prior. If consumers are still sheepish and slow to pick up spending, procurement will closely match that prevailing sentiment and freight markets will be able to absorb the moderate growth in demand without issue.
In contrast to the dramatic spikes of the COVID era, the freight recovery is likely to happen in a more measured, gradual fashion and will likely extend well into 2025. Eventually, the market will reach an inflection point in which the recovery kicks off in earnest, but continued overcapacity and tight monetary policy provide headwinds against any upward rate pressure.
The good news for truckload carriers is that rates have stabilized, and while that’s not grounds to break out the champagne, the cyclical nature of freight dictates that as capacity continues to adapt to lower demand, rates will inevitably rise.