THE OUTLOOK TURNS ON TWO FACTORS: The first is on the demand side. It used to be that September and October were hot times for van markets as retailers built up inventories in preparation for the Christmas season. That surge has diminished as retailers began ordering earlier to move their stock during the normally soft markets of the summer. That practice allowed them to avoid seasonal trucking surcharges. They traded off higher inventory costs for savings in transportation. That’s why you see Christmas stuff in Lowes and Home Depot in September. It’s not marketing; it’s logistics. That leaves the holiday rush limited to the year-end’s rush of consumer-packaged goods as retailers struggle to maintain inventories of their hot items. Given the rise of internet sales, that peak period extends into January for a week or two now.
Looks like payback time in late 2022: Since the summer of 2020, the economy has been buzzing with VERY high levels of consumer spending on goods. People were flush with money and couldn’t indulge in their normal appetites for travel and entertainment. Their spending went into stuff they could use at home, stuff that moves in a truck. The result is consumer freight levels way above normal, levels that will inevitably come back down to normal. That process has clearly begun in spot markets; witness the dramatic reductions in spot pricing. We also see stress among the big-box retailers for the same reason. Accordingly, the Christmas surge in spot volumes and pricing should be muted this year. Don’t depend on it for that normal late-year goose in earnings.
How much farther with the fall go? This is the second key factor of the late 2022 forecast. Although pricing has slipped, carrier margins, best we can tell, have stayed strong. Sure they are falling well below the record earnings of 2021 and early 2022. However, even the near 20% fall for all of 2022 leaves margins still well above normal.
And there lies the dilemma and the threat: Markets work, especially in the chaotic world of spot market trucking. One doesn’t need a 20% operating margin to run a truck company. Even with the recent peak years, the average since 2012 is but 9%, less than half of my latest 2022 estimate. So normal competition in a softening market will push pricing and earnings down toward or perhaps below the long-term trends. Again, markets work!
Even with strong trucking cost inflation, prices and margins will continue to fall. The very strong market of early 2022 will keep full-year pricing and margins much stronger than end-of-year levels. Year-end pricing will be 20% below the year’s start and about 10% below the year’s average. That will lower carrier margins dramatically. Those margins will still be good, but well below the peak values. Given that trajectory, the outlook for next year is back to normal. While such margins will remain high enough to run an operation, they will feel VERY bad for carriers who have enjoyed the good times of 2020-2022.
Of course, the brokers will be blamed! It is a constant of truck brokerage economics that broker margins are inversely related to truckers’ margins. When things are tough for the carriers, broker gross margins go up, even as broker profit margins fall. The carriers don’t see the latter, just the former, and cry bloody murder. The reverse happens in good times—I have yet to find a carrier congratulating a broker for keeping operating margins in check during a hot market. So it is imperative for the broker community to emphasize their essential role in finding loads for truckers in a tough market, while keeping broker costs in check.
In Summary: The fourth quarter of 2022 is a time for brokers to be very vigilant about market conditions. We are well past an inflection point in market conditions (downward—BUT—still above the long-run trends.) That imbalance between margins and softening market conditions will eventually correct itself. The only question is how much of that correcting behavior will surface between now and the new year. My guess is for a modest amount that will feel like a large amount to a market grown quite comfortable with the most favorable conditions on record. Such is the nature of cyclical market economics, whether we like it or not.