US trucking market stuck in the ‘muddy middle’

US trucking market stuck in the ‘muddy middle’

Spot market truckload rates are down 10-12 percent from this time last year, but contract rates are up about 5 percent after a 14 percent jump in 2018, according to a JOC.com analysis of data from DAT Solutions and Truckstop.com. Photo credit: Ari Ashe.

LONG BEACH, California -- Last year was great for trucking companies and less so for the shippers that rely on those operators to move their freight, but capacity is beginning to loosen as more trucks come online and shippers have come to accept higher rates as part of the cost of doing business, bringing the market closer to what could be considered balanced. Even so, no one knows exactly what this new normal will look like.

Or as one executive put it, the US trucking market is in the midst of what he calls "the muddy middle."

Spot market truckload rates have dropped between 10 and 12 percent from this time last year, but contract rates are up about 5 percent on top of a 14 percent climb in 2018, according to a JOC.com analysis of data from DAT Solutions and Truckstop.com. Shippers that exited the spot market a year ago, desperate to find relief in contract carriage, are now returning to the spot market.

“There is that plethora of available capacity right now. As a whole, the [spot] market is pretty loose,” Matt Pyatt, CEO of Arrive Logistics, said at the JOC’s TPM 2019 conference in Long Beach, California.

It’s possible beneficial cargo owners (BCOs) reacted to the spot market spike from mid-2017 to mid-2018 by shifting so much freight back under contract that the pendulum swung too much, putting upward pressure on rates.

Truckload carriers and third-party logistics providers have used terms such as “balanced” and “equilibrium” to describe the state of the market heading into 2019, but that’s not entirely accurate either. One thing that is certain, however, is that it’s not as strong of a seller’s market as it was in 2018.

Finding the bottom

With contract and spot rates currently headed in different directions, it’s unclear exactly how this will all play out. IHS Markit chief economist Nariman Behravesh put the odds of a recession in 2019 at around 30 percent, but upped that chance to 50-50 for 2020. A recession would mean lower cargo volumes, which would drive down both contract and spot rates, creating a buyer’s market.

“If I had to give it a name, I’d call it the ‘muddy middle,’” said Brian Reed, vice president of global supply chain optimization at Geodis. “The market is at a teeter point. It can go either way, [and] it can go there fast or slow.”

Some shippers are waiting out the market, extending their bid cycles for longer than normal before awarding a given lane or volume in order to better gauge market conditions.

“A lot of shippers who started the process in the third or fourth quarter, they saw the rates [moving] in the right direction for them, so they actually held out on releasing the awards until mid-January or even into February,” said Mark Ford, chief operating officer with BlueGrace Logistics. “Shippers are trying to figure out where that bottom is, throwing out their routing guides, and going to the spot market depending on the cost differential.”

In an industry in which every minute matters and every second has a dollar amount attached to it, shippers can drive those rates up or down simply based how they value time.

“Shippers should look at how they can get from a two- or three-hour load time to a 30-minute load time or 45-minute load time, and what that would do to increase capacity in trucking,” Pyatt said. “We don’t have a driver shortage problem; we have a utilization problem.”

In this “muddy middle,” with no clear picture of which direction rates will go in the next nine months, shippers that keep drivers moving, thereby increasing productivity, could avoid the tap dance of changing carriers every time the winds shift by driving down rates for good.

Contact Ari Ashe at ari.ashe@ihsmarkit.com and follow him on Twitter: @arijashe.