News / More pressure on US owner-truckers as inflation puts the brakes on demand

Credit Arrive Logistics

After an extended run on the high road to profits, the US trucking industry appears to be headed for a bumpy ride that will take a toll on rates thanks to significant economic pressures, including fuel costs.

The latest monthly freight market report from Arrive Logistics indicates a sharp turn of the parameters that shape demand for trucking and rates.

“Conditions are likely to experience a meaningful shift due to surging oil and gas prices. The forecast for the remainder of 2022 is now expected to experience deflationary rate conditions, but how far and how quickly rates fall is highly dependent on how future inflation and rising fuel prices play out,” the report’s authors wrote.

It was released in the aftermath of the jump in fuel prices in the first week of March, to a record $4.85 per gallon for the national average diesel price. The price surge was more than double the previous week-on-week record increase.

In the short term, this will push freight pricing higher as capacity remains constrained, but down the road it should push in the opposite direction, Arrive analysts reckon.

“The surge in oil and gas prices is expected to accelerate inflation and carrier revocations, leading to deflationary market conditions as the year progresses,” they warned.

At the end of February, the US inflation rate hit 7.9%, a 40-year high, and with further upward pressure from soaring fuel costs, consumer demand and production are likely to be impacted.

“The backlogs in manufacturing and industrial production are still strong, but continued inflation poses a threat to production levels as costs rise. Continued inflation and rising interest rates would also present a downside risk to residential construction as housing costs rise, due to an increased cost of building materials,” the report warns.

According to Arrive’s analysts, inflation is one of two factors that have entered the mix that determines demand, going forward, which had previously been largely dictated by backlogs and supply chain disruption. The second element is inventory levels, which have risen significantly this year. The analysts attribute this to a combination of over-ordering for the peak, late arrivals of goods ordered for the peak and softening demand.

Consumer appetite for goods will likely be impacted by the pent-up demand for services and travel, as Covid restrictions ease, resulting in fewer goods being ordered.

Early this month, tender rejections were down in the dry van and reefer segments, but rose in the flatbed sector, owing to the start of the construction season. Load-to-truck ratios in the truckload market hit their lowest level since mid-2020.

The deflationary pressures are likely to increase the longer inflation puts the brakes on demand.

“There are many uncertainties that remain surrounding the conflict in Ukraine, and what that means for the duration, and the magnitude we will see in terms of impact on fuel prices and the domestic freight market. However, we believe this situation is unlikely to be resolved in the near term, meaning that we expect to see significant changes as a result of recent events. The most likely scenarios of declining truckload demand and an increase in capacity associated with larger fleets is a mix that should result in deflationary market conditions, should fuel prices remain elevated for a prolonged period of time,” the Arrive report warns.

The impact on the trucking market will hit owner-operators the hardest, as they do not have the financial muscle to withstand lasting pressure on margins. Since the early days of the pandemic, their numbers have billowed. It is estimated that over 70% of more than 100,000 new carriers contain just one vehicle.

Arrive’s analysts point to the aftermath of the storms Katrina and Rita in 2005 that saw fuel prices surge $0.55 in a month, noting that this resulted in high numbers of revocations of carrier operating licences.

“If our hypothesis regarding truckload demand declines due to rising inflation is correct, the opportunity in the spot market will begin to dry up as truckload demand falls. This will not only make access to freight more difficult, but the competition among carriers could intensify, resulting in rapid spot rate deceleration, putting further financial strain on carriers,” they say.

“Although this appears to be pulling capacity off the roads, we believe it would actually act to resolve the equipment and driver shortage problems for the larger carriers, which are more equipped to handle the cash flow constraints and have less exposure to the spot market’s volatility, therefore giving them the ability to attract owner operators and their equipment,” they added.