News / Truckload spot prices sink below contract rates as market feels the brakes

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Despite headwinds, the US trucking market continues to expand, albeit at a slower rate, the latest industry data shows.

The decline in spot pricing appears to have eased, having sunk below contract rates.  

The US Bank Freight Payment Index for the second quarter, released today, shows growth overall in the truckload market, with shipment volumes up 2.3% from the first quarter. 

This came after two consecutive quarters in which volumes slipped by about the same percentage as its rebound, the bank’s analysts observed.  

The underlying economic momentum has weakened, though. Household consumption decelerated in the second quarter and housing starts decreased, US Bank found. 

Elsewhere, the CASS Transportation Index for June diagnosed that two key drivers of growth – goods consumption and inventory restocking – faltered last month.  

On the other hand, manufacturing output increased in the past quarter, US Bank noted. This tallies with other statistics that indicate an expansion of US manufacturing in June, as well as growth in employment in the sector.  

The rise in national truckload volumes masks considerable regional variations. While volumes shrank in two regions, others experienced considerable expansion, with the north-east and south-west posting their strongest gains in three years, fuelled largely by manufacturing. 

In the north-east, shipments rose 7.3% over the first quarter, 8.8% higher than in the second quarter of 2021. The region benefited from strength in manufacturing and housing starts.  

Manufacturing was the driver for increased volumes in the midwest, which advanced 6.8% over the first quarter.  

Increases in trade with Mexico fuelled a 2.2% rise in shipment volume in the south-west.  

Owing to slower activity at the ports and a loss of momentum in the housing market, the west was one of the two regions that saw volume declines. Shipments were down 0.7% from the first quarter. In the south-east, volume fell 4.3%, caused by weakening retail sales and a drop in housing starts.  

While volume trajectories varied from region to region, freight spend increased across the board. Overall, it climbed 3.3% from the first quarter and was 19.7% higher than a year ago. 

The west and south-west led the rise in expenditure with year-on-year gains of 30.2% and 29.7% respectively. The other regions had increases of between 14.3% and 17%.  

The biggest factor behind this was higher fuel costs, while rates were relatively steady in the contract segment and continued their decline in the spot market.  

“While we’ve seen bigger jumps in spending in other quarters over the past year, the second quarter increases were significant,” said Bobby Holland, US Bank VP and director of Freight Data Solutions. “Contract carriers seemed to hold their prices relatively steady but high levels of fuel surcharges likely drove up spending.”  

As shippers continue to seek longer-term arrangements for their traffic, the activity and pricing in the contract sector have remained at elevated levels.  

“We’re seeing a transition in the freight market back to contract carriers and away from the high level of spot market shipping we saw in late 2020 and throughout 2021,” said Bob Costello, the American Trucking Association’s SVP and chief economist. “The spot market for freight shipping continues to soften, but the contract market remains solid, even after the economy contracted in the first quarter.”  

Spot rates dropped from February through May, a development that was increasingly accompanied with owner-operators terminating their authorities. The bloodletting eased in June, with rates showing signs of stabilising.  

According to Crane Worldwide Logistics, shippers have reduced their exposure to the spot market by nearly 80% since the peak. By consolidating larger volumes with fewer carriers, many have been able to secure reductions in contract rates, the logistics provider reported.  

Still, contract rates have largely held their ground, contributing to the elevated level of pricing overall, despite the rate decline in the spot market. For owner-operators, who tend to work overwhelmingly in the spot market, this has produced a dilemma. Costs have escalated sharply, which they are less able to alleviate than larger carriers, while rates are down significantly, albeit still above historic pre-pandemic levels.  

This has also made it more difficult to absorb their investment in trucks in recent years, as many left positions with larger firms and struck out on their own. Used truck prices have plunged more than 10% from last year, leaving operators stuck with overpriced equipment they had assumed to pay for with soaring spot rates.  

Brokers are also feeling the impact of the shift to contract pricing. According to Crane, spot rates are now cheaper than contract rates. The forwarder told customers that experts now expect contract rates for broker source capacity to decline between 5% and 10% in the second half of the year, while asset-based carriers “appear to raise prices in 2022”.