What 2022 Can Tell You about the 2023 Freight Market

This article originally appeared in the first quarter issue of The Illinois Manufacturer

In order to review the freight market and to make strong logistics decisions going forward, Illinois manufacturers should understand that the North American Full Truckload (FTL) market is supply and demand-oriented. We’ve been on a rollercoaster ride the past 2 ½ years due to increased consumer demand and COVID-related supply chain issues in the US and overseas. 

However, in 2022, we began to see an unfamiliar sight–signs of an oversupplied market. While the dry van spot market has held close to the five-year average of load to truck ratios for the last several months, indicators suggest that market is oversupplied. Simply put, this means there is enough available truck capacity, and market pressure has largely abated.

Indicators that point to an oversupplied market:

• The Class 8 tractor fleet expanded 4% year over year.
• ACT research continues to increase their estimation of fleet growth across private and for-hire fleets each month. Their November 14, 2022 report forecasted 4% growth for 2022 year over year and an additional 1.5% for 2023.
• Trucking labor is shifting away from owner-operators. Since Q2, 2022, owner-operator capacity has diminished while employee-based and independent contractor capacity has increased. Meanwhile, there was an uptick in voluntary revocations of operating authority in conjunction with the Bureau of Labor Statistics (BLS) reporting trucking job growth (through October). These combined factors suggest self-employed truck drivers are seeking the shelter of employee-based carriers.
• Owner-operators are faced with compressed spot market pricing, elevated diesel costs, and fewer opportunities in the spot market. The October Bureau of Transportation Statistics (BTS) and BLS jobs report amended reported a trucking jobs growth figure in both September and October (amending a forecasted loss in September). Year-to-date trucking jobs have increased by about 55,400 or about 3.5%.
• Carriers are close to reaching the threshold of cost-per-mile to operate a truck.

What does an oversupplied market mean for Illinois manufacturers?

An oversupplied market can provide some pricing relief for manufacturers in the short term, however it can create a plethora of problems over time. Like most manufacturers, trucking companies saw their operational costs increase over 2022. With costs rising and rates decreasing, something has to give, and too often that is preventive maintenance on equipment. This leads to safety issues and increased breakdowns which result in late deliveries contributing to chaos with value dock space.

There are only two remedies for an oversupplied market. Capacity must leave the market or demand must increase. Most economists do not predict enough growth in 2023 to offset the oversupply of capacity, therefore, the more likely scenario is capacity leaving the market. This means smaller trucking companies shut their doors completely or they downsize and many of their drivers take jobs in other industries or with very large fleets. As we explore the possible impact of the above scenario, it’s helpful to remember the American Trucking Associations (ATA) reports that 91% of truckload firms have six or fewer trucks with 97% having fewer than 20 trucks.

The aftermath of such a capacity rebalancing is where Illinois manufacturers will be affected most. Like the trucking industry, the economy is cyclical, and as industries and markets rebound we will see a surge in demand with limited capacity. Truckload rates will increase which draws more entrants to the market, and the cycle will begin again.

Based on the economic headwinds we are experiencing today, we predict freight volume growth will be negligible in 2023. This allows us to classify 2023 as the sort of rebalancing year described above which means truckload capacity will be in equilibrium with demand and bring stability to the market.

Of course that stability will last only until the next economic bull market takes off and upsets this equilibrium.

What can Illinois manufacturers do during this period of capacity rebalancing to prepare for the future?

• Begin preparing your strategy for the next cycle shift. Now is an exceptional time to get a jump on developing transportation strategies for the upcycle. Lower rates are welcome in the short term, but building relationships with your transportation providers will insulate you in the long run.
• Maintain efforts to deliver positive driver experiences at your facilities. When rates are high, we hear about the importance of being a “Shipper of Choice,” but when rates decline, this distinction seems less important. That’s a mistake. If your facility is driver friendly, your rates are affected. Driver experiences do make a difference in your ability to partner with superior transportation providers.
• The old adage, “You get what you pay for,” will certainly hold true through 2023. Freight can act as an extension of your marketing department. Think about it like this: Do you want your customers to have a bad experience based on the transportation provider you have chosen in order to save a few dollars?