Truckers leverage cost pressures to drive rate recovery

Consumer-related freight remains soft, but analysts say strength in the industrial economy is helping support the freight market. (TT File Photo)

Freight rates strengthened in the third quarter as capacity constraints and rising costs gave the trucking industry greater pricing power despite soft demand, analysts said.

The third-quarter results came amid a prolonged freight downcycle that started with the coronavirus pandemic. The resulting surge and correction in freight demand spurred an oversupply of capacity in the years since. But this year, a federal crackdown on noncompliant drivers, alongside ongoing market pressures, has led to a supply-driven recovery.

“Heading into earnings season, we said we felt worse about costs, better about pricing and worse about demand for retail-centric truckload,” said Bascome Majors, managing director of transportation equity research at Stephens. “Exiting earning season, our views have only been reinforced, this remains a supply-side recovery for truckload.”

Driver pay and inflation

Majors expects contract rates to continue to rise along with driver pay and other inflationary costs. His team also views intermodal as being the best positioned to show meaningful growth with shippers continuing to convert truckloads to lower overall costs.

“There’s no doubt in our view that this is a supply-driven recovery,” said Ken Hoexter, managing director at Bank of America. “You’ve taken out somewhere around 70,000 drivers of a pool of a million and a half.”

Hoexter noted that his investors have expressed concern over whether the peak of capacity reductions has passed. He expects the pressure on capacity will continue, it’s just not clear at what pace. They also are unsure when freight demand will improve.

“Assessed conditions remain pretty constructive, especially as it relates to carriers’ ability to pursue rate increases,” said Dan Moore, senior transportation analyst at R.W. Baird & Co. “The demand environment, I would describe as maybe seasonably a little bit more muted. Keep in mind that in the second quarter, we had some pull forwards.”

Increased federal enforcement

Moore pointed out that these early freight moves were among several disruptions that influenced the market going into the third quarter. The Department of Transportation played a major role with increased enforcement. Brokers also have faced increased scrutiny over how they select carriers after the Montgomery v. Caribe Transport II Supreme Court ruling.

“All of those things really created a very constructive backdrop for 2Q,” Moore said. “As we got into July and August, the industry definitely experienced weaker seasonality. However, base rates continue to improve, and we did see spot rates begin to inflect in August.”

Weak consumer market

Moore warned that a weak consumer market is preventing a robust freight economy, alongside a lackluster housing market, automobile sales interest rates and fuel costs. He has found, however, that it is easier to underwrite strength on the industrial side of the economy.

“We kind of peaked out on rates during the summertime, and that was evident in the results,” Hoexter said. “You saw that with quarterly results, and you see that in how spot rates have come down. Now again, that’s from an elevated level. So still elevated from where we’ve been the last few years, and up significantly, but down from the peaks of the summertime.”

Increasing utilization

Hoexter noted that many carriers have responded to the market rebound by focusing on increasing utilization. This comes, he pointed out, as they also grapple with driver pay starting to scale, alongside increased operational costs across the truckload sector.

“Energy prices had been higher for much longer than everyone had thought, and there was concern about the impacts on the consumer,” said Jason Seidl, managing director at TD Cowen. “The news on the macro side I would say was slightly better. I’m not hiring a band and marching down the street to celebrate, but I’m saying it’s slightly better.”

Seidl noted that the consumer base remained stable despite having to deal with higher energy prices. He pointed out that companies such as UPS and Knight-Swift Transportation Holdings anticipate a normalized peak shipping season.

Strength in the industrial economy

He also noted that the industrial economy showed some broad strength during the quarter as well, though he has heard concern over the data center buildout.

“Hyperscalers came up a bunch, which is a concern, given the midterm results,” Seidl said. “The interesting thing is there are a lot of companies that seem to be pushing into either the growth areas or the higher-margin areas, but they all seem to be attacking the same market.”

Seidl also pointed to semiconductors and healthcare as focus areas alongside hyperscalers. He recalled earlier concerns over whether such a concentration would hinder growth, but he hasn’t seen that occur with those companies finding other opportunities. He also suspects that the data center pushback has been more on a state-by-state basis.

“We have tailwinds related to the One, Big Beautiful Bill, and we have tailwinds related to the buildout of AI,” Moore said. “We also have emerging signs of an oil field-services recovery, and while the consumer economy is certainly weaker than we’d like, the industrial economy is really holding freight up and helping to create a more resilient backdrop.”