Trucks make the goods economy go round and round
Transportation plays a critical role in providing us with goods when we need them. Everything from the foods we eat, the cars we drive and the clothes we wear to raw materials such as grain, chemicals and lumber move via some mode of transportation to get from source to destination. Transportation is nearly a $1 trillion revenue market, dominated by trucking. In the U.S., trucks moved about 73% of all freight, based on tonnage and represented 83% of all transportation revenues. Within trucking, most revenues are accounted for by over-the-road truckload carriers that move goods from point to point, and about $55 billion is the Less-Than-Truckload (LTL) market (goods too big for major freight and logistics providers but too small to fill a full trailer). Rails represent about 15% of tonnage and 8% of revenues, with consolidation over the past few decades yielding six major Class I railroads that represent 94% of all revenue by rail. Air freight is approximately 0.3% of tonnage but 3% of value of goods shipped. Other areas such as non-asset truck brokers, inland barges and pipelines represent the remaining freight transport modes. Simply put, transports don’t make the freight — they move it. When demand is strong, transports are busy; when demand is weak, excess capacity exists. Thus, the Airfreight and Surface Transportation group is quite cyclical and exposed to the strength of GDP (gross domestic product) and industrial production levels.
“Where are we in the Transports cycle?”
That’s a frequently asked question heard within the transport group. To gain real-time visibility, we launched BofA Hoexter’s biweekly Truck Shipper Survey about 15 years ago, within which we have a demand indicator that has demonstrated an 81% correlation to the ISM (Institute for Supply Management), leading by a month, providing us with great insights for cycle turns. Over the past 15 years, we have seen three freight recessions (not full-blown economic recessions given the sustained strength of the consumer and services economy). All but three surveys since June 2022 indicate that we remain in a freight recession (and that’s just the average of those prior three freight recessions, highlighting the weak backdrop of today’s market). The survey also highlights that inventories remain elevated (we are not done with destocking), and excess capacity remains.
Truck spot rates provide an indication on the state of the economy and truck supply
Given there are approximately 500,000 registered truck carriers and 3 million trucks on the road, trucking remains a very fragmented market. In our weekly Transport Tracker, we measure the state of truck spot rates as a measure of supply/demand balance. Spot rates are currently $1.29, well below the $1.50 average cost per mile1; this data highlights that too much capacity continues to exist in the market during this elongated freight recession.
Even amid a difficult cycle, there are opportunities
We look at high-frequency data (port volumes, Truck Shipper Survey, truck, air and shipping rates) for early cyclical reads. In the interim, we look at companies that are idiosyncratically cutting costs to provide operating leverage when that rebound occurs. While a normal cycle would tell you that the supply side corrects itself (e.g., truck bankruptcies), such corrections are occurring slower than expected given some regulatory mandates for carriers to add newer trucks. Thus, this elongated freight recession is likely to continue until a demand inflection ramps up.
Alternatively, rails have improved service. Out-of-favor commodities like coal are ramping up given increased power needs (partially offset by declines in housing/lumber products, which are less profitable), and service improvements could drive some volume gains in the sector later in ‘24. The LTL sector benefitted from the bankruptcy of a large carrier last year and continues a pricing focus that is carrying the group. Lastly, a SMID (small-mid cap) beneficiary of pricing is the inland tank barge group, where the supply/demand balance improved after a decade of imbalance and continues to correct despite rising demand. This leads to robust pricing and years of margin improvement at this inland transport subsector.
