8 years ago while working at GE Capital I had a conversation with a sales leader in the truck financing division who explained to me that the transportation sector is a leading predictor of the economy six months into the future. The U.S. government and the Bureau of Transportation Statistics confirmed this in research released in 2014. In fact, the BTS research says “When the accelerations and decelerations of the freight TSI are compared to the growth cycles of the economy, the freight measure leads by an average of approximately four months.”
Fast forward to the pandemic beginning in 2020, the price of freight was elevated due to outsized demand and fewer drivers on the road as the U.S dealt with COVID-19 and the various variant outbreaks. Larger logistics companies maintain their own fleet of drivers but may also contract individual owner/operators or smaller fleets of drivers depending on demand. In the past few months, many individual drivers have returned to the market now that COVID-related risks have subsided and the freight rates have been very attractive. There is a spot market where supply and demand determine the truckload rate per mile. This rate typically includes a base rate plus a fuel surcharge.
As we’re all aware, fuel prices have been surging in recent months and therefore it would make sense for the price per mile for a truckload to be up. However, the price per mile has been declining significantly despite the fuel surcharge. This may be partially explained by an increase in drivers available for hire. Financial commentators such as Jim Cramer from CNBC have shrugged off the declines for this very reason but it isn’t the whole story. The head of North American surface transportation for C.H. Robinson, the largest logistics provider in the U.S., says load to truck ratios have been coming down. Transportation rates are a leading indicator of the economy because it’s the first place in the supply chain where economists get a glimpse into the interactions between producers and consumers. If consumers are feeling the pain of higher prices or cost of living, there will be less demand for goods to be shipped.
Whether you believe the decline in trucking rates is explained by additional drivers on the road or a more recessionary outlook, small business owners need to be informed and prepared for all outcomes. Perhaps now isn’t the best time to lock in an expensive long-term lease because it feels as if rates will always continue to rise. Rates may be cheaper in four to six months if we are heading into a recession. In my experience, financial journalists are quick to dismiss leading indicators only to backpedal months later. An example of this is highlighted in my article about inflation and its early characterization of being “transitory.”