December Market Update
How did the market look at the end of 2021?
Fueled by government stimulus and a shift towards goods consumption, increased demand has created a supply chain backlog that we are still trying to overcome. For the situation to improve, multiple facets of the supply chain must recover. Recently, the Secretary of Transportation announced more than $241 million in grants to help improve port facilities in 19 states. While this is good news for the long-term health of the nation’s supply chain, it does little to relieve the near-term pressure that we are all experiencing.
While nobody knows what the future holds, the goal of this month’s update is to highlight a couple of important trends that could impact the supply chain in 2022.
Following the largest pull-back on record in April 2020, retail sales surged in June 2020 and have not slowed. Altered consumer behavior coupled with unprecedented federal stimulus set the stage for increased consumer spending. As we start 2022, we will evaluate the impact of this pandemic and consider what a return to normal might look like.
The effort to restock depleted inventories will help bolster truckload demand next year. If current trends continue, total business inventories (BUSINV) will return to pre-COVID levels during the second half of 2022. This assumes that consumer spending will continue to be a strong headwind to the effort to normalize inventories.
Year-to-date inventories were up 6% with sales up 10% during the same timeframe. Consumer spending is expected to slow during the first half of 2022 as the Omicron variant poses new challenges and Federal stimulus begins to fade. Inflation has also begun to erode consumers purchasing power. The Federal Reserve is expected to address inflation in 2022 through a series of interest rate hikes. Each of these factors should slow consumer spending and allow inventories to normalize sooner than recently projected. Once inventories rebound, expect it to have a deflationary effect on truckload spot rates. With truckload contract rates at all-time highs, reduced demand should significantly improve routing guide compliance and help cool the spot market.
The chart below highlights the relationship between contract rates and tender rejections (van equipment). During periods where spot market rates exceeded contracts, tender rejections spiked. This effect can be seen during the second half of 2020 as escalating spot market rates pushed tender rejections above 25%. Most of this year has been marked by a tug-of-war between spot and contract. As contract rates rose, tender rejections would decline. But truckload demand was so strong that the spot market never cooled enough for these contract rate increases to have a meaningful effect on tender rejections. According to data provided by Internet Truckstop, spot market rates have increased over 120% since March 1, 2020.
On the supply side, driver availability continues to improve. According to ACT Research, this is driven primarily by the exclusion of most fleets from federal vaccination rules. There are also indications that the chip-constrained environment is beginning to improve, which will allow more vehicles to roll off production lines and onto our highways. This should help to gradually ease capacity constraints but do not expect it to occur overnight. As of October, there was a backlog of approximately 280,000 Class 8 trucks.
The last year has shown that our nation’s supply chain is resilient. The fact that inventories have increased in the face of unprecedented goods consumption illustrates this fact. While considerable strides have been made, there were many lessons learned in 2021. Our supply chain will recover and should become stronger because of these lessons.
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