July Market Update
A look at the 2021 truckload market
As we begin the second half of 2021, the logistics industry is still experiencing the effects of an unpredictable economic environment. In 2020, the unemployment rate reached the highest rate since the Great Depression, followed by the fastest recovery in history. Fiscal and Monetary spending reached unprecedented levels to help avoid the worst of the economic downturn and hasten the recovery. Consumer spending hit all-time highs while inventories reached all-time lows. Supply shortages have affected everything from consumer electronics to automobiles to housing and everything in between. With all this uncertainty, what are the expectations for the remainder of 2021?
It’s no secret that the logistics industry has experienced a capacity crunch throughout 2021. According to BMO Transportation Finance, five of the first six months of the year saw 100% utilization of all seated class 8 trucks. The second half of the year is forecasted to see a similar trend, with an average utilization rate of 99% compared to a 10-year average of 91%.
In response to the capacity constraints, new orders for class 8 trucks have exceeded a 100% YoY increase for 9 consecutive months, but supply shortages of input materials, such as steel and semiconductor chips, have made it difficult for manufacturers to produce trucks fast enough to keep up with demand. Deliveries of new trucks are expected to make a material impact on capacity in Q1 2022, as the class 8 utilization rate drops below 98% for the first time since Q4 2020.
Spending up/Inventories down
Driven by boosted unemployment benefits and stimulus payments, consumer spending and net worth reached historical highs in the first half of 2021. Retail sales experienced 10%+ YoY growth for the first 5 months of 2021, including 20%+ in March and May and nearly 50% in April. This boost in spending saw inventories (especially retail inventories) drop to historical lows, while supply shortages and capacity constraints have made it difficult for restocking to keep pace. Inventory levels saw a slight increase in May from their low point in April but are still exceptionally low and are expected to remain low throughout the remainder of 2021.
Although the last stimulus payment was disbursed in March and unemployment benefits have ended in many states, consumer spending has not seen a significant decrease. In fact, Personal Consumption Expenditures (PCE) have increased for 4 consecutive months. PCE and retail sales are expected to remain elevated for the rest of the year, although there could be slight MoM decreases. The new Child Tax Credit payments (which began July 15) and the highest level of the Consumer Confidence Indexsince the pandemic began are expected to continue to prop up spending.
Manufacturing PMI (Purchasing Manager’s Index) is a measure of growth in the manufacturing industry (a measure > 50 indicates growth) and is a key indicator of freight demand. At the onset of the pandemic in April 2020, it fell to a low of 41.5, its worst measure since 2008. It has since rebounded to a high of 61.2 in May 2021, including 13 consecutive months above 50 and 5 consecutive months above 60. Our forecast for PMI is near (or above) 60 for the remainder of 2021 due to new orders, significant backlogs, and low inventory levels.
Though market factors can always change, as we move into the second half of 2021, freight demand is expected to remain elevated, and capacity is expected to remain tight. Spot rates will likely moderate slightly from their 2021 highs but aren’t expected to experience a significant decrease until we get into 2022. New truck deliveries will likely begin to have an impact on capacity in Q1 2022.
At that point, inventories should start to normalize as capacity constraints and supply shortages ease and allow for restocking to catch up to spending. Manufacturing strength should also continue to push freight demand throughout 2021 but should begin to see some moderation in 2022. Although freight demand will likely see a slight moderation as we head towards the end of 2021, many of the difficulties the logistics industry has faced throughout the first half of 2021 are expected to continue during the second half before experiencing some relief in 2022.
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