Peak season is here. What's in store for rates?

Speaker 1:

So what's up with contract rates and when can we expect a rebound? Hey everybody, welcome back. I'm Jason Cannon and my co-host is Matt Cole. Trucking has improved over the last few months and by improved, I mean they've basically stopped getting worse contract rates from a year over year perspective. They've been relatively stable. There were signs earlier in the year that rates might improve with a roughly 1% bump, but we couldn't stick the landing for various reasons. And truckload contract rates in Q2 were down about 1.4% from Q1.

Speaker 2:

If you were kind of following what's going on with rate volatility in the back half of last year, I think most people thought that there was some momentum that could carry us towards the end of Q1 and into Q2 with an increased contract rate environment given what's happening. And we really didn't see that. So we saw contracts just kind of stay relatively flat, still inflationary year over year, but ending that Q2 still kind of in that one to one and a half percent zone. So I think when you talk about what happened with rates and demand in the back half of last year, some of that volume pull forward, what really with that kind of tariff uncertainty and some of those things, a little bit of a pause and that kind of the contract market kind of followed that pause going towards the end of Q1 and into the beginning part of Q2.

Speaker 3:

You can't talk about trucking in 2025 without mentioning tariffs and that's been a volatile and often changing subject and market hate. Nothing more than volatility and uncertainty

Speaker 2:

When you get into trying to predict government policy. It is a difficult game to play for sure, but I do think the picture is a little bit clearer now than it was certainly at Liberation Day and kind of going into liberation day. But I think when you look at the way that shippers navigated that picture and that uncertainty when you rewind and go back, I think shippers did a really good job of predicting and thinking about what that might be. And what we started to see was a demand picture that again pulled that volume forward. You saw inventory levels kind of at higher levels staying stagnant into the back half of 2024 in the beginning part of 2025. And then when liberation day hit and you look at kind of the tariff timeline and what was happening, things were spiking up and things were really uncertain.

And what I think it was a nice job as far as demand planning and that handoff for kind of a smooth transition during that real uncertain period in which inventory levels kind of started to come down a little bit and demand was really smooth from that Q1 to Q2 picture and it didn't really allow for a lot of surges in that peaks and valley that we talked about or that we might be used to during that Q2 food and bev season if you're on that side of the retail space. So I think that handoff and as kind smooth as that was kind of kept everything closer to equilibrium and that's I think from a contract perspective, didn't really allow for that momentum to build and completely go to the upside for increased volatility from what is typically a slower Q1 into food and bev and a higher demand picture in Q2. So I think that's kind of what kept that equilibrium in check for contract rates. Going into

Speaker 1:

Q2, we're now entering peak shipping season and while we still don't have a lot of certainty as it relates to tariffs, it does feel like the current environment is a little less haphazard. What does that mean for trucking's busiest season?

Speaker 2:

I think it's probably a little too early to tell there. You know what I think when we think about goods consumption in the country and really what kind of drives truckload demand, it's been stagnant and it's been slow, right? When you think about consumption and goods as a percentage of consumption, we're still in a downward trend there and that's what's going to drive overall demand in the trucking industry on the truckload side and that rate of change is slowing. So I think that that's important as we're kind of leading up to the back half of the year and what that might look like. Can we start to see some increase on that side of consumption? I think it remains to be seen, but I think still a little too early to tell on what happens from a peak perspective. What I do think is interesting that we are watching is certainly that import activity that has picked up as we kind of talked about, the picture has gotten a little bit clearer from the tariffs. So the west coast port activity over the last six to eight weeks, July being a pretty strong month for import activity and what that brings for that handoff between inventory levels and demand into Q3 and into Q4

Speaker 3:

Trucking is still over capacity as it relates to the number of carriers compared to the amount of freight that needs to move, putting more downward pressure on rates. But an increase in carrier exits in July could signal a changing of the tide.

Speaker 2:

When I think about the supply side, it is certainly continued pressure there and when I try and read through what's happening from a supply end, one indication that I try and use is kind of that mc authority level or new entrance into the market, or are we continuing to see capacity leave the market? And when we were last with you guys in Q1, we were talking about capacity continuing to leave the market. I think at that point it was about 26 of the last 28 months or 27 of the last 29 months. And then we started to get a little bit of a head scratcher of some data for MCs entering the market and we actually saw about a four month period in which mc levels were growing in considering what's going on in this macro demand backdrop. That's a little confusing to kind of get through, but I think when you peel it back, what we started to see was that new grants were kind of moving along at regular pace revocations still happening, they were slowing a bit, but those reinstatements were starting to accelerate and that looked like maybe supply kind of entering the market.

But what I think when you go back and look as fleets and as larger asset carriers in the market were navigating this, they really had to think about how they were optimizing their network going into this year. And I think some of that release of drivers were driving some of those reinstatements and given what's going on from a rates standpoint and how much pressure that the supply side is under, I think we're going to start to see capacity exit. Again, it's just if you're subject to play in the four higher market, then that's a tough environment to be in and we saw it again reverse in July. So capacity starting to exit, I think we're going to continue to see that into the back half of the year. And then from a rate side, the way that I think about that last year, if you rewind that demand and that volume pull forward was real, I think we're going to see a seasonality that is close to what was last year. We're going to continue to get those constrained periods as you head into Labor day next week and some of those different things as you go through Halloween and into Thanksgiving and into Christmas for the peak season. I think we're going to follow that. It's kind of that slow march up given what we know about what's happening on supply, but nothing that shows us right now that there's a super volatile movement given the demand backdrop and the headwinds that are happening

Speaker 1:

Coming into 2025, roughly 2% growth was forecast in contract rates. And despite this being what can best be described as a weird year, we're still on pace to hit that with about four months left.

Speaker 2:

When you look at it from a line haul perspective and you take the year over year, by the time we get to the end of the year, we've had conviction that the bottom of the cycle from a line haul perspective happened around Q2 of last year. When you're looking at a line haul perspective year over year, I do think that that is still a possibility. Now, what gets interesting from an all in rate environment, and I know we want to focus on the contract side, but thinking about spot rates in the market driving kind of contract behavior, what gets interesting towards the back half of the year is what's happening in the diesel market and what that does to operating costs and overall profitability for carriers in the market. So right now as it looks, Q3 is looking to be the first inflationary print on diesel fuel prices year over year since Q1 of 2023.

Now that can go different ways if you're playing the four higher market and rates are pretty stagnant, all in all that's going to do is drop the line haul rates to carriers and that's going to put continued pressure on the profitability for the carriers. And then fast forward if it's a one-to-one change, when you think about all in rates in the industry moving higher, I think that's going to be really important when you think about, okay, what did we look at from a year over year perspective? I think we could start to see that growth because you're starting to see a change in a fuel environment.

Speaker 3:

Even if your fleet isn't a spot market player, as you're trying to forecast and make great decisions, you've got to keep an eye on what's happening there.

Speaker 2:

Spot is continuing to move at a discount to contract rates right now, and I don't think you're going to really see acceleration for contract rates until we see spot moving at a premium to contract for a sustained period of time. So again, Q2 kind of brought a little bit of movement on the spot side, but when we didn't get to parody and we don't have spot moving at a premium to contract, I don't think we're going to see that true contract rate volatility in growth. And usually you start to see that about 60 to 90 days later. So can we get there in Q3 and Q4 as we get into peak season and spot rates are potentially growing and we get closer to parity, that's what I'm really watching to drive contract rates into 2026.

Speaker 1:

That's it for this week's 10 44. You can read more on ccj digital.com. While you're there, sign up for our newsletter and stay up to date on the latest in trucking industry news and trends. If you have any questions or feedback, please let us know in the comments below. Don't forget to subscribe and hit the bell for notifications so you can catch us again next week.