The Federal Reserve’s efforts to tame inflation with aggressive interest rate hikes over the past 15 months appear to be working with July’s core inflation rate reaching the lowest level since October 2021. The U.S. labor market remains strong with low unemployment and 187K knew jobs created in July. As inflation eases and the economy continues to be strong, it is becoming more likely that we could experience a soft landing.
Consumers continue to fuel the economy with retail sales hitting a record high in Q1 2023. E-commerce is a growing portion of sales, thus resulting in increased demand for last-mile delivery to consumers. In contrast, major retailers are coming off a post-pandemic inventory bubble created by supply chain shocks and elevated consumer demand, forcing them to now decrease inventory levels which is adversely impacting the commercial freight industry. High retail inventory levels and high interest rates are reducing orders so demand for commercial deliveries is down. This dynamic is negatively impacting the earnings of large freight companies and smaller carriers are beginning to exit the industry. This dynamic in addition to mounting debt after receiving $700MM in federal Covid-19 relief loans, is part of the reason that Yellow recently declared bankruptcy.
What I am watching:
Yellow was the third largest less-than-truckload carrier and is the largest trucking bankruptcy in the history of the U.S. It will be interesting see the ripple effects throughout the industry. It is widely expected that Yellow’s customers will drive up demand among other trucking companies and thereby increase prices across the industry. It is yet to be determined if increased shipping costs will be passed to consumers as the beginning of the holiday season approaches.
With July inflation still above the Fed’s target of 2%, the Fed may issue another rate increase in 2023 before they begin monetary easing in 2024. High interest rates and high inventories will continue to suppress commercial freight demand. The freight industry will be required to optimize existing shipping assets and how they are deployed and shift operational focus from long-haul freight to last-mile solutions, filling the retailer to consumer demand. It is expected that the industry will continue to decrease in new entrant growth and an increase in business exists which will decrease excess capacity and increase demand for larger providers. The freight industry is a lifeline for U.S. consumers but is at a transformational point, it must adapt to these new market conditions.
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