Link to original article: Transfix’s Chief Economist: ‘Rates are Moving Fast and Here’s Why’ Greenscreens.ai Announces New Product, Greenscreens Ignite
The freight industry has been near the bottom of a two-year slump – an inevitable rebalancing act that’s par for the course in this cyclical industry. In the meantime, experts and pundits scramble to present how this market flip might look or what will drive it, whether consumer demand, a mass carrier exit, inventory restocking, or a mix of the three.
As Chief Economist at Transfix, an AI-driven freight brokerage, my team offers freight advisory and risk analysis to shippers of all sizes. Our rate prediction model utilizes machine learning (Seasonality Adjusted Gaussian Process) and forecasts all 18,000+ US lanes individually.
In January 2023, when the dominant market voices within our industry (and most bank analysts) predicted stable to higher rates for the coming year, we remained committed to a quantitative, data centered approach to forecasting, which led to predicting substantially lower trucking rates for 2023, and that approach proved accurate.
Similarly, in January of 2024, our market outlook differed from market consensus, and again, from Morgan Stanley’s more aggressive trucking rate predictions based on increased demand and restocking in Q1. While we do not discount a minor pick up in trucking demand in Q1 2024, we simply do not believe it will noticeably move the needle on rates in the first quarter. Carrier consolidation is and will remain the main driver and, as it accelerates in Q1, will create the foundation for a cycle reversal into Q2 (or H2) 2024.
Compared to Morgan Stanley’s prediction of a 40% rate bounce, we are suggesting a more conservative 15% rate increase by the end of the year. Both predictions, however, contrast with the many shippers already operating under the assumption that 2024 is still a weak market. We believe that these shippers are building their pricing strategy based on a scenario that is no longer possible.
Why the Carrier Situation is So Dire Right Now
January trucking rates inflated by the winter storm season did not sustain themselves like some industry constituents predicted. Therefore, carrier margins continue to be squeezed by increasing operating costs, such as high interest rates and insurance premiums. Motor vehicle insurance costs alone jumped by a record 20.3%, with premiums linearly increasing through 2023 at rates unseen since the 1970s. Insurance expenses alone can account for anywhere from 5 to 8% of the operating expense for a typical carrier.
As the deterioration of capacity accelerates, it will create significant structural challenges for shippers, rate and capacity volatility chief among them. Shippers will not only face increased global uncertainty but also stark regional rate disparity, exposing them to sharp local cost increases despite lower national averages. Supply doesn’t leave the market uniformly. Low seasonality areas will see supply leave first and, as the seasonal cycle reverses, rates spike exponentially.
Our position is that shippers should see this as an opportunity to take advantage of the uncertainty in Q1 2024 to ‘fix’ their rates and create predictability in their networks for the rest of the year. While we expect things to get worse before they get better, we are also predicting a sharp trucking rate rally towards the end of Q2 2024.
Until the rebalancing act reaches a new equilibrium, make sure your freight partners have the right balance of people, tech, and long- and short-term data and insights that allow you to weather the downs and to flourish in the ups.