Shipper sentiment is slipping. Is the freight market turning?

Entering the third quarter of 2023, the freight market is at a crossroads, teetering between tumult and a potential step toward balance. The first half of the year, best characterized by a capacity glut that pushed truckload spot rates underwater, has shown signs of bottoming. Now, the turmoil at major carriers is beginning to make its mark, and freight sentiment is changing.

Yellow (NASDAQ: YELL), the troubled Kansas-based less-than-truckload carrier, is struggling to stay afloat, pressured by a Teamsters union that may be prepared to strike if the company is unable to pay the $50 million owed to its pension fund in the next 30 days. In another show of force, the union is currently negotiating with UPS (NYSE: UPS) and could strike come August if the parties don’t reach an agreement. Elsewhere, FedEx pilots surprisingly rejected a contract amendment, and last month West Coast ports narrowly averted a peak season shutdown.

There’s no debating it: North American supply chains are flirting with major, multimodal restructuring.

RELATED: LTL industry likely altered regardless of Yellow’s fate

The Q3 2023 Freight Sentiment Indexes show the freight market in this flux. For the first time since we began tracking in Q4 2022, shippers are the least positive group (though their overall score is still above 0), and this shift in sentiment could be a first indication of a market change.

Shippers have enjoyed pricing power this year due to excess capacity, but their sentiment this quarter now dips to 8.32 from 10.56. (See also: FreightWaves’ Pricing Power Index has moved slightly in carriers’ favor.)

Carriers and brokers are showing increased positivity in Q3 2023. This could be a response to the potential for last-minute freight movements and the ability to renegotiate higher rates as shippers look for alternatives amid the industry disruptions.

Brokers/3PLs have seen their sentiment rise to 12.55 from 9.39 in Q2. Carriers, who had been grappling with negative overall sentiment in Q2, have rebounded to a positive sentiment of 9.17 in Q3. This has to do in large part with their growing confidence that they’ll be more profitable in 12 months.

When taken together, the Q3 2023 Freight Sentiment Indexes suggest a change is underway.

Note: Survey data was fielded in the first two weeks of July.

FreightWaves SONAR: LTL contract initial (LCWT1.USA) and final (LCWTF.USA) reporting rates over the previous five years. In 2023, LTL rates have held strong, leading to the possibility of capacity spilling over into the truckload market if Yellow declares bankruptcy and LTL rates climb.

Carrier sentiment: Climbing amid industry upheaval

Carriers are showing renewed optimism in Q3 2023. Their overall sentiment has rebounded from a minus 0.52 in Q2 to a positive 9.17 in Q3. This shift reflects a belief that’s been gaining some traction recently: that we’ve already hit rock bottom and will experience a rebound over the next 12 months.

One of the key drivers of this positive sentiment is the significant increase in carriers’ longer-term profitability sentiment. This metric has risen from 6.28 in Q2 to a robust 25.68 in Q3, suggesting that carriers are optimistic about their future earnings. This optimism may be fueled by the potential for increased pricing power as supply-and-demand dynamics begin to shift in their favor.

Yellow was able to temporarily avoid a strike, but the company is far from in the clear. A UPS strike would likely have even wider implications.

The exit of a major player like Yellow from the market could help balance the current excess capacity in the transportation market, giving remaining carriers more leverage to negotiate rates. It could also provide opportunities in the equipment and labor markets. Carriers with strong balance sheets might have a chance to expand their fleets and workforces at a lower cost.

RELATED: 5 things to know with the UPS-Teamsters clock ticking

Similarly, a strike at UPS could lead to a surge in last-minute freight movements, providing carriers with additional opportunities to secure higher rates. These developments, while disruptive, could ultimately strengthen carriers’ position in the market and contribute to their positive sentiment.

It’s important to note that while the sentiment is positive, it’s not uniformly so across all carriers. Many are still facing monumental challenges, and the overall positive sentiment should not overshadow the need for continued resilience and adaptability in the face of a dynamic and often unpredictable market. Additionally, near-term sentiment is still below 0 (minus 1.44).

FreightWaves SONAR: Outbound tender rejections (OTRI.USA) with outbound tender volume (OTVI.USA) over the previous five years. Because neither volume nor rejections have really started to pick up yet, we can infer that broker and carrier positivity is more focused on the long term (i.e., 12 months out) than near.

Broker sentiment: Disruptions could mean opportunities

Brokers and 3PLs are also demonstrating a positive outlook in Q3 2023. Their overall sentiment has risen from 9.39 in Q2 to 12.55 in Q3, reflecting a growing confidence in the market. This increase suggests that brokers and 3PLs are anticipating favorable conditions in the future, with the exception of workforce, which ticked down on both a near-term and long-term basis.

Like carriers, the significant factor contributing to this positive sentiment is the substantial increase in longer-term profitability sentiment. This metric has risen from 16.88 in Q2 to a remarkable 27.47 in Q3, indicating that brokers and 3PLs are optimistic about their future earnings. This optimism may be driven by the potential for increased business as shippers look for alternatives amid industry disruptions.

The potential bankruptcy of Yellow and the possible strike at UPS could have a significant impact on brokers and 3PLs. These events could lead to a surge in last-minute freight movements as shippers scramble to find alternatives, providing brokers and 3PLs with additional business opportunities. Typically, brokers thrive in volatile markets, and these disruptions could give them more leverage to negotiate higher rates, further boosting their profitability.

FreightWaves SONAR: Container Atlas Ocean TEU Volume Index. Ocean imports are a long way off from pandemic-era highs, but they’ve held strong this year, keeping domestic freight volumes afloat.

Shipper sentiment: Dipping as market shifts

Shippers are showing a decrease in overall positivity in Q3 2023. Their top-line index has dipped to 8.32 from 10.56 in Q2, marking the first time shippers are the least positive group since the inception of the index in Q4 2022. This change could be an early indication of a market shift, with shippers potentially losing some of the pricing power they have enjoyed over the past year due to excess capacity.

A key factor contributing to this decrease in sentiment is the drop in near-term profitability sentiment. Shippers’ near-term profitability sentiment has decreased to 5.48 in Q3 from 11.26 in Q2. While this figure is still notably above 0, the trend is suggesting concerns about immediate earnings. This could be a reflection of the potential challenges shippers face due to industry disruptions.

Shippers will be the real losers if Yellow files for bankruptcy or UPS strikes. They’ll need to find alternative freight services on short notice, potentially at higher rates. This could further impact near-term profitability.

They’re also grappling with macroeconomic factors. Economic data paint a picture of fairly resilient consumer spending and a robust (but slowing) job market. Still, shippers haven’t fully enjoyed the easy freight environment because of higher-than-target inventory levels and fears about future demand.

And it might be passing them by.

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Editor: Joe Antoshak