Total intermodal volume fell 7.1 percent in the third quarter compared to the same quarter of 2022. It was the ninth consecutive quarterly decline in intermodal output year-over-year. While domestic container originations grew 1.6 percent, loadings of international containers contracted 13.2 percent, and trailers continued to fall, this time by 23.3 percent. Total shipments did come in at 4.2 million, the most of the first three quarters of 2023, and next quarter, they are expected to see somewhat favorable comparisons given the weaker performance in the fourth quarter of 2022.
Intermodal currently faces a number of headwinds. Despite the strong performance of the overall economy, certain freight-related economic components, such as imports of goods and inventory rebuilding, remain sluggish. Key sectors like housing and manufacturing also continue to show muted activity. In response, truckers have reduced their rates to attract shippers and gain a larger share of the shrinking freight market. Also, inflation-adjusted retail inventories (less automotive) are roughly 13 percent higher compared to pre-pandemic peaks. This plays a key role in the decreased demand for freight as retailers and wholesalers sit on out-of-season product and overbought, pandemic-related items.
International Intermodal
In terms of international containers, seven out of the ten North American regions experienced a decline in volume compared to the third quarter of 2022. To the positive, Mexico and the Northwest gained 6.6 percent, and the Southeast ticked up 0.8 percent. On the other hand, Western Canada fell 23.8 percent, and Eastern Canada dropped 21.1 percent, the latter a potential indication that Canada’s overall economy is slowing, especially after second quarter GDP turned negative. Double-digit declines in four U.S. regions (15.7 percent in the Southwest; 15.5 percent in the Midwest and South Central; and 10.3 percent in the Northeast) spoke to the ongoing softness in imports. These four regions accounted for 52.8 percent of North American international moves. The Mountain Central dipped 0.5 percent.
While consumer spending on goods has remained stable in 2023, wholesalers and retailers have been able to meet demand by using existing inventories and by heavily discounting out-of-season inventory. International intermodal has seen a consequent volume loss across the regions as inventories are worked down. The diverging trend between the broader economy and the freight economy will likely continue if lingering pandemic-related issues, such as bloated inventories and consumers’ preference for services over goods, remain in place.
Domestic Intermodal
Following a general trend from the end of 2022, third quarter domestic container volume was up 1.6 percent compared to the previous year, with five of the ten regions seeing improvements. Mexico’s domestic container traffic continued to benefit from an improving supply chain, rising auto production, and light vehicle inventories in need of replenishing. It surged 27.8 percent. The Mountain Central, the smallest volume region in the quarter, had 8.6 percent more output, while the largest volume region, the Midwest, had 6.3 percent more loads. Volume from Eastern Canada moved up 5.0 percent, and shipments from the Southwest (the second largest output region) expanded by 2.1 percent. On the downside, volume contracted 8.4 percent in the Northwest and 7.2 percent in Western Canada as a result of fewer transloads from import freight along with the port strike. Additionally, volume slipped 5.4 percent in the Southeast, 2.1 percent in the Northeast and 1.7 percent in the South Central. Although fewer imports did not help, these regions were more likely challenged by tougher trucking competition.
Along with global headwinds, certain rate-sensitive components of the economy, such as manufacturing and housing starts, have muted domestic intermodal activity. However, strong consumer spending and retail sales along with an elevated number of unfilled orders for manufactured goods should provide some support for domestic container traffic and partially offset weakness in the intermodal network.
Trailers
The third quarter contraction in trailer movements, off 23.3 percent, was the ninth consecutive decline for the equipment segment. At just over 160,000 moves, the quarter represented the lowest of trailer loads moved on record and only 3.8 percent of total volume moved. Intermodal haulage by trailer is uncommon in Mexico and Canada, only 0.1 percent of North American trailer movements originated outside of the U.S. in Q3, and within the U.S. all seven of the U.S. regions lost ground. The Southeast region performed best, and its loads still decreased 16.4 percent.
The contraction in overall freight across truckload, temperature-controlled, parcel and LTL is putting downward pressure on any OTR carrier’s use of intermodal at the margins. Also, long-time trailer shippers are swapping their trailers for more efficient domestic containers.
IMC Results
Intermodal Marketing Company results are reported by participating IMCs. This quarter’s results mirror the conditions described above and underline the competitiveness of the truck market. Intermodal volume handled by IMCs moved down 12.1 percent year-over-year in the third quarter, a sixth consecutive quarter of volume losses, while trucking volume handled by these same IMCs contracted by more than three times that percentage, falling 36.7 percent. This marks the fourth straight quarter of lower highway shipments. Combined, total loads for IMCs slid 28.7 percent. On the revenue side, total intermodal revenue dropped 28.8 percent, while total highway revenue declined a much larger 48.4 percent. Total IMC revenue for both modes combined was 39.3 percent lower. That equates to a per-unit decline in revenue of 19.0 percent for intermodal and a similar 18.5 percent drop for highway.
IMCs have been forced to take pricing lower on both modes to attract freight, while operational costs for trucking have surged over the past year. In addition to higher interest rates, these increases include equipment, fuel, labor and maintenance costs. They signal a potential bottom on rates may be near.
Outlook
The broader economy is expected to remain on solid footing for the rest of the year, but the sluggishness of the freight-related components of the economy support a weaker freight outlook. In light of consumption patterns and still-high inventories, the outlook for international containers moving by rail is forecasted to drop 11.3 percent for full 2023 year, especially as an increasing number of import containers land on East Coast and Gulf shores. Weak transload volume from those imports, lower domestic production and more aggressive truck competition should cause a 2.0 percent decrease in domestic container volume for the year. Loose truck capacity and shipper conversions to containers anticipates 24.9 percent fewer trailer loads, rounding out a projected 7.7 percent decline in total North American intermodal volume through December.
Trucking Industry Outlook
The stagnation in trucking volume that characterized the first half of the year continued during the third quarter. Consumer spending on goods was remarkably solid, but it barely grew. Easing inventories still remained high. Also, the housing sector – a major generator of freight in flatbed – suffered from a host of challenges, including the highest mortgage rate in 23 years.
Q3 tractor-trailer loadings were essentially flat versus the second quarter, falling off a mere 0.1 percent, seasonally adjusted. Dry van saw the greatest strength – relatively speaking – with a 0.3 percent increase. Refrigerated results were flat, and the other combined equipment types fell 0.4 percent. Overall volume was 0.4 percent higher than it was in the third quarter of 2022. Dry van and refrigerated numbers were up nearly 1 percent year over year, but others declined 0.1 percent.
The picture changed little by length-of-haul. Only medium-haul (125 to 299 miles) increased, rising 0.7 percent, seasonally adjusted, from the second quarter. Long-haul (300 to 549 miles) and super long-haul (550 or more miles) both declined 0.4 percent. Short-haul (fewer than 125 miles) dialed down 0.3 percent. Year-over-year, only long-haul grew, but at 1.7 percent, it was hardly robust.
The spot market is not signaling any near-term strength as rates and volume are moving in line with seasonal expectations but below the five-year average. Dry van spot rates in the current cycle likely bottomed out the week before the May International Roadcheck inspection, but a new low is not inconceivable in Q4. Refrigerated spot rates are more secure above the recent bottom in April, but they have been easing recently, in line with seasonal expectations.
Small trucking operations are failing at a high rate, but the latest data on payroll employment implies that established truckload carriers continue to absorb a significant share of those displaced drivers. Payroll employment in the general freight truckload sector is down from a record level in May but is still far higher than the freight demand environment would seem to support. Yellow Corporation’s shutdown at the end of July certainly has tightened the LTL market, but it appears to have had little, if any, bleed over into truckload.
Capacity utilization remains weak, which should be driving more capacity out of the market than appears to have been the case so far. One possible explanation is carriers’ expectation of a rebound in the truck freight market.
Outlook
Active truck utilization – the share of seated trucks engaged in hauling freight – is estimated to have bottomed out during the second quarter, but the forecast is for only gradual recovery. Utilization is expected to remain below the 10-year average of 92.0 percent until 2025.
The prospects for stronger-than-forecast truck utilization rest largely with accelerated capacity loss, but even that situation probably would have limited near-term effects due to weak freight demand. The forecast is basically for no change in overall tractor-trailer loadings through the second quarter of 2024 and only modest improvement in the third quarter. Freight demand faces multiple headwinds that likely will constrain volume in all equipment types.
Solid job growth so far has kept consumer spending steady, but Americans continue to drain what is left from remaining stimulus funds, and millions now have a renewed obligation to service student loans after more than three years of forbearance. A decline in consumer spending would hit dry van and – to a lesser extent – refrigerated. Meanwhile, retail inventories relative to sales are in line with the pre-pandemic norm, so any near-term inventory restocking is unlikely barring an even less likely increase in consumer spending. Nor is an inventory correction likely, but it probably is more likely in the near term than a restocking event.
The industrial sector is also holding up but is not showing much prospect of acceleration. Automotive could be an upside outlier. Despite ongoing labor disruptions at three U.S. auto makers, automotive production remains very high, and both pent-up demand and still-depleted inventories should support output well into next year or beyond, which would do the same for both dry van and flatbed. Although the impact would be somewhat regional, that industry’s footprint has grown substantially over the past couple of decades.
The challenges facing the housing market appear more intractable because the Federal Reserve’s anti-inflation monetary policy seems certain to keep mortgage rates high absent an economic recession. Although flatbed suffers most from weak residential construction, a depressed housing market also affects dry van due to lower spending on home furnishings that often accompany home sales.
Intermodal Implications
Ample capacity in truckload remains a headwind for intermodal, and the outlook is for little significant change in that situation through at least the middle of 2024. Although truck drivers are expected to continue to exit the market in large numbers, the lack of any meaningful freight growth will keep utilization at depressed levels for now.
The loss of trucking capacity is hardly irrelevant, however. Market conditions in trucking over the next several quarters could determine how stressed the trucking freight market becomes once freight volumes begin to accelerate. Even if now volatile diesel prices stabilize, many small carriers will continue to fail due to sluggish spot rates and rising financing costs, among other factors. Those conditions could set the stage for a tighter market at the beginning of the next upcycle that would bolster intermodal’s competitive position.
