Business

Inflation, Labor Shortages, and the Supply Chain

Every year, deal seekers prepare for the highly-anticipated sales event, Amazon Prime Day. The retail giant will hold the two-day summer sale on July 12th and 13th and offer significant savings on thousands of products. Amazon recently gave Prime members a sneak peek at this year’s best offers, which include electronics, household staples, beauty products, and more. And while members won’t know the exact details of the sale until midnight EDT on July 12th, we can guess it will be comparable to previous Prime Days.

However, unlike in past years, this year’s event will happen despite some obstacles. So, what can the industry expect this Amazon Prime Day?

Potential obstacles facing Amazon Prime Day

Amazon Prime Day is held annually and offers members a chance to benefit from exclusive discounts and extremely low prices on thousands of items. This year’s sale is coming at an opportune time with some recent issues curbing consumer spending and, in turn, threatening the success of those in the shipping industry. 

So, while more sales are anticipated, we do expect a few impediments will get in the way, including:

1. Inflation

In May, the inflation rate was at 8.6% –the largest year-over-year increase the country has seen in 40 years. The elevated rate increased the prices of goods and services and decreased consumer spending. However, Amazon swears that its member-exclusive sale will change the tide with savings on products from national brands and small businesses. And there is nothing more valuable than a great deal in a tough economy. As the holiday season approaches and more companies attempt to unload excess inventory with low prices and sales events, consumers will resume spending, and the shipping industry, including the supply chain, will recover. 

2. Supply chain struggles

While Amazon still promises that Prime Day will be full of deals for various products, there’s no denying that this year’s selection will differ from previous years. While there will still be a variety of goods, it will be far less than what members are used to due to the shape of the world’s supply chain. But the retailer isn’t giving up. They accumulated their stocks and upped their inventory by almost 47% from Q1 2021 to Q1 2022. The retailer’s sales also increased by about 8% during that same period. So, the supply chain may see further strain depending on how Amazon handles this year’s exclusive event. But, as those within the supply chain have proven time and time again, there’s nothing they can’t handle.

3. Amazon labor shortages and unions

On top of mounting inflation and unrelenting supply chain issues, Amazon is also battling some in-house challenges. If things stay on their current trajectory, the retail giant could run out of workers by 2024. This loss could cripple Amazon’s service quality and growth plans. The memo that explained the labor shortage also explained how the crisis could be delayed, including raising wages and increasing automation. Still, the only way the company could significantly change the course they are on is by altering the way it manages its employees. The company also predicts that it could lose the availability of staff in some regions by the end of 2022. This loss could damage the potential for future sales events, like Prime Day, and, in turn, take a toll on those within the transportation industry who rely on Amazon’s sales.

Amazon Prime Day still has a lot to offer consumers

At the end of the day, Amazon is offering significant discounts on Prime Day that will draw people in regardless of the state of the economy or the supply chain. The deals will be available for items like Apple AirPods, TVs, gaming systems (PS5, Xbox, and Nintendo Switch), Echo devices, Fire TV Sticks, robot vacuums, and gift cards. To get people excited for Amazon Prime Day, the retailer is also offering early Prime Day deals to drum up some business that will have people returning for the actual sale.

As previously mentioned, those working within the supply chain could feel some strain during this time of year, but there will still be much to gain. As people hunt for online deals, supply chain workers and transportation professionals will be needed more than ever, meaning job security amid a shaky economy.

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In 2018 the trucking industry was flourishing. Drivers were earning more than ever before, which quickly drove people into entering the career. But, in 2019, things took an unexpected turn. As things grew, the demand for trucking services declined, leading to more than a thousand trucking companies going out of business. The incident was later coined “the bloodbath of 2019”.

Now, experts are certain another “bloodbath” could be on the horizon. The question is: are they right?

What caused the bloodbath of 2019?

2017 through 2018 was a prosperous time for carriers in the trucking industry, but when 2019 rolled around, the market dried up and led to a period of contraction. This trying time was labeled as a trucking bloodbath due to the operating ratios for dry van carriers averaging over 100%. Carriers also battled oversupply, lack of demand, and fallen investments. In 2018, fleet owners thought it wise to invest in new trucks, but their investments later proved unbeneficial as 2019’s daily truckload volumes were over 4% under 2018’s volumes. Combined, these factors contributed to many trucking companies closing shop and hundreds of industry professionals without a job.

What is causing the latest trucking bloodbath?

The COVID-19 pandemic has wreaked havoc on global freight markets for the past two years. As we’ve attempted to move forward, the market has taken an unfavorable downturn, and the result could be as detrimental as what we saw in 2019.

Unfortunately, truckloads have already been relatively soft. While March has proven to be a stronger month in previous years, this year’s has not seen the same surge. A few factors contribute to the market’s current state, and industry professionals worry they could be enough to spark yet another bloodbath.

The contributing factors include:

1. Soft truckload volumes and spot rates

In 2020, inflation began creeping up, causing many consumers to slow down on spending and truckload volumes to lessen more and more. This slow truckload decline only worsened when Russia invaded Ukraine at the start of 2022. For the past few years, industry experts have monitored the dwindling volumes and confirmed that spot rates are also falling fast.

With too many trucks on the road and insufficient freight to load them with, spot rates have skyrocketed. In January, spot rates reached $3.83 per mile, and while they are now down to $3.42 per mile, many experts aren’t exactly sure how the rest of the year will play out.

2. Inflation and high fuel prices

As most Americans know, fuel prices, along with everything else, are higher than it’s ever been. This economic chaos is responsible for curbing consumer spending, therefore affecting truckloads and conjuring the foreseen bloodbath.

3. Consumer spending on the decline

After years spent indoors (thanks to the COVID-19 pandemic), consumer spending on physical goods has slowed, while spending on travel and entertainment has increased. Unfortunately, experiences do not drive much in the way of freight. This spending trend has taken much longer to balance out than most experts expected. In fact, in February, retail sales only reached 0.3%, and they haven’t been much better in the proceeding months.

 4. Inventory struggles

The lack of inventory has also played a significant role in why many experts believe another bloodbath is on the horizon. After the pandemic, transshipment infrastructures were clogged up, and freight velocity slowed. Many companies were left with barren shelves and unhappy customers. So, the same companies ordered more stock to safeguard themselves against inventory outages. However, this plan backfired and left businesses with more than they needed after prices spiked and consumers cut their spending habits. Now, experts believe the purchasing of goods will slow to work off excess inventory, and truckloads will continue to remain light.

Will some fleets survive the bloodbath?

So far, most of the larger trucking companies have had decent first-quarter earnings this year. According to market projections, analysts believe that the more established fleets will continue to prosper. However, smaller companies may not be so lucky.

Larger carriers don’t have to worry about spot loads or adjust pricing to account for customer rate cuts, whereas smaller fleets don’t have the same luxury. However, both small and large companies should still be cautious. In 2019, hundreds of fleets went bankrupt, three times as many as the year prior. So, when it comes to fleet survival, it really depends on several factors, such as location and client relations.

Moving forward, owners and operators can expect lower rates and an influx of new fleets entering the market, even after loads soften. And with everyone chasing after high spot volumes, fewer opportunities will be available. And as we saw in 2019, the declining spot rates, dwindling volumes, and increased prices will continue to push fleets into another trucking bloodbath. We all just have to hang on for the ride.

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The demand for trucking has taken a shocking turn. According to Bank of America, shipping demand is “near freight recession levels,” and the prospects surrounding freight capacity, inventory levels, and shipper rates are moving in a similar direction as they were in the Summer of 2020, at the height of the COVID-19 lockdown. 

The managing director of Bank of America, Ken Hoexter, said in a recent investor’s note that a survey found that the demand for trucking is down 23% year-over-year (y/y), and the Truckload Demand Indicator fell to ‘58’— the lowest it’s been since June 2020. 

So, what does all of this mean for the future economy? This article will break down what led to this decline in demand and what we can expect to see in the future.

The demand for trucking: Then vs. now

The need for trucking has, for the most part, been a significant pillar in the foundation of our country. Now, as the demand for trucking is slowly dwindling, industry experts wonder what the future holds for the trucking industry.

In the Cass Freight Index, the demand for domestic shipping increased 0.6% in March from the prior year (2021); the percentage is also a 2.7% increase from February. At the end of this year’s first quarter, the creeping growth rate shows Cass Information Systems Inc. that the freight industry is clearly slowing down. 

The trucking industry recently experienced historical highs when it comes to freight rates, but those numbers seem to be decreasing as shipping demand and available capacity reach an equilibrium. For example, according to Bank of America, dry van spot rates (excluding fuel surcharges) are down 27% in the past month and 37% since December 2021. The analysis from Bank of America also shows that shipping rates have dropped to their lowest point since July 2020.

Why is the demand for trucking declining?

Over the years, the trucking industry has proven to be a reliable gauge for the U.S. economy’s prosperity or lack thereof. It’s simple math, really—when consumer spending declines, companies purchase less, and, as a result, business in the trucking industry dwindles. 

Since 1972, the trucking industry has faced 12 industry recessions, out of which six led to larger economic issues. Now, as the Federal Reserve attempts to diminish inflation, there are growing concerns surrounding another recession that would impact both the trucking industry and the overall economy. 

Cass Freight Index Report

These concerns led policymakers to raise shipping rates by a quarter-percentage point and promise half-point increases starting in May. This increase has caused freight volumes to slow. Since March, the Cass Freight Index shows shipment components are up 0.6% y/y, but this is significantly less than the 3.6% y/y growth the industry saw in February.

Other shipment component stats include:

• Although the shipments component rose 2.7% from February, the overall seasonal pattern was still 1.0% lower.
• If the Cass Freight Index used a normal seasonal pattern from March to predict shipment components for April and May, we would see an approximate 3% y/y increase in April and a 3% y/y decrease in May. 
• The year-over-year shipment growth decreased to 0.4% in the first quarter of 2022 from 4.3% growth in the fourth quarter of 2021.

The changes to shipping rates have Wall Street traders predicting a 100% chance of a half-point rate increase at the beginning of May. If they are correct, this increase would be the first time the U.S. central bank has raised federal funds by 50 basis points since 2000. 

While some economists believe the actions of the Federal Reserve are too late, others are concerned that stabilizing prices too quickly could trigger a wide economic recession since higher interest rates force consumers and businesses to reduce their spending.

What could this mean for the economy?

Since Class 8 vehicles move around 72% of all freight, and approximately 2 million Americans work as truck drivers, a recessionary period could be detrimental. 

Suppose industries such as retail, housing, and lumber predict needing fewer heavy-duty trucks for shipping. In that case, the trucking industry would be plunged into a recession. This downturn could lead to many businesses going bankrupt, thousands of people across affected industries losing their jobs, and American families severely disrupted. Thus, leading to a nationwide economic crisis.

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