An inflection point in the spot market for the trucking industry : Planet Money : The Indicator from Planet Money The trucking industry saw a boom in the early months of the pandemic as consumer demand for goods surged. This caused a key trucking indicator known as the spot market rate to hit historic highs. Today, we learn what the recent decline in the spot rate could mean for the economy.

The market for on demand trucking

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SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC’S “WAKING UP TO THE FIRE”)

WAILIN WONG, HOST:

This is THE INDICATOR FROM PLANET MONEY. I'm Wailin Wong.

PADDY HIRSCH, HOST:

And I'm Paddy Hirsch. Trucks and the truckers who drive them are the lifeblood of the U.S. economy. Trucking companies move more than 70% of the nation's freight. That's everything from toilet paper to Teslas, driven from ports and railheads to stores and shipping hubs and even direct to your door. My god - I kind of feel like I'm in a commercial right now.

WONG: I mean, it's been a big year for truckers.

HIRSCH: Because of the pandemic, we've been ordering more and more goods. And of course, that's created huge demand for trucking services.

WONG: But recently, some of the gauges on the dashboard of the trucking industry have been flickering a little lower. One gauge in particular - it's called the spot rate, and it's often regarded as a bellwether for the industry - sometimes even the economy.

HIRSCH: Yes. And over the last quarter, the spot rate for trucking has been falling, and it's been falling fast. It's down 15% since the beginning of the year. And now I sound a bit like Chicken Little.

(SOUNDBITE OF FILM, "CHICKEN LITTLE")

PAUL PAPE: (As Fire Chief) What's going on?

ZACH BRAFF: (As Chicken Little) The sky is falling. The sky is falling.

UNIDENTIFIED ACTOR #1: (As character) The sky is falling?

UNIDENTIFIED ACTOR #2: (As character) Are you crazy?

BRAFF: (As Chicken Little) No, no, no.

HIRSCH: No, I'm not crazy. So on today's show, we take a look at the trucking spot rate. We explain what it is and how it works. And as for that 15% drop - well, we'll find out whether that means the sky is falling or not. That's coming up after the break.

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WONG: If you need to truck your goods across the U.S., there are two ways you can do it. You can use the contract market where you make a contract with a haulage firm - that's where the cost of transportation is agreed to weeks or months in advance - or you can use the spot market.

KENDRA TUCKER: So buyers and sellers in a spot market are trying to satisfy a need or a desire in a particular moment.

HIRSCH: This is Kendra Tucker. She's the CEO of truckstop.com. It's a service that links people who need to move their goods with drivers who can do the moving for them.

TUCKER: One everyday example of a spot market is a ride-sharing app like Uber or Lyft, right? So at any given moment or any given location, there's a market for drivers and riders - riders looking for a seat in a car, drivers who have the seats to supply. So they are seeking each other at that point in time.

WONG: And if the spot market is like Uber, then the contract market is like a corporate car service where there's a written agreement and fixed fares to the airport and all that stuff.

HIRSCH: Yeah. And in the U.S., most shipping is done via the contract market - like, 80% of it. The deals to move the remaining 20% of freight that are moved every year in the U.S. are done the last minute in the spot market. For example, a company whose cargo arrives early at the Port of LA might contact a marketplace like truckstop.com and say, hey, I've got 100 tons of dried cuttlefish that I need to get to Boise by tomorrow. I need a driver, stat.

WONG: Is all that cuttlefish going to one person?

HIRSCH: I don't know. I like cuttlefish, so whoever that is is a lucky guy. Anyway, the spot market in trucking is just like the spot market in rideshare. It's super dynamic with prices rising and falling all the time as supply and demand fluctuates. But during the pandemic, of course, we saw a massive surge in demand for goods, and that led to a surge in demand for truckers to ship those goods. And of course, that led to a surge in transportation prices. Since 2020, the cost per mile to ship something in a truck has gone pretty much only one way - upwards.

TUCKER: So the five-year average was something like $2.23, and rates in the spot market have been over $3.50 for a considerable amount of time.

WONG: That's close to a 60% increase in the spot rate - an increase that peaked in January this year and created an interesting wrinkle in the trucking market.

HIRSCH: Yeah - 'cause, remember, 80% of deals to ship goods around the country are done in the contract market where prices are set ahead of time. But as those spot prices began to rise, contract market truckers started to get jealous of their spot market peers, and they started to reject their contracts.

TUCKER: So just because the contract exists doesn't mean the contract is always honored, particularly when spot market rates start doing what they've been doing. Carriers then say, I've got to get out of this contract because I could make more in the spot market.

WONG: The fact that trucking contracts can simply be broken at will by truckers makes supply in the trucking spot market incredibly elastic...

HIRSCH: Econ vocab.

WONG: ...Meaning that the quantity of the good or service supplied changes by a larger percentage than the price change.

HIRSCH: In early 2020, spot rates hadn't really gone up that much, but the amount of supply in the spot market began to expand dramatically. New truckers and trucking firms entered the market, and long-term contracts were canceled in large numbers, all recorded on something called the Outbound Tender Rejection Index.

TUCKER: At the beginning of 2020, that rejection index was at 5%. It then climbed. It went through the roof to - I want to say 20% or higher were getting rejected - so a really high rate.

WONG: And for a while there, the supply in the spot market actually did meet demand as we ordered more and more Peloton bikes and toilet paper and garage doors and, you know, dried cuttlefish.

HIRSCH: Yum, yum. But of course, now the spot price is falling - down 15% since January - which I would characterize as a slump, right, Wailin?

WONG: Yeah, sounds pretty slumpy (ph).

HIRSCH: It's pretty slumpy. Yeah. And in the past, a slump in the spot market has been kind of like a red light flashing on the dash of the trucking industry and maybe even the economy at large, warning that a correction could be coming - or maybe even a recession.

TUCKER: So we generally are - avoid the R-word in that it's not actually recessionary. I guess it's recessionary in that demand is receding. But demand was incredibly high, right? The last time we saw something that looked even close to this was in 2018. And we have - we far outperformed, I think, the highs that we saw then. So what we're headed back to now is a normal market based on the trends that we see.

WONG: A normal market - and this makes sense, right? We are now coming out of the pandemic - fingers crossed.

HIRSCH: Fingers crossed.

WONG: And so our demand for services is rising, and our demand for goods is falling. Consumer spending was up just 0.7% in the first quarter of this year, compared to 3.3% in Q4 of last year. That ebbing demand for goods means less demand for trucks.

HIRSCH: Which is good for the consumer - right? - because it means our stuff costs less to ship and, therefore, should be marginally less expensive - and good for shipping companies that arrange their shipping through the contract market because there's now less likelihood that truckers will renege on their contracts and jump into the spot market.

WONG: But what about all those new trucking entrepreneurs who entered the market while it was raging hot? How are they doing? Kendra Tucker says, at one point during the pandemic, there were as many as 400 new operations entering the trucking market every day.

TUCKER: They came into the market at the time when it was at its highest. And so if they've built their cost structure around the high rates and they haven't built in the safety net for what happens when those rates come down, then they will be challenged.

DEMETRIS WASHINGTON: My name is Demetris Washington (ph). I'm the owner of Nomadic TransX LLC.

HIRSCH: Demetris first dipped his toe into the trucking market last year, investing in a company with a friend. And things went so well for him that in February, he went all in and started his own small trucking business in Maryland. But a lot has changed since then.

WASHINGTON: The industry right now - it's tough. Now gas prices are really high, and the amount of money that you normally make is a little low for the industry standards right now.

WONG: Demetris says it's not just the falling rates and the cost of gas that is challenging entrepreneurs like him. There's also the fact that many shipping centers are chronically short-staffed. That can cause delays that throw off truckers' schedules and force them to cancel contracts.

HIRSCH: But all of these problems aside, Demetris doesn't think that the sky is falling. Like Kendra Tucker, he believes that the industry is merely in a correction. He thinks the numbers still work.

WASHINGTON: It's a gamble. It's scary. You just have to believe in yourself and, you know, pray a little bit. You bet on yourself and hope that the, you know, trucking gods are with you. And I think that's what everybody's going through.

HIRSCH: Demetris says what comforts him, really, is his belief that the supply chain is somewhat recession-proof, and he's doing OK. Last week, he says, he broke even. That felt great.

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HIRSCH: This episode of THE INDICATOR was produced by Nicky Ouellet with engineering by Isaac Rodrigues. It was fact-checked by Corey Bridges. Viet Le is our senior producer. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.

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