The word that Craig Fuller used to describe the freight market in February: “abysmal.”

That was one of the initial observations in FreightWaves’ February State of Freight webinar. But could it be that the month marked a low point in the long freight recession?

Here are five takeaways from Wednesday’s webinar. 

Another tough month in the freight market

Fuller, FreightWaves CEO, said he had spoken to several trucking executives who had a high exposure to the spot trucking market, and that it had been “a pretty abysmal February.” But that’s when the possibility that the end of the cycle had arrived came up.

“One of them said that this was sort of the beginning of the end of the cycle,” Fuller said. “So it’s the big washout and I think that’s a fair statement.”

The “washout” is the exit of capacity that the market has been waiting for since the beginning of 2023. Predictions of a stronger market by the end of last year never came true, and there was wide agreement in the trucking sector that it was stubborn capacity sticking around that was bringing about a freight recession that would not end.

The February market perspective comes after signs of an upturn in January, Fuller said. And he pointed to an unusual cause for part of it: tax refunds.

“A lot of folks that have been impacted by inflation are getting a surge of money, and they’re spending that in January,” Fuller said. “And we don’t seem to be repeating that in February, March and April.”

The end result is that “as bad as February may feel, I think the reason it feels worse is because things were on the up and up,” Fuller said. The hope, he said, is that “we’re bouncing off the bottom.” But he added that he did not foresee a return to the lows of last May. “I think we’re actually in pretty good shape.”

Capacity continues to bleed out

One of the reasons for that optimism: the continuing decline in net trucking authorities, as shown in the CDNCA.USA chart in FreightWaves SONAR.

Fuller reviewed the number of motor carrier authorities in recent years, going back to the weak freight market of 2019, followed by “this massive build and growth in authorities during the COVID cycle.” Authorities collapsed after that, and Fuller said they remain in a “churning-out phase, which is actually positive for the fleets because it means there are less participants in the market.”

“I doubt we’ll see expansion in 2024,” he said. At one point, it could be argued that the number of authorities was 90,000 more than was needed.

Zach Strickland, FreightWaves’ director of freight market intelligence, said the loss of capacity “still has a long way to go” but that net revocations of motor carrier authorities are trending lower.”

Spot vs. contract and what it means

Fuller said the relationship between spot and contract rates is key, and what is happening now suggests a market that is returning to normalcy.

In a normal market, spot rates might be about 20 to 35 cents per mile less than contract rates, “so it’s cheaper to go spot.” But during the strongest days of the COVID bull freight market, it became more expensive to book freight in the spot market than the contract market.

When that happens, Fuller said “it was an opportunity for carriers to make a lot of money by shifting capacity” into the spot market. But when spot rates collapsed in the second quarter of 2022, according to Fuller, “shippers said, ‘Hey, I don’t have to honor my contract rates so screw it. I don’t care if the carriers get upset at me. That’s not going to matter anyway because I don’t need them.”

But Fuller said with spot and contract rates now more in alignment, as the lagging contract rates adjust to the new reality, it’s a sign of “rational behavior.” With the two rates, contract and spot, normalizing their relationship, “it starts to suggest that the recovery in the freight markets is back and the market is starting to act rationally,” Fuller said. 

But that behavior might not hold. Fuller said when the rates start to normalize, it could result in situations where carriers reject contract freight and turn to the spot market that has gotten up off the canvas. “Carriers now have options to actually do what the shippers could have done last year, and that’s go find something more financially rewarding.” If that happens, the rejection rates can “skyrocket,” he said.

California’s weather issues

With another atmospheric river pounding the Golden State, it raised the question: What does this mean for produce season?

Strickland said — after admitting “the produce season fascinates me” — that the heavy rains in the state are not just a flooding issue, but can delay planting as well. “Those harvests can get delayed because the fields are too wet to plant,” Strickland said. The result is that normal seasonal flows get “pushed out,” or even worse, crops can be ruined by the excessive wetness. 

The refrigerated season for California produce usually runs from late March through July, Strickland said. That’s when disruption in the markets from the rains could take place, “and I think it’s going to happen,” he added.

That disruption means that the demand for freight ends up being in a smaller window. “The sense of urgency is higher,” Strickland said, and that could create profitable opportunities for produce carriers.

How are earlier calls looking right now? And what does it mean for brokers?

A listener on the webinar asked whether Strickland and Fuller were sticking to earlier bearish predictions heard at the Future of Freight Festival from November in Chattanooga, when the State of Freight for that month was held live.

Fuller said at that time, he was thinking there might not be a turnaround until early 2025. “We’re constantly getting new information here and we’re bringing it in,” Fuller said. “But yes, I have become more bullish. But it’s not dramatically different. I wouldn’t say it’s a quarter ahead, but maybe two quarters.”

The shifting of margins is not good news for already beleaguered brokers, Fuller said. The spread between contract and spot rates, which are now normalizing, is “where the brokerage margin lives.” When spot rates invert to lower levels less than contract, “they make a lot of money because they’re able to charge high premiums,” Fuller said. But a compression in the rates results in tighter margins, “and we see brokers lose in this part of the cycle.” Conversely, it’s that sort of spread that gives more power to carriers, he added. 

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