The U.S. Federal Reserve, or the central bank, raised interest rates seven times in 2022, bringing the current rate to 4.50%, its highest mark in 15 years. While these interest rates have had an effect on businesses—making it more costly for consumers and companies alike to take out loans and make purchases on credit—the Fed has no plans to reverse course in 2023.
Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office, in a comment to CNBC, said “Fed hikes and volatility have been central themes of 2022, and investors should expect both—along with hits to corporate earnings—as we enter the new year.”
Some experts predict rates will go as high as 4.75 to 5% in 2023. In fact, the Fed itself expects to raise interest rates even more than the current rate, and Fed officials predict it will go higher than the expectations of other experts, with a 2023 prediction of a benchmark rate topping out somewhere from 5.25 to 5.75%.
Interest rate hikes like these impact all areas of society, and shippers need to be prepared for how they will affect transportation.
With more interest rate hikes on the way in early 2023, it’s time for logistics professionals across the transportation industry to begin considering the effects of rising interest rates on their operations. Supply chain visibility is a must-have as the industry undergoes changes due to high-interest rates.
The high-interest rates that shippers can expect in 2023 are likely to impact transportation in numerous ways, creating the need for better supply chain visibility. Here are three important parts of the industry you can expect to be affected:
Since the supply chain crises that accompanied the COVID-19 pandemic, manufacturers have struggled to keep up with the demand for new semi-tractors and trailers. These demand issues, paired with driver shortages, caused major capacity crises. The capacity crisis has since begun to abate as manufacturers normalize production and consumers return to pre-pandemic spending habits. In addition, there has been improvement regarding component availability and cost inflation. Production logjams have eased.
However, now that these previous problems are being alleviated for the transportation industry, it is facing a new one in the form of rising interest rates. The interest rate increases are expected to curb purchases, including of trucks. After all, that is what raising interest rates is supposed to accomplish—curbing purchasing, reducing demand, and thereby cutting prices. Non-vocational Class 8 trucks, which include the big rigs doing much of the cross-country overland transportation bringing goods throughout the U.S., had an improvement in sales last year of 198,800 compared to 168,600 the previous year. But, sales are expected to go down to 174,000 (a decrease of 12.4%) in 2023.
Daimler Truck, the maker of Freightliner, described the variety of pressures on trucking in the modern climate. “The company’s outlook is especially subject to the further developments in the Russia-Ukraine war and its impact on the global economy as well as the development of the very high inflationary pressure and the associated central-bank increases in interest rates. The further macroeconomic, geopolitical as well as the COVID-19 pandemic development and ongoing supply bottlenecks, also harbor an exceptional degree of uncertainty.”
While the supply and demand issues are regulating (gas and parts), shippers could see capacity issues arising as older trucks spend more time off the road receiving maintenance, and fleets contract as owners grow reluctant to purchase new vehicles. A more visible supply chain and logistics strategies help shippers have a clearer idea of capacity and respond to it.
This past year included numerous major mergers in the trucking industry. A few important ones worth noting include Heartland Express paying more than $500 million to acquire Contract Freighters, Werner Enterprises paying $112.4 million for ReedTMS Logistics, and DB Schenker paying $435 million for USA Truck. However, 2023 will likely see M&A slowdowns, according to expert predictions. Primarily, there are two contributing factors:
So, this new year likely will not have the ripe conditions for these large acquisitions that were present in 2022. Nonetheless, that doesn’t mean M&A will stall altogether. Instead, as a result of current conditions, this year’s M&A is likely to see a large number of smaller transactions. Spencer Tenney, president and CEO of Tenney Group, says, “We won’t see as many transformational-type mergers and acquisitions as we did in 2021 and 2022. But small- and mid-sized transactions will be abundant.”
Any type of M&As will continue to create changes within the industry, with the full impact not being known until the process fully unfolds. Despite changes, shippers can improve their transportation management through increased logistics and supply chain visibility.
Another area that impacts transportation is fuel. Current conditions show that interest rate hikes aren’t all bad! After all, the Fed enacts them on purpose in an effort to control inflation. As shippers contend with falling freight rates, higher interest rates could lead to falling fuel costs. This effect happens due to the cooling effect of higher interest rates on economic activity. We saw this effect play out in September 2022 after the Fed created an interest rate hike of 75 basis points to about 3.00 to 3.25%. In response, oil prices went down about 1%. Brent crude futures went 0.9% lower, and U.S. West Texas Intermediate (WTI) crude went 1.2% lower.
For shippers contending with falling rates, lower operational costs could be a saving grace from the Federal Reserve. Spot rates have fallen by as much as 90% YoY in key markets, including in ocean freight rates going from China to the West Coast of the U.S. There have been record drops and faster-than-expected falling trade demand. The result could be an overabundance of ocean vessels and container capacity, potentially creating a price war.
While these kinds of patterns can be good and are helping to balance the record-high supply chain prices helping contribute to inflation, going too far has the potential to create a recession. Shippers can manage fluctuations in part through a more visible supply chain.
The Central Bank is purposefully increasing interest rates in an effort to calm inflation. However, this kind of move introduces challenges for consumers and businesses along the way. Rising interest rates create the need for shippers to find solutions that help them adapt and respond to changes.
As shippers face the positives and negatives of rising interest rates on the transportation industry, many turn to holistic supply chain visibility as a means of optimizing operations amidst historic inflation. With Intelligent Audit's supply chain visibility software, shippers can access a powerful suite of holistic options:
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