Morgan Stanley's truckload spot-market index hits seasonal lows not seen since '09

Investment firm Morgan Stanley & Co. said today that its measure of truckload dry-van spot-market capacity fell to levels not seen at this time of year since 2009, an indication of an overcapacity of noncontractual space—and, because contract rates often follow spot trends, a harbinger of a buyer's market for contractual services in 2016.

The firm's "Truckload Freight Index," which is published every two weeks—the last time being five days ago—and which serves as a proxy for spot-market conditions, has shown a "materially larger" decline versus the historical average from the just-prior cycle, according to Alexander Vecchio, Morgan Stanley's transportation analyst. The drop was due mostly to weak demand, though the firm detected a slight increase in truckload supply that was somewhat unusual for late October, Vecchio said in a research note.

Vecchio said he doesn't expect to see a meaningful increase in the index through the first two weeks of November, because any early signs of peak holiday-shipping demand are likely to be muted by persistently high inventory levels. The nation's inventory-to-sales ratio, which measures inventory levels relative to monthly sales, stood at 1.37 as of last month, according to the U.S. Census Bureau. At this time in 2014, the ratio was around 1.30.

The ratio spiked early this year, in part due to retailer over-ordering for the 2014 holiday season; historically low borrowing costs that encouraged inventory investment; and the impact of a labor dispute at West Coast ports that delayed the deliveries of early spring merchandise until after the spring season, by which time buyer interest had waned and retailers were left with unsold goods. The ratio has remained at elevated levels throughout 2015.

"Absent a significant pickup in demand, it is hard for us to envision a strong uptick in market tightness and rate-growth momentum until we start to see a material decline in supply," Vecchio wrote in his note.

The truckload spot market accounts for an estimated 20 to 25 percent of the total truckload market. However, spot pricing is considered a barometer of upcoming contract rate negotiations. Because the spot market has been weak all year, a tepid peak season could force carriers to settle for 2016 "core" rate increases of 1 to 2 percent, down from their expectations of 2 to 4 percent, according to Vecchio. Core rate increases exclude fuel surcharges and other so-called accessorial charges.

Not surprisingly, the analyst is taking a cautious stance on truckload contract pricing in 2016.