If there is one current truth, it is that 2020 has been an unprecedented year. It has been over a century since we last dealt with something of this scale, and perhaps not even then. When was the last time we had a global pandemic combined with a near-Depression level recession and this kind of social unrest? These are certainly extraordinary times.
Fortunately for those working in the trucking and transportation sectors, goods must still be taken from one place to another. And now, more than ever, truckers are needed to deliver essential supplies to those who need them. This has kept trucks moving, but still the trucking industry has been hit from multiple angles from this crisis. Trucking companies continue to struggle to figure out how to cut costs and survive during a global pandemic.
While there was a fair amount of pent-up demand after the COVID-19 shutdown, other sectors of the economy are dragging on the industry. Retail movements are solid, but the manufacturing sector has undergone a fairly sizable contraction, which has decreased the number of freight movements required in the sector.
Digging Deeper into the Numbers
The shutdowns caused by COVID-19 started in March and resulted in an immediate and substantial contraction across the board. No industry and no sector of the economy was spared. This initial shutdown lasted for over six weeks with a reopening beginning in May in some states. By June we saw a big jump in economic numbers as people spent money after being in lockdown. Spot freight rates reflected this dynamic.
The problem is the disparity between consumer and industrial sectors. There has been a clear difference in both sectors, as financial help from the government, additional employment benefits and PPP loans. We also saw the CARES Act, stimulus checks and other efforts to prop up the consumer economy. New home sales are also up across the board.
The main problem is in the industrial sector, which is significantly below where it was before the pandemic. Whether you look at core industrial production or manufacturing, the numbers are down. Durable goods orders have also taken a big hit. Even with the increase in consumer metrics, the gap is wide.
Interested parties can see the disruption that the supply chain has gone through as the pandemic has progressed. You can see this highlighted in the overall inventory-to-sales ratios. Inventories are incredibly low while sales are quite high. We may see a situation where the retail sector requires a massive infusion of inventory. Will this further prop up the numbers?
The fact is low inventory levels put pressure on the movement of goods. The transportation sector has also seen a big increase in freight traffic coming out of California. The question now is whether or not the strength we see now will continue.
The Big Question Mark
Considering this is an unprecedented situation, no one knows how it will all play out. It may be too early to say if the sector’s strength will continue. Some analysts are quite pessimistic, but the data may still show a solid recovery. We could still be looking to mid-2021 until we see even a basic normalization. This is especially true in light of what is going on with manufacturing. The largest part of freight movements come from the manufacturing sector.
Some analysts believe the retail surge from restocking and stocking for the holidays might give the industrial and manufacturing bases time to catch up. Still, this may be an overly optimistic point of view. With unemployment claims still high and economic disruption still as far as the eye can see, it may not be until 2022 that we see any meaningful normalization.
One only need to look to freight rates to see the full picture. The spot market as been on a roller coaster ride for most of 2020. Rates were up for a brief period during the start of the pandemic, but then bottomed out in April. Loads were down almost 60% year over year. For an April reading, rates were down nearly 25%. Then the market shifted again in May and June. The data has simply been all over the place.
Other Factors at Play
A broader look at the trucking sector will reveal other interesting details. Dry van, for instance, has remained especially strong throughout the pandemic. Load volume in the dry van segment has been 40% higher year over year. A lot of the movements in the dry van category can be attributed to the automotive market, which has been seeing brisk sales after the spring shutdown.
Consider, however, that the spot market does not represent the overall freight market. The overall freight market has still not fully recovered despite the jump thanks to the movement of essential goods. With the inventory side so lean, manufacturing still has not picked up the slack. Freight research firm FTR believes that rates will be down this year compared to 2019, but that they will rise in 2021.
A big reason behind rising spot rates is the always-familiar capacity problem. Capacity is currently running tight across the trucking industry, regardless of trucking company size or type. But why? The main factor is that not all the truck drivers lost during the pandemic have been brought back into the fold. Compound this with a pre-pandemic truck driver shortage and you can see where the problem is. Simply put, it isn’t for a lack of trucks, it is for a lack of truck drivers.
But with the trucking industry considered essential during the pandemic, why is it that fleets had been slow to add drivers back into the mix? Well, there are many reasons, with the biggest one being nagging uncertainty, but that isn’t the only problem.
A Fear Among Fleets
Fleet managers are also dealing with federal assistance, whether it be unemployment payments, PPP loans, or stimulus checks. When combined, these stimulus measures may have put less pressure on truck drivers to return to work. After essentially being paid to stay home, many operators may be less inclined to make the effort to get back into the cab.
There is also the new drug and alcohol clearinghouse to consider. While it has been quite successful in doing its job, it has contributed to the truck driver shortage. From January through July, nearly 30,000 truck drivers tested positive for drugs or alcohol or otherwise refused a test. This represents a large chunk of people who cannot currently be tapped to help fill the employment rolls.
There are also some inflow issues related to licensing and hiring. According to the Commercial Vehicle Training Alliance, social distancing and COVID-19 problems in some states have resulted in 40% less CDLs being issued in 2020. The bottleneck in the bureaucracy is causing major problems. As a result, fewer truck drivers enter the market.
Another aspect can be seen in the impact COVID-19 has on older truckers. It is highly likely the industry has seen a big wave of temporary or permanent retirements due to COVID-19 as older truck drivers decide it is not worth the risk to continue driving and potentially contract COVID.
Finally, analysts are seeing a lot of competition within trucking segments. Consider that local delivery has grown 9% since February. With so many more people at home ordering goods and not going out, the local segment is exploding. This generates competition among fleets who are all looking for the same truck drivers.
In the end, FTR projects that trucking rates will be down around 2% year over year once all is said and done in 2020. As vaccine development ramps up and pharmaceuticals take up more space in reefers, we could see the refrigerated segment make a big uptick in the final quarter of 2020, but don’t see any huge moves. It is highly likely the trucking industry will not see any significant growth until at least mid-2021.
In the end, provided the economy improves and we don’t see a massive third wave of the virus, the overall transportation sector should improve by leaps and bounds. Expect to see both truck drivers and fleets get off the fence and get back to work in the market, especially if everyone else is doing it and there is money to be made.