We are now one month into the New Year. As the old saying goes – time flies. And these days it seems to fly ever faster. Before we know it, we will be talking about 2022! But let’s not get ahead of ourselves. We still need to get through 2021 and the outlook is somewhat murky. Yet there is reason for hope.
2020 certainly was a remarkable year in many ways. And it wasn’t just because of the COVID-19 pandemic. The trade war with China was already in full swing before the pandemic and a raucous election put stress on the supply chain. Just before COVID hit in full force, trucking activity was already trending downward in January of 2020.
But the year was anything from an ordinary recession. By the second quarter business inventories had rose at a record pace, mainly due to manufacturers reopening their previously closed plants. By the final quarter of the year, we began to see broader trucking activity once again begin to rise. And with consumer spending on the rise and a rebound in residential construction, could we be on the other side of it?
The Picture is Unclear
While we all hope for a much better 2021, the picture is still unclear. The timeline surrounding a full recovery will be largely dependent on how quickly the COVID-19 pandemic can be brought under control. With a new administration in place and vaccines being rolled out, many hope for a quick resolution, but medical experts recommend caution.
Even more, other countries are already experiencing vaccine bottlenecks that could threaten an effective herd immunity strategy. Already, domestic, and international supply chain disruptions are causing fissures in the market. With supply chain issues on the rise and acting as a strain on imports, many expect continued weakened expert activity in 2021.
A major source of the transportation bottlenecks can be traced back to the ports. The main problem lies in getting both the containers and ships to the right place. There has been a lot of documented delays at some of the nation’s largest ports of call, and issues on either side of the supply chain do nothing to help relieve import/export constraints.
All this is compounded by a pressing revenue shortfall faced by state governments and municipalities across the country. Without adequate funding, local governments are not able to invest in roads, bridges and other improvements to public buildings and public infrastructure.
Trucking and Transportation Volatility
Against this backdrop, trucking transportation prices are beginning to rise again. Trucking activity across all segments is beginning to rise. And while this activity is not matching the level we saw in 2018, when the economy was really roaring, it is a marked improvement over the abysmal readings during the height of the pandemic.
The effect of this on trucking freight and rates will vary over 2021 as consumer spending shifts away from retail goods and back towards services. The fact is 2020 was a wild ride for both Gross Domestic Product (GDP) and freight transport. GDP as it relates to freight transport suffered a contraction in the first two quarters of 2020 but rebounded in the third and fourth quarters as the economy picked back up and emerged from lockdowns.
Transportation research company FTR expects growth to be moderate in 2021, which is not a bad thing considering moderate growth is better than no growth at all. Their specific forecast calls for GDP growth of 4% in the first quarter, then by the fourth quarter of 2021 they expect that to drop to 2.6%.
So, even if we see some slowing in the freight economy, there is still strength in the broader economy, whether it be in retail trade, construction, manufacturing, or otherwise. A lot of this has been driven by an increase in demand for goods transported by truck combined with a continuing truck driver shortage driven by the pandemic and the new federal drug-testing clearinghouse.
A Closer Look at Port and Trucking Data
Trucking analysts see active truck utilization recovering a bit since the height of the pandemic, but it was a big hole to crawl out of. The share of all Class 8 trucks hauling freight at any given moment dropped from 90% in 2019 to as low as 82% from March through October of 2020. And while we are back to close to 96%, in 2017 and 2018 the industry was at near-100% utilization across all segments.
In 2021, rates have already started to pick up. With high demand and low utilization both on the horizon and projected to get worse as we move further into the year, contract rates could wind up a full 10% higher than where they were at the same point last year. Spot rates are on the rise and many analysts are having a hard time seeing where they level out.
One of the other big unknowns is the balance between goods and services. The boon for trucking during the pandemic has been the boom in goods deliveries, even as the service economy was almost wiped out. Still, not every fleet segment has come through unscathed. Those involved in food service or hauling equipment for events have been hit especially hard.
All of this is driven by the problems we mentioned earlier at the ports. While there has been an improvement in intermodal traffic since mid-year, the big story of the day are international imports, which have seen a huge surge in the first month of the year, which itself is driven by the retail sector.
With inventories at extremely low levels, retailers are pumping money out to restock, especially as the economy is expected to pick up in the second half of 2021. This record level of import activity is contributing to a rise in nearly all transportation segments. And this is at a time when ports on the nation’s West Coast appear to be losing ground to their East and Gulf Coast counterparts.
Still, don’t expect West Coast ports to just fade into the sunset. While there has been severe congestion at ports in Southern California, the first month of 2021 as seen a sharp rebound in West Coast port activity.
The United States in 2021
The biggest blank spot in the trucking and transportation crystal ball remains the COVID-19 pandemic. With the U.S. nearing 400,000 deaths, cases and infections seem to be trending in the right direction. Still, it is anyone’s guess as to when the country and even the entire world will get back to anything even close to resembling “normal.”
Many expect cases will peak out sometime in mid-February, especially as the vaccine proliferates. It will be several weeks before anyone has a good idea of when we will be able to see the light at the end of the tunnel. Fortunately, even with a new administration in Washington D.C., no one is expecting any widespread shutdowns or lockdowns.
Even with no lockdowns, headwinds remain. For the first time since April 2020, the U.S. Bureau of Labor Statistics reported a decline in the overall number of payroll jobs. While the vast majority of them were in leisure and hospitality, there are knock-on effects to a cratering job market within the once-thriving service sector.
In addition to declining payroll jobs, unemployment also rose. Growth will slow, which itself will have an impact on the trucking sector, should the unemployment situation not improve rather quickly. And there are still unknowns regarding government spending.
A New Political Calculus
The Biden administration has come out in support of more stimulus, but there is still a question mark on whether they will actually be able to get more money injected into the economy. With the Senate evenly divided and the filibuster still in effect, the Biden administration will need the help of moderates on both sides of the aisle to get anything passed.
In addition to providing additional unemployment benefits and stimulus checks directly to Americans, the Biden administration plans to push a major infrastructure overhaul. Questions of how it would be funded remain, but major players in the trucking and transportation sectors have come out in support of a fuel tax to fund infrastructure improvements.
The question is whether there is a political appetite for big deal making in the current political environment. Both sides are still far apart on minor matters, so getting them to the table on major ones will continue to be an open question.