The Transport Navigator 2020 Recovery: Is History Repeating Itself?

Noël Perry

WE KNOW A lot about the COVID-19 contagion now, some of which may be quite surprising. Here are five principal findings:

1.  There is nothing new under the sun: COVID-19 is but another in the regular stream of viruses that infect some proportion of humans. Like the common cold, COVID-19 is a coronavirus against which the medical profession is largely powerless to prevent infection from, save for the time-honored provisions of quarantining and social distancing. The medical profession has shown surprising ability to limit mortality once the infections occur, but, lacking a vaccine, it can’t hold off infection.

2.  You can’t hide from this one: COVID-19 is one of those viruses, that again, like the common cold, has proven highly infectious. That means, in a highly interactive culture such as ours, the infection will spread. It may spread more slowly due to limits on contact. Still, it WILL spread. Scientists tell us that masks can reduce the chance of exposure by 50% for each use. That is reassuring if you have but one trip to the grocery store per month. If, however, you have five trips to the grocery store, any statistician will tell you that your odds of avoiding exposure will fall to 3%. Put differently, this bug is noticeable because it spreads in many ways, and our normal lives put us in contact with those many ways.

3.  Deadly, but not so deadly: Fortunately, COVID-19 is turning out to be a somewhat more serious version of the normal annual flu season. Estimates of its lethality are steadily falling and are expected to end up in the range of a ‘normal’ bad flu season. This contagion appears more dangerous, primarily due to the media coverage it has earned. Were governments to count other flu seasons as carefully as this one, we would be surprised at the similarities. Three years ago, estimates of flu mortality for the U.S. ranged from 50,000 to 100,000 deaths. Estimates this time range from 50,000 to 200,0001, with the higher range having more to due with measurement than mortality.

4.  The odds are with you: Your chances of getting sick and dying from COVID-19 are much smaller than most people understand. So far, 5.6 million Americans have been diagnosed with COVID-19. However, experts say that four to 10 times that number have been infected, but not tested. How is that possible? It turns out that only about 5% of people infected get really sick, and most have either no symptoms or mild symptoms. Those cases are only diagnosed in the course of relatively rare testing of people without symptoms as with baseball players. These numbers tell us several things. With somewhere around 35 million Americans really infected, the chance of all us being exposed to an infected person becomes very large. See principle 2 above. Next, the numbers tell us that the chance of an American becoming infected is about one in a 1,000. Your chance of getting a cold this year is one in less than two. Finally, the chance of an American dying from COVID-19 is about one in 10,000. Your chance of dying from something else is one in 10,400. So COVID-19 has increased your chance of dying by 4%, but 4% is a very small chance.

5.  There is light at the end of the tunnel: Flu contagions have a well-understood life cycle characterized by a rapid rise in cases to something called ‘herd immunity’ followed by a more gradual fallback to normal infectious disease noise levels. The virus spreads until it runs out of vulnerable people to infect. Once infected, they become immune (or die), leaving a decreased population of targets. One can achieve the same result through immunization by vaccine. There is also the certainty that the virus will mutate, sometimes getting worse, sometimes getting less powerful. Still, the pattern seems to hold. In this contagion, we saw the standard pattern first in China, then Europe, then in the Eastern U.S. and then the big Sun Belt states as well as Mexico and Brazil. I want to emphasize that these viruses go away! As of mid-August, the global count of daily new cases had already fallen by a third from its max. Think of it this way. Viruses like COVID-19 have been going around for most of human existence. People have not worn masks before. Why do we expect this contagion to suddenly require us to make mask wearing a permanent thing?

Our governments will let up: Here’s what these principles tell us. There are two big lessons that both lead to the same economic and business result. First, the crisis will end along with the restrictions. Second, this contagion is simply not a fundamental threat to human welfare, the kind that justifies suspension of economic activity and personal liberties. Perhaps it seemed that way back in February and March. The stats tell us clearly that the threat was profoundly overstated. Whatever one concluded about the wisdom of our leaders back then, the reality means that they will be very reluctant to reimpose such restrictions when most Americans are behaving normally and are becoming increasingly aware of the costs of the restrictions. As part of this reaction, it is more and more apparent that American economic and cultural life is intimately interconnected. There is no way to surgically incise selected activities for embargo without massive disruption. For instance, there are well over a million jobs directly or indirectly dependent on high school sports, accounting for about 1% of American employment. Add up all such disruptions and you get the second quarter of 2020, the worst economic quarter in U.S. history.

Fortunately, for trucking, the sectors recovering fastest tend to generate a lot of freight. That is because of a change in the split between purchases of goods and services.

What a third quarter for trucking! One concludes then that the U.S. is opening up and will steadily move back towards normalcy. How fast will that be, and will there be some changes to that normalcy? Initially, the movement upward will be quite fast, with the third quarter being the fastest growing quarter in U.S. history. Fortunately, for trucking, the sectors recovering fastest tend to generate a lot of freight. That is because of a change in the split between purchases of goods and services. Normally services consume 75% or more of consumer dollars. With continuing limits on openness and the public’s lingering fear, restaurants, airplanes, and spas are half empty. Yet with employment growing and the cash from the stimulus funding, Americans have money to spend. They are spending it on housing and goods, goods that move by truck. As a result, in the third quarter, truck freight grew by twice the rate of its best quarter during that 2017-2018 peak. Accordingly, capacity was tight, and rates rose rapidly.

What goes up will come down: Will such growth continue? I think not for four reasons. First, economic peaks never continue, beyond a quarter or two. We saw that in early 2018. It will happen here. Second, one must not forget the profound trauma caused by the spring lockdowns. If your town is like mine, you are passing scores of closed businesses, some large, some small. Such pain is bound to affect the willingness of entrepreneurs to take risks. Yes, the American instinct to try new things will return—but not for a while. Third, the consumer spending that switched from services to goods will move back to services. Cancun or Disneyworld will look mighty fine next February. With garages and drawers full of the current spending, consumers will cut back on goods. They have already bought the boat and resort wear, and that will be the time to use it. Meanwhile, some of those trucks that were full of goods will be empty.

Can one pay off loans with printed money? Finally, our government’s ability to stimulate the economy has limits regardless of financial theory in Washington, D.C. Some of the limits will be budgetary, as we will see commonly in local government where borrowing is restricted. Most states have exhausted their unemployment benefits. Their only apparent source of new funding would be the Federal Government. In Washington’s case (Congress and the Federal Reserve) the limits will be gradually, but decisively, be imposed on financial markets. Policymakers are still convinced of their ability to create additional stimulus without a negative reaction from financial markets. However, the federal deficit and the Fed’s money printing (quantitative easing) are in such unprecedented proportions that financial market reaction is inevitable. The only question is when. The Federal Government pays about 2.5% interest for its record borrowing. That equals 8.7% of the U.S. budget, or about $400 billion. It takes little creativity to see a combination of increased deficits, inflation, and reduced debt ratings to see that interest rate double, to a rate about equal to long-term averages. At that point, debt service would be $500 billion—more than 18% of the federal budget. What would have to be cut to cover those dollars? Or would the government simply continue its deficits and money printing, daring the financial markets to react—as did Brazil, Argentina, Italy, or Greece?

Don’t let the goods suck you into euphoric decision making: We are left, then, with a tenuous (and possibly confusing) time of trucking prosperity. Things are very strong right now, probably record strong. But, to think that a disruption as extreme as the COVID-19 lockdowns will not have prolonged effects, is foolish. It will be wise to think back to the euphoria in the truck spot market in January 2018. We know now that by mid-summer, that lovely rose had thoroughly wilted, ushering in a year or more of very difficult times. Something very similar is likely in 2021.            

Noël Perry is TIA’s Chief Econo-mist and serves as Principal with Transport Futures, located  in Lebanon, Pennsylvania. He can be reached at [email protected]

1 The current official estimates include many deaths with strong contributions from other problems. Factor those problems out and you get a much smaller estimate.