N EARLY 2020, the question was whether the sluggish economy would slip into recession or simply continue the modest growth characteristic of a long recovery. For the truckload spot market, it already felt like a recession as that market had slumped from the extreme peak of early 2018. Everything else since then has depended on our government’s reaction to the appearance of a strong flu season now known as COVID-19. I say “our government’s reaction” because the contagion itself has little to distinguish itself from previous significant flu contagions; events that had little or no economic effects. However, this contagion has been perceived from the start as an existential threat to humanity, at least as much as the 1918 Spanish Flu, if not worse. As a result, governments across the globe ordered restrictions to human activity, aimed at the isolation of infected people, the time-honored defense against contagions.
Interestingly, the first effect of the restrictions was a short boon in truckload activity, especially van shipments.People, fearful of shortages, purchased extra supplies, represented by the widespread shortages of toilet paper. That boon to trucking soon turned to disaster as the lockdown orders spread, eventually causing a 32% annualized reduction in the United States’ Gross Domestic Product (U.S. GDP), easily the worst quarter in U.S. history. Overall truckload volume fell by 28% annualized, spot prices by 14%, not annualized.
In these numbers, there was a small but good sign in the difference between the loadings drop and the GDP drop. That difference is because of a bias of restrictions toward service functions rather than the goods’ functions that generate the most truckloads. Indeed, some sectors, like home improvement, gardening and supermarkets, had strong demand.
Fortunately, as more statistics on the contagion appeared, the panicked governments began to relax many of the restrictions, and the economy began to recover. The economic recovery has been as dramatic as the drop, akin to a room plunged into darkness then illuminated again with the flick of a switch. Importantly, with restrictions and fear limiting the consumption of services, money has been available for the purchase of extra goods. Such purchases have especially stimulated the spot market, a sector always hot when demand surges. It helped as well that disrupted supply chains needed extra trucks to handle surges and out-of-circuit moves. The result is a very tight spot market with rates up a healthy 27% in the third quarter.
LOVELY AS THE ACCELERATION IN ACTIVITY WAS, IT WAS MAINLY A REBOUND FROM THE ARTIFICIAL RESTRICTIONS OF THE SECOND QUARTER. IN ORDER FOR THIS THING TO HAVE LEGS, THE UNDERLYING ECONOMIC FUNDAMENTALS MUST DRIVE US FORWARD.
That number was bigger than the drop in the second quarter because spot rates had already been depressed before the COVID-19 restrictions. They had less to fall during the second quarter.
This rapid swing of prices is also an excellent demonstration of the relationship between contract and spot prices. There are two insights: First, note the much greater volatility of the spot prices, something that happens all the time. The spot market is the market that absorbs much of the volatility in supply chain activity. Second, note the delay in the contract market’s response. Prices fell a quarter after the drop in volume and rose a quarter after the rise in volume. That is typical of contract price moves.
As 2020 ends, we are watching the strength and staying power of the third quarter recovery as the economy moves through the fourth quarter. Here’s the key. Lovely as the acceleration in activity was, it was mainly a rebound from the artificial restrictions of the second quarter. In order for this thing to have legs, the underlying economic fundamentals must drive us forward. It is most likely that those fundamentals will resume the modest pace of most of this recovery. That means 2%-3% freight growth, some reductions in spot volumes, and a sharp retrenchment of spot prices. None of that should be surprising except to supply chain participants overreacting to the third quarter extremes. Such extremes never last.
The fundamentals could strengthen should a successful COVID-19 vaccine quickly eliminate pandemic fears. Or the housing market could finally start the boon people have been waiting for since 2009. Unfortunately, neither of such stimulants is likely, nor has Congress shown much interest in passing a stimulus bill before the new Congress takes over in January. More likely is an outright recession caused by the lingering effects of contagion fears and the trauma of the lockdowns. Look at any strip mall and see a sprinkling of darkened stores gone bankrupt during the lockdowns. How long will it take for new entrepreneurs to put down money to repurpose that capacity? In the same way, how long will it take for people to board airplanes for Las Vegas? This possibility worries me. It is naïve for our policymakers to think they can shut down the economy without lasting effects. If there ever was a time for you to be following the economy, New Year 2021 is that time.
One final collection of thoughts as we approach the new year. The COVID-19 trauma has accelerated several underlying trends already underway. While most of these changes are slow to be realized, they will have VERY substantial effects over time. I will mention just a few, each powerful in its own right.
- Online shopping: It is no coincidence that Amazon expanded hiring during the lockdowns. The new shopping habits, thus demonstrated, are not likely to revert. The same store-based retailers hurt badly by the lockdowns are under a bigger threat from online shopping.
- Downtown employment: Companies are learning that remote work works! Why pay high rents and endure long commutes, if your people can work from home? Only about 10% of Manhattan office workers (as of September) have returned to their desks on the island.
- Reshoring: We are learning the vulnerabilities of depending on suppliers half a planet away.
- Warehouse automation: Why have workers near each other interacting if robots and conveyor belts can do most of the work—at a lower cost?
- Federal fiscal and monetary policy: The current strength of the dollar and low-interest rates are dependent on the U.S. being the best-looking, ugly boy at a dance with all ugly boys. As deficits double and the Fed prints record-setting amounts of new money, the market’s tolerance of such extravagance will eventually end. Before 2020, that looked to be a 2030s problem. We may now have to pay the price for our self-indulgence a decade early.
All but the last of these trends are positives. However, the power of these changes is more than sufficient to require a somewhat painful period of adjustment. The move from steam to diesel in the railroads was great for rail productivity but devasting to boilermakers and pipefitters, not to mention the steam locomotive builders. Have you ever heard of Baldwin Locomotive Works? Long gone now! They produced 70,000 steam locomotives. The move to streaming is great for listeners and movie watchers but awful for sound system makers and movie theaters. I suspect my wife and I have seen our last theater movie; that, from a couple who watch five or six movies together per week. Here’s the point: after the virus fades into history, these are things that will be affecting our business and personal lives. We will quickly forget the virus, just as Americans forgot the Spanish Flu. These changes will become part of our lives. The events of 2020 remind us to keep our heads up watching for a change.
Noël Perry is Principal with Transport Futures, located in Lebanon, Pennsylvania. He can be reached at email@example.com/.
The viewpoints expressed by the author are for general informational purposes only, and is the opinion of the author. All information in 3PL Perspectives Magazine is provided in good faith, however we make no representation or warranty of any kind, express or implied, regarding the opinion of the author.
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