Roller Coaster 2020
It is now June 2020, and to say that the last six months in transportation and supply chain have been volatile is an understatement. It seems appropriate to take some time to recap what has happened and what may happen in the next six months.
Rolling into 2020, insurance was one of the biggest issues on the minds of carriers, who were seeing their premiums increase by as much as 20 to 30% without cause. Concern over so-called “nuclear verdicts” seemed to be at play. In recent years, injury settlements and payouts for trucking accidents have skyrocketed, and in a low-margin business like trucking, such increases can create very real problems for companies.
Volumes were about the same as 2019, but the large increases in capacity from 2018-2019’s freight resurgence had created a supply-and-demand imbalance and put downward pressure on rates, further compounding issues for carriers. Carriers got a reprieve at the end of Q1, as the imminent shutdown of the country due to COVID-19 caused freight volumes to surge. Suddenly, shelves were bare, and transportation was tasked with keeping them full as the entire country searched for the items they needed to remain safe at home for an extended period.
That increase was short-lived and basically ended the last week of March. After that, with the country in quarantine, volumes plummeted. Spot rates followed, falling below the cost of operation for many small carriers. This sparked a backlash as carriers and brokers traded public barbs over what was considered to be “price gouging” by brokers, leading to trucker protests in Washington, D.C.
May saw volumes start to climb higher, besting year-over-year marks as the United States began re-opening. Things are getting better – as volumes increase, so have tender rejections. Carriers are finding strength and choice in markets, and that’s where we are now. No one really knows what the rest of 2020 and the start of 2021 will hold, but that will not stop many from speculating. The Loading Dock is no different. There are two things we are watching: freight volume and capacity.
Volume is a hard one to predict. Sure, May and June volumes are up so far, and the period just before July 4 is typically a busy one in the spot market, but will they hold their gains? There is no clear understanding if a seasonal fall return of COVID-19 is likely or what that may look like. Does the country lock down again? Combine that with high unemployment from the first quarantine and a national election, and the American consumer may very well go into savings mode, as people are looking to rebuild their savings and feel secure with their place in the economy.
So, what does volume look like? Is it a “V” or “W” or maybe a “swoosh”? The immediate climb out of April has basically ended the swoosh idea, and it remains to be seen if volumes dip, but we anticipate that volumes come up and plateau. People have stocked up on so many things from the initial quarantine rush that there will be little need to replace them in the near term. Consumers will likely maintain the level of spending we are currently seeing due to generous unemployment benefits and government stimulus money. As those programs end, this will put pressure on the economy.
Capacity and how it reacts to volume will be the driving force for expenditures and how shippers feel about the freight recovery. Spot prices are not really tied to just volume, but the ratio of volume to available capacity. If volumes fall but capacity falls to a larger degree, prices will rise and do so quickly. That would drive up spot rates. As of now, we cannot see why carriers that can easily add capacity will do so. There was such a mad rush to add capacity in 2018-2019 that it affected the rate environment in a negative way – there will be little appetite to repeat that situation.
Will the capacity in the marketplace now stay? Payroll Protection Plan loans subsidized carriers as spot rates dropped at the start of Q2. As that money and the program run out, will those carriers be able to see those monies forgiven (turning it to a grant), or will this become new debt for those companies? Can they run and service that debt and remain a participant? If not, when do they fall out and make the supply-and-demand dynamic worse from that perspective?
National tender rejections rates continue to move up and grind, but they are not yet to that 7-10%, which would lift spot rates across the board. There is not enough volume being pushed down the route guides, which would allow for spot rates to rise, but the national volume situation is improving.
There are indications things will come back quickly, but those indicators have a lot of conditions applied to them, and no one knows if they can be met. Our gut feeling is that if volumes continue to climb and stabilize after July 4, there exists the real possibility that a freight economy recovery is well in hand and likely to stick. There may be enough volume and rate available to retain capacity that might otherwise leave the market. It is unlikely that additional capacity will be added at any time soon – at least not above today’s levels.
What do you feel is likely? Anything we missed? Don’t hesitate to let us know.