Trucking rates surge amid restocking efforts in COVID-19 pandemic

Spot trucking rates continued to rise as drivers delivered goods to allow retailers to restock after consumers depleted inventories in the wake of the coronavirus disease, or COVID-19 pandemic. But analysts expect rates to fall as freight volumes decline and the U.S. economy enters a recession.

Dry van spot rates rose 2.4% in the week that ended March 29, from the previous week, as truck drivers hauled freight to replenish retail inventory, according to DAT Solutions. Rates, however, are likely to fall this week as a result of declining load-to-truck ratios. But in the Southeast, ratios continue to rise on northbound lanes from the region.

Recently, truckload and airfreight sectors have been strong in response to the supply chain disruptions from the pandemic, but freight demand is expected to start falling in April, according to a transportation industry update from senior research analyst Benjamin Hartford and research analyst Andrew Reed, both of Baird. The decline is expected to become evident starting with a decrease in the Purchasing Managers’ Index. The index shows whether the manufacturing sector is growing or contracting. A reading above 50% indicates it’s expanding, while a reading below 50% shows it’s contracting. Hartford and Reed expect a reading below 50% for March, a month that is historically good for transportation.

Spot truckload rates have risen for three consecutive weeks, according to Internet Truckstop, but the rise moderated last week from the previous weeks. The moderation looks to continue in April, and this is consistent with typical seasonality when rates have historically fallen between 2% and 3%, according to Hartford and Reed. Consumer demand is expected to fall after the initial disruptions from the COVID-19 pandemic start to settle.

In April, weakness in industry volumes will become evident in consumer and industrial end-markets, Hartford and Reed said. Retail and consumer demand look to soften as a result of retailer closings, including Macy’s, Kohl’s, US Foods, Gap and L Brands, and a decline in overall spending. The analysts noted a rise in personal consumption expenditures correlates with an increase in retail sales and will be negatively impacted by rising unemployment rates, fewer hours worked and lower wage growth.

The U.S. industrial sector is expected to follow declines in the sectors in China and Europe. The Purchasing Managers’ Index is projected to fall to 46.1% in March, from 50.1% in February, according to consensus estimates. Industrial freight volumes were stable through mid-March but have started to fall over the past two weeks, according to Hartford and Reed.

Freight transportation has outperformed the broader market since March 3, when the Federal Reserve cut the federal funds rate by 50 basis points. Transportation has historically outperformed the market after the Purchasing Managers’ Index falls below 50%, and the relative performance of cyclical trucking companies has been most favorable during the weakest periods, according to Hartford and Reed. The strength of transportation in March looks to lead to further outperformance as the Purchasing Managers’ Index dips below 50%.

In a recent industry note by analysts Justin Long and Jack Atkins, senior associate Brian Colley and associates George Sellers and Wade Schaller, all of Little Rock-based Stephens Inc., they highlighted an expert call with FTR’s CEO Eric Starks. FTR assumed the United States is in a recession that is expected to continue through the third quarter. GDP is expected to fall 11% in the second quarter as industrial production falls 15% and U.S. freight ton-miles decreases 11%. FTR expects a U-shaped recovery that will extend into the first half of 2021. FTR also projected production cuts for transportation equipment markets that are expected to persist into 2021.

The GDP decrease in the second quarter is projected to be followed by a GDP increase of 3% in the third quarter and a 5.1% increase in the fourth quarter, according to FTR. However, on an absolute dollar basis, it doesn’t expect GDP to recover to first-quarter 2020 levels until early 2021. FTR expects industrial production to fall by 14.7% in the second quarter, decrease by 4.5% in the third quarter and rise by 3.6% in the fourth quarter.

Following the 11% decline in freight-ton miles in the second quarter, freight-ton miles are expected to fall by about 4% in the third quarter, according to FTR. Freight-ton miles should rise slightly in the fourth quarter as a result of restocking. Growth in the low-single digits is expected into 2021. The transportation sector won’t return to pre-COVID-19 levels until the second quarter of 2021, based on FTR’s U-shaped recovery.

The rise in truckload demand is expected to lead to tonnage headwinds in the second quarter of 2020, according to Long, Atkins, Colley, Sellers and Schaller. Temperature-controlled freight demand is expected to remain stronger than freight attributed to the industrial and energy sectors, including flatbed and bulk markets. The rise in unemployment might become an industry headwind later this year and early into 2021 as lower barriers to enter the truckload market and falling used equipment prices might lead to additional capacity in the market.

In the intermodal segment, FTR expects volumes to decline between 6% and 8% in 2020 as consumers reduce discretionary purchases. FTR doesn’t expect changes in modal shifts between truckload and intermodal. “On one side of the coin, there could be increased demand for truckload due to lower fuel prices and the need for expedited shipments,” said Long, Atkins, Colley, Sellers and Schaller. “But on the other side of the coin, there are some logistical challenges in truckload (drivers not wanting to accept long haul shipments, rest stop closures, etc.) and the fluidity of the rail network should improve as volumes decline.”

Regarding pricing, FTR expects contract rates to fall, while the spot market will see more significant change with a short-term spike as a result of restocking followed by a medium-term decrease in response to the weakening economy.

Truck equipment manufacturers are projected to see production cuts between 40% and 60% in the second quarter of 2020, from the first quarter, according to FTR. The decline can be attributed to a pause in production because of the COVID-19 pandemic. A slow recovery in truck production is expected following the second quarter as a result of a pause in demand. Production rates look to remain weak into 2021.