Trucking industry strength has ‘staying power,’ might last years, reports show

The trucking industry is as healthy as it has been since 2017-2018 when the backdrop for carriers was strong, and the existing vigor might be the start of a “multi-year upcycle” for the industry, according to recent reports.

The third-quarter shipper and carrier rate reports by FreightWaves show the industry reached a peak in mid-2018 as too much capacity became available and contributed to an 18-month downward trend. The downturn came with other issues, including trucking bankruptcies, declining new truck orders and rising insurance premiums, and the result was a reduction in capacity.

Unlike the mid-2018 peak, the improving industry trends that have started to develop “have staying power,” and the industry looks to be “on the cusp of a new multi-year upcycle,” according to the reports.

As capacity tightens, contract truckload volumes have risen 27% at a time when they typically decline. The industry usually experiences a seasonal slowdown after Independence Day.

“Instead, an acceleration in demand is occurring, and the strength is manifesting itself in the midst of the deepest recession since the Great Depression,” the reports show. “The trucking industry is benefitting from a host of factors in our view, principally among them being the generous government stimulus and unemployment benefits that are keeping consumer spending intact; the fact that demand for goods is robust relative to services in light of COVID-19 which is a positive tailwind for trucking; a resumption of imports to the West Coast U.S.; and finally, a broad rebuilding of inventory as the economy recovers.”

Load volumes have risen 28% above 2018 levels, which was a strong year for trucking. Because of the existing conditions, FreightWaves analysts expect upcoming contract rate negotiations to be at least flat to positive low-single-digit increases for carriers. Along with the tight capacity, as measured by tender rejections of above 20%, spot rates continue to rise.

Through Sept. 27, truckload rates continued to rise, and load-to-truck ratios showed that capacity is tight on the spot market, according to DAT Solutions. However, the pace of the increases has slowed for dry van and temperature-controlled freight, but flatbed rates continue to rise rapidly. National spot rates were more than 25% above 2019 levels, and rates have been rising on most major trucking lanes and activity is up across the spot market, according to Truckstop.com.

“This pushes the negotiating leverage to carriers in our view,” according to the reports. “Even if contracted load volumes decelerate and turn downward, it would take a nearly 30% collapse for them to go negative. Meanwhile, as noted, the rate picture is dramatically improving, which should allow carriers to drive meaningfully higher profits and cash flow from now into 2021.”

Recently, shippers have started to renegotiate rates to obtain capacity because of the rise in freight volumes, according to a recent article in the Journal of Commerce. Freight demand has risen beyond expectations as U.S. consumers who would have normally been spending on summer vacations have instead purchased items for their homes, either online or in stores.

“Typically, you see a disruption on the supply side or the demand side of transportation,” said Eric McGee, executive vice president of highway services for Lowell-based carrier J.B. Hunt Transport Services. “This year, it’s been both supply and demand. Demand has increased week over week for each of the last six weeks.” McGee spoke Sept. 9 at the Cowen & Co. 2020 Global Transportation and Sustainable Mobility Conference.

Some trucking companies have put a lower priority on customers that negotiated for rate reductions earlier this year, according to the JOC article.

“There are numerous examples of customers who have struggled to get their loads picked up, their tenders accepted, proactively come back to the carrier asking, ‘What is [it] going to take because we need to have our freight moved,” said Stephen Bruffett, chief financial officer for Green Bay, Wis.-based carrier Schneider National. Bruffett along with Eric Fuller, CEO of Chattanooga, Tenn.-based carrier U.S. Xpress, also spoke at the conference.

Fuller said shippers have come to the carrier offering to increase their contract rate to ensure capacity in the peak season. He noted that shippers volunteering to pay rate increases is “not something that happens a lot in our industry,” and some shippers are looking to 2021.

“You’re also having customers trying to lock in next year’s rate increase now, in the hopes that they can get a lower rate increase, rather than being fully exposed to the bid cycle in early 2021,” Fuller added.

J.B. Hunt, however, hasn’t looked to reopen contract rates amid the recent rise in freight volumes and will wait until the 2021 bid cycle, according to the article.

“We haven’t gone back to the market, saying the contract solutions we put in place last fall don’t work and we need to change them. That’s not the case at all,” McGee said. “We’re more surgical with our shippers, and [we] have good conversations as partners. Most of those shippers understand what’s going on, are working with us, and want us to be in a good situation.”

The FreightWaves reports highlighted several economic forecasts for the second half of 2020 that included a U-shaped or V-shaped recovery or a double-dip recession. The probability for each forecast happening was 40%, 30% and 20%, respectively.

“All in all, we currently see no obvious red flags or warning signs that suggest an imminent slowdown,” according to the reports, “And therefore, our expectation is for conditions in the trucking industry to stay relatively strong and slowly improve as we head into 2021.”

Real GDP declined 31.7% in the second quarter after falling 5% in the first quarter, according to the second estimate from the U.S. Bureau of Economic Analysis. The third estimate for the period is expected to be released Wednesday (Sept. 30).

In a recent webinar, James Bullard, president of the Federal Reserve Bank of St. Louis, expects third-quarter GDP is rise rapidly and that the growth might put the U.S. economy on track to “a sort of ‘full recovery’ by the end of 2020.” Aggregate national income might rise to the average level in 2019 by the end of 2020, said Bullard, adding that this would require GDP to rise 35% in the third quarter and 10.3% in the fourth quarter.

“These are big numbers but not outside the realm of possibility,” he said.

On Oct. 29, five days before Election Day, the Bureau of Economic Analysis is expected to release the advance estimate for third-quarter GDP.