Tight capacity will drive year-end snapback in trucking markets: TIA economist

The “snapback” in freight markets is going to be hard and fast, driven by tighter capacity as drivers leave the current falling market, according to the chief economist of the leading third-party logistics providers’ (3PLs) trade association.

Longtime industry economist Noel Perry, now chief economist of the Transportation Intermediaries Association (TIA), told a TIA-sponsored webinar this week that he sees a recovery in which volumes fall off sharply this quarter and into the third quarter, climb back slowly, but face a capacity crunch because of the number of trucks put “on the fence” by owners beaten down by low rates and volumes now.

“This baby got bad all of a sudden and it didn’t get back because markets were inherently weak,” Perry said. “This one stopped all of a sudden. So there is likely to be some sort of a whipsaw event as people suddenly go back to business.”

The reduced volume levels that Perry sees are from what he estimates will be a 20% decline this year, with year-on-year comparisons not rising above the prior year until the second quarter of 2021. He noted that after the decline in 2009 during the Great Recession, freight volumes didn’t get back to their pre-recession point until 2015. Things won’t take quite that long this time, he said, but Perry said he didn’t expect to see volumes of the fourth quarter of 2019 return until “sometime in 2023 or 2024.”

Although a full return to 2019 levels isn’t slated for a few years in Perry’s model, he did say growth should be “relatively steady and low” and will return the market to a “stable” state at the end of the year.

But markets are going to hit what Perry said would be a “big surprise … an anomaly.” Even with a slowly rising freight market, Perry said he sees capacity utilization in excess of 100% by the end of the year, only climbing down below it in the first quarter of next year, but still remaining elevated.

Source: Transport Futures

With the sudden decline of the first half of 2020, “because the bad things all happen at once, we have the need to shed capacity five times greater than we did in 2009,” Perry said. That would take 400,000 trucks off the road this quarter and 200,000 the next, he added.

And although he doesn’t see the volumes of the fourth quarter of 2019 returning for a few years, they will increase enough that he described a marketplace that “jumps up” later this year. “It usually takes us a quarter or two until we realize the need to change something, and by the time we start adding drivers, the marketplace is already tight,” he said.

“Trucks are parked and won’t be manned, so pricing should be relatively attractive once we get into late this year and next year,” Perry added.

It’s possible that fleets will be better able to manage their capacity than they have in the past,” Perry said. It’s possible that drivers won’t be laid off at the rate they have in the past (and Perry did not mention the possible impact of the Paycheck Protection Plan, designed to keep people employed though not through the fourth quarter). Or possibly companies will bring back drivers faster than in the past, he added. “If so, then we don’t get back to capacity levels as bad as they were in 2018,” he added.

The impact from these developments, without putting a number on it, is that prices will “drop badly in 2020,” according to Perry. But he said he expected prices to move up “strongly” late this year and into next year “because they are making up the capacity pressures of two downward years.”

The dynamics of this fast-changing market mean that the normal assumption — a weak market makes spot transactions more attractive — won’t necessarily hold this time around, Perry said. First, according to Perry, spot rates have fallen so much that they’re already down about where you’d expect them to be at the bottom of the cycle.

But secondly, Perry said, carriers with contracts “will be dying for business and they will accept every tender they get.” Some of the best opportunities in the spot market are when “the contract guys stop accepting every tender and dump business on the spot market.” That’s not the scenario Perry sees for much of this year.

Historically, the spot market share goes down in a downturn because “people are looking for the easiest way to move freight, and if a contract covers it, it’s what they do,” he added.

Perry cited similar instances to those in 2004 and 2017. “I think it’s possible now that prices will go through the roof and truckers will be unparking their trucks and giving out bonuses to get those people back they laid off,” Perry said.

But looking into the future is particularly difficult this time around, he added, because “we just haven’t had a shock of this magnitude before.”

“I can tell you the industry will be surprised by the snapback,” he said. “There will be a time when there will be scrambling for trucks.”