Crafting a Pandemic Recovery Plan

There is considerable euphoria in the trucking industry these days. The July 2020 issue of Broughton Capital Truck Freight Barometers® is entitled “Fasten Your Seatbelts! The Economy & Truck Marketplace are Poised to Surprise to the Upside.” The issue contains the following thoughts.

“In all three modes, the Broughton Capital Truck Freight Barometers® are reflecting an environment in which demand exceeds capacity by a significant margin . . . the underlying fundamentals have never improved this dramatically in such a short period of time. The rapid, intense improvement runs counter to typical seasonality, making the gains even more impressive. Normally, July demand is softer than June . . . This year's Q3 trends, however, are shaping up to be exceptional in every way.” The report goes on to say the following.

“Consistent with our very bullish outlook for the U.S. domestic economy, the demand side of the equation is expanding robustly. Meanwhile, the capacity side of the equation has been constrained, which magnifies the imbalance and contributes to an extraordinary surge in spot rates. Today's spot rate levels are poised to exceed contract rates. As spot rates had fallen in April to record low levels, both nominally and in terms of the gap between spot and contract rates, the meteoric rise in spot rates over the last 13 weeks has been even more spectacular.”

Similarly, the Morgan Stanley Freight (MSFI) Index “has improved sequentially and outperformed seasonality for the 7th time in a row . . . On absolute terms, the index now sits at the highest level for mid-August in over a decade . . . Our straight-line forecast now projects 2020 ending the year nearly on par with 2017 levels, the highest YE level on record.” There is encouraging news on the Covid-19 front. This week reported new cases of the virus in the United States have dropped into the 30,000 to 40,000 range and reported deaths have dropped into the 400 to 500 range. Do these numbers signal a strong fall and winter season for the North American freight transportation industry? Here are a few thoughts to consider.

The U.S. Economy

Thousands of companies, large and small have closed their doors, many permanently over the past six months. The pandemic, which triggered an unprecedented shutdown of America's economy, has caused the worst unemployment crisis since the Great Depression. The Labor Department's July jobs report released at the beginning of August showed that employers added 1.8 million jobs last month, sending the unemployment rate down to 10.2%. Initial weekly jobless benefit claims rose in mid-August and topped 1 million again, potentially pointing to an increase in layoffs after a summer surge in the coronavirus epidemic or perhaps to more people applying for benefits after President Trump temporarily added $300 in extra federal payouts.

The U.S. Labor department reported last week that new applications for unemployment benefits, a rough gauge of layoffs, climbed to 1.11 million from 971,000 in the prior week. While it marked the third consecutive month of job growth in the millions, the economy has so far added back less than half – about 42 percent – of the 22 million jobs it lost during the pandemic.

These statistics greatly understate the pain. True unemployment rose to nearly 32 percent in April after including all people working part time but seeking full-time jobs and those who were without jobs but wanted one. According to the New York Times, even now, well into the promised recovery, 28 million Americans are receiving unemployment benefits.

Job growth in July was less than half the pace of the June increase, and August figures may well show a still smaller increase or — amazingly — no job growth at all. And that’s with only 42 percent of the lost jobs having been recovered so far.

Consumer Purchasing Power

More than one-third of Americans who lost their jobs during the coronavirus pandemic and related economic recession cannot last more than one month on their savings. That's according to a new study from SimplyWise, which found that 38% of Americans who either lost a job or had their income reduced during the crisis did not have enough money stashed away to live off of it for longer than a month. One in five respondents said their savings would last just two weeks – an alarming statistic that comes just three weeks after the supplemental $600-a-week in unemployment benefits expired for some 30 million Americans.

Another warning sign emerged last week that bears watching. “Spending among those no longer receiving unemployment insurance (UI) benefits is starting to fall and is particularly acute with lower-income Americans. Spending by lower-income Americans who previously received UI is falling at a rate of 12% year-over-year; previously, the low-income population was the strongest spending cohort. It is less bad for previous middle- and upper-income UI recipients but still falling materially. If Washington does not quickly renew the expired benefits, there could be a sharp drop-off in consumer spending and therefore trucking volumes in coming weeks. The current talk in Washington is that a deal is far away as negotiations have reached a stalemate. (source: Freightwaves: The second freight frenzy of 2020 is upon us, Andrew Cox, Friday, August 21, 2020).

The New York Times also reported that there is evidence that a second wave of layoffs and furloughs is already underway — roughly three out of five workers who had reportedly returned to work have either been let go again or been told they are at risk of being sidelined again.

The Trump proposal calls for special unemployment benefits of $300 per week, half the amount lawmakers provided in the first round of the CARES Act. There is no money for schools, for virus testing, or for state and local governments. Since this will impede millions of people from paying their rent, mortgages and/or food, this is not a plan to reactivate the U.S. economy.

The Back to School Conundrum

The University of North Carolina at Chapel Hill abruptly decided it will no longer hold in-person classes on campus after about 130 students tested positive for Covid-19 in the first week since classes began. During that week, the Covid-19 positivity rate among students rose to 13.6% of the 954 students tested, and five employees also tested positive, according to the university’s Covid-19 dashboard. UNC reported that 177 students were in isolation and 349 were in quarantine, both on and off-campus.

The stunning rise in cases, just a week after classes began, illustrates the speed of Covid-19 and the difficulties of bringing young people into proximity during the pandemic, even as students begin their return to primary, secondary schools and college campuses.

The student education issue is very complex. There are a host of variables such as computer and network access, daycare costs, safety protocols for students, teachers and staff, classroom sizes, learning conditions at home, and the need for parents to leave their homes to perform their jobs, that complicate the return to school process and impede the reactivation of the economy.

The Recovery Process

The coronavirus is still rampant even as new case numbers and deaths decline. There are worries about a big spike in Covid-19 and in the flu this fall. Many businesses, schools, and other organizations are struggling to figure out how to adapt, adding to a complicated process of getting the economy back up to full speed. A recent survey of consumer sentiment shows Americans think a full recovery will take years.

About half of the National Association of Business Economists members expect that US gross domestic product — the broadest measure of the economy — won’t return to its pre-pandemic level until 2022. A majority of those experts also say the US jobs market will be back to its February level in 2022 at the earliest. Nearly 80% say there is a one-in-four chance of a double-dip recession -- an economic downturn that begins to recover and worsens again before fully recovering.

Finding and Producing a Vaccine

There are numerous companies around the world working on developing an effective vaccine. A vaccine is the best way to keep people safe and allow us all to return to normal life. There is considerable optimism that one will be found as soon as the end of this year. This will raise at least three key questions:

1. How effective will it be?

2. How quickly can it be mass produced?

3. What percentage of the population will take it?

If a vaccine is found, it must be highly effective, it has to be produced quickly in large quantities, and a substantial portion of the population must be vaccinated. If not, this will limit a return to normal life.

What does this all mean for the Freight Industry?

As people returned to work, restaurants opened their patios and retail stores began to receive customers, there was pent up demand. People went out to buy new clothes, new cars and have a meal at a restaurant. eCommerce operations have soared since the start of the pandemic. Amazon hired 100,000 new employees and is looking for more. These developments gave the economy a “sugar high” that is reflected in the statistics above.

Trucking companies have a lot to consider as they craft their budgets and business plans for 2021. The contagious nature of the virus, the time required to produce and distribute an effective vaccine, and the large number of unemployed people who are not receiving financial support, will likely dampen an economic recovery. Shippers and carriers should carefully study the data as they prepare for what will likely be a bumpy recovery.

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