After a Roller Coaster of a Q2, Where Does the US Truckload Market Go From Here?

How the Coronavirus Has Impacted the U.S. Truckload Market: From the Onset to the Response to the Recovery Now in Progress – The Q2 Summary & Revised 2020-23 Forecast

As the COVID-19 pandemic swept across markets throughout Q2, we saw rapidly shifting consumption patterns driving unprecedented volatility on the demand side and a sharp economic recession wreaking havoc on the supply side – making it increasingly difficult to anticipate what new challenges the next day would bring. And the US Truckload market reflected that over much of the quarter as spot linehaul rates cycled ferociously from one period to the next. With the economic recovery now in progress - albeit unevenly distributed across sectors and geographies - and as the scientific community pursues improved treatments and eventually an effective vaccine, this article offers a map as to where US Truckload rates are likely headed through the balance of the year and beyond.

As a market economics advisor to Coyote Logistics and developer of the Coyote Curve US truckload market cycle framework, Chris Pickett has published earlier articles examining the potential impact of the COVID-19 crisis on trucking rates in the US relative to Coyote’s pre-COVID 2020 forecast. Now with complete second quarter results across a variety of historically relevant indicators, the potential impacts over that period are known and the path forward appears in much sharper focus.

Not with a bang but with a whimper: A surprisingly brief and relatively benign disruption…so far.

At the onset of the pandemic, at times it certainly felt like the end of the world (and the market) as we knew it – and in many respects, it still does. And that with such an unprecedented and therefore unexpected shock, models that relied on historical relationships or patterns that proved meaningful in the past should suddenly become obsolete in providing any predictive value going forward. However, with the outcome of Q2 now known and Q3 well in progress, the net impact of the pandemic at this point in time represents only a brief and relatively modest kink in the historically consistent US Truckload capacity/pricing cycle as shown in the chart below – much like some of the past natural disasters (highlighted below) that the COVID-induced transportation market disruption has often been compared to.

Figure 1: Q2 2020 Actual vs. Forecast 

For Q2, the Spot TL Linehaul index closed exactly flat at 0.0% Y/Y after rising to +5.3% Y/Y in the prior quarter - well above our revised forecast of -5.0-7.5%. Given the roller coaster ride that spot rates took throughout the quarter, it is perhaps ironic that we ultimately landed dead even to equilibrium when the averages were tallied up. Contract TL pricing, for which we use the Cass Linehaul Index as our proxy, closed Q2 at -6.0% Y/Y which was slightly higher than Q1’s -6.3% thus implying a likely inflection point to lead rates higher over subsequent quarters. And while the inflationary divergence between spot rates and contract rates that began developing in Q1 was temporarily put on hold in Q2 as that gap materially narrowed as a result of nationwide COVID-19 mitigation efforts, normal cycle behavior is expected to re-take the reins from here on out – provided the economy avoids another shutdown that is in any way comparable to what we saw in April.

From a macroeconomic standpoint, the steep declines in consumption, industrial production, imports, exports, and truckload demand expected in Q2 are exactly what we got. Overall Consumption tanked all of the way to -10.7% Y/Y, well below the last recession trough of -2.3% in Q2 2009. But as one might have also expected given the nature of this particular recession, the weakness was heavily focused on the Services component of Consumer spending which closed at -14.7% Y/Y. Consumption of Durable Goods fell to only -1.4% Y/Y and NonDurable Goods to -2.0%. This could at least partially explain the perhaps counterintuitive relative strength in the US truckload market during this period given the relative truckload freight intensity across these disparate components of spend.

In turn, Industrial Production also fell to levels not seen since the trough of the last recession in Q2 2009, closing the quarter at -14.2% Y/Y. The only difference this time is we got there in one quarter as opposed to the five quarters it took then (from recession start). This of course assumes that Q2 represents this recession’s trough and numbers will improve from here. And while the current course of monthly data supports this, there is certainly plenty that could still go wrong in the months ahead to derail the recovery and send us towards a still lower trough.

And now, back to our regularly scheduled programming.

So with what we hope (and expect) represents the worst of the worst behind us, we will proceed into a leg of the cycle where we have some version of an economic recovery stimulating overall truckload demand on one side. While at the same time on the other side, the overhang of a painful economic recession will continue to force poorly positioned suppliers out of the market – either partially or completely, temporarily or permanently. And both of these inflationary forces will compound each other to drive market rates increasingly higher through the back half of 2020 – starting immediately with Spot rates then later with Contract rates as 2020 routing guides begin to break down before resetting altogether in early 2021 per the standard calendar-driven procurement cycle. And certainly any major storm of sufficient magnitude, location, and duration between now and the end of the year would accelerate and amplify this.

This revised 2020-2023 outlook is represented by the dashed lines on the following chart in Figure 2. With the one quarter COVID-driven shock now behind us (again, as we both expect and hope), we now expect Spot market rates to hit this cycle’s peak of ~+30-35% Y/Y as early as Q4 2020, to inflect lower by Q1 2021, and to remain Y/Y inflationary through the end of next year. For further context, a +35% Y/Y Q4 2020 would represent a +40% increase in Spot market linehaul rates as compared to Q2. Though keep in mind the pace of the economic recovery, and whatever letter or shape we end up getting (V vs. U vs. W vs. square root, etc.), will likely determine both the height of the peak and the ultimate duration of this inflationary leg. The stronger the recovery, the more inflationary the truckload market and longer we stay inflationary. Though even with a weak recovery, or no recovery at all for the foreseeable future, we still expect TL Spot rates to remain Y/Y inflationary through at least the next several quarters.

Figure 2: Revised Forecast, Q3 2020 - 2023

As a result of this inflationary spot market pressure, Contract rates will have no choice but to reset incrementally higher over coming months as pricing is re-negotiated either as a result of the normal calendar-driven procurement cycle, as necessary due to transportation networks re-calibrating to shifting consumption patterns or vendors exiting the market or re-calibrating themselves, or under duress as primary tender acceptance erodes and unplanned and unbudgeted spot market exposure becomes increasingly untenable. Contract rates, as measured by the Cass Linehaul Index, then break inflationary by Q4 2020 and surge higher into 2021, hitting their respective peak of ~+5-7% Y/Y by the end of next year.

While plenty of uncertainties remain as the US continues to grind its way through an uneven and volatile COVID-19 recovery – from public health to economic to geo-political to cultural to a presidential election in November – the forward trajectory of the US trucking market is coming into sharper focus as the fog lifts and prevailing historical market dynamics appear to once again illuminate the road ahead. And now that we can see the road, the focus should naturally shift to how best to navigate the curves ahead and keep between the lines.

Is your transportation plan and routing guide prepared for an inflationary spot market in the quarters ahead? Whether you are a buyer or a seller, what is your current spot vs. contract market exposure? Can your 2020 budget tolerate a significant uptick in unplanned spot market exposure over the balance of the fiscal year? How well do you know your Vendors and Customers and trust them to uphold contract commitments when more financially attractive alternatives exist? Is your fleet, if you operate one, positioned for this cyclical shift in the market? How closely are you tracking your contract rate and term commitments? While the focus has rightfully been on basic survival over the past several months, now is the time to begin asking some of these questions. And to have a plan in place that will allow you to adapt quickly and engineer the best outcomes for your organization as the market evolves.