The freight industry under the impact of the pandemic: after the second-quarter shutdown, where is the industry headed?

On April 1, 2020, the second quarter officially began. This quarter is widely expected to go down in economic history—but not for positive reasons. Many economists believe the second-quarter economic contraction caused by COVID-19 and the shutdowns and slowdowns it triggered will be massive. Goldman Sachs predicts second-quarter GDP willshrink by 24%。

Freight industry officials are already well aware that the second-quarter outlook will be bleak. But what happens next? Will the slowdown and shutdowns lead to a financial crisis that deepens the recession? Or will the federal government's response—loans, stimulus checks, and the Federal Reserve's expanded credit—be able to contain the impact of COVID-19 within the second quarter?

With the COVID-19 outbreak perhaps nearing its peak, what happens after the pandemic has become a top concern for many in the transportation industry.

For Daseke, a major U.S. freight company with a portfolio of flatbed carriers, now is the time to hold meetings to discuss the outlook for this quarter and beyond. Daseke executives now regularly meet at the Texas headquarters to discuss the economic crisis, roughly two to three times a week.

"This is an all-hands-on-deck moment," Daseke's Chief Transformation Officer John Wilbur told Transport Dive.

If the problem spreads further into the rest of 2020, the economy could hit fleets that transport industrial goods for factories, construction crews, and other large industrial shippers. For Daseke, a major company serving such industries, its outlook on COVID-19 is slightly more optimistic.

"We primarily view it as a second-quarter event," Wilbur said.

Wilbur said the company's diversified portfolio of fleets—including wind turbine component transporters and high-security cargo transporters—is helping the Texas-based, flatbed-focused conglomerate weather the storm. Company executives meet two to three times a week to review outlooks and forecasts regarding the national crisis.

"We are trying to distinguish between demand destruction and deferred demand."

— John Wilbur, Chief Transformation Officer at Daseke

The Trump administration hopes the economy will rebound quickly as businesses reopen and move forward with plans in the third and fourth quarters. Daseke is studying whether business has been postponed, and by how much.

"We are trying to distinguish between demand destruction and deferred demand," Wilbur said.

Federal Response

Since early February, economic forecasters have been worried about the COVID-19 scenario. One economist told Transport Dive in early March that it was a bit like a hurricane that, after shutting down parts of China and Europe, was hovering offshore. How much damage would North America suffer?

Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University's business school, in early Marchtold Transport Divethat if businesses shut down and then stopped paying banks, the knock-on effects could be far-reaching. Banks would then wobble, and a second-quarter event could turn into a financial recession—the worst kind of recession.

Much of what Dhawan outlined to Transport Dive in early March has come to pass. Federal officials, wary of another Great Recession, moved quickly to plug holes in the financial dam.

"The Fed came out strong from the start and addressed the issue," Dhawan told Transport Dive. "What they did over a year during the Great Recession, they did in a month this time."

However, Dhawan said the pandemic could change consumer habits in the long term. As consumers come to see e-commerce as more reliable and safer, retail malls could be severely impacted by this rapid shift.

"The reallocation of capital, funds, or property—what Schumpeter called the creative destruction force of capitalism—will accelerate in this sector because of the virus... Money will move online," Dhawan said. "What would have happened in five years will happen in the next five months."

For the freight industry, this could accelerate demand for last-mile delivery, with little impact on the actual volume of goods moved over long distances. But Dhawan said other long-term changes could hurt overall goods demand. Consumer purchases in certain areas will slow, Dhawan said. Hotels, for example, will buy fewer linens, and restaurants will order less food. Fleets hauling such goods for retailers and restaurants could be hurt for more months.

For now, fleets hauling consumer staples are performing well. Americans have increased some spending, but Dhawan said this may remain confined to a narrow range of consumer goods.

"If they're just buying Netflix, that doesn't help freight," Dhawan said.

Difficult Times for Forecasts

Just as before COVID-19 hit the United States, experts remain uncertain about what will happen in the rest of 2020—whether in the second quarter or beyond.

During a conference call with analysts on April 9, FTR Transportation Intelligence economist Bill Witte said the coronavirus event is somewhat unique in economic history, making it difficult to analyze.

"This is not a business cycle event," Witte said. "This is entirely a man-made event."

Witte said that if the quarantine period is short, the economic "restart" should be quick, possibly in May or June. He said federal stimulus programs are designed to get people back on payrolls.

But looking at thefederal unemployment claims datathat emerged immediately after many employers and schools began closing—6.6 million claims in the week ending April 4—Witte pointed to the severity of the crisis.

"These numbers are really bad," Witte said.

FTR CEO Eric Starks told analysts and transportation officials he expects GDP in the goods sector to fall 44.5% in the second quarter. Industrial production will also fall 24% in the second quarter, he said. Mortgage lending will decline in the second quarter, but refinancing will rise slightly.

Starks said the third quarter will see a pickup, but the "clear rebound" comes at year-end, in the fourth quarter. The recovery is "not an overnight return to normal," he said.

But Witte and Starks said if there is a rebound in the third quarter, executives should be prepared to recall workers. FTR expects 22.1% growth in the third quarter. If that happens, executives' ability to recall workers will be "very, very high," Starks said.

Witte also cautioned executives and analysts not to compare the second-quarter recession to the Great Recession of 2007-2009. However, concerns about a slow recovery stem from fears that the second-quarter economic hole will be very deep.

"The next three months will be terrible by any measure," Dhawan told Transport Dive.

Fleet and OEM Reactions

Some fleets and logistics companies have made difficult decisions.

Less-than-truckload carrier Saia furloughed some sales personnel in the week ending April 10, according to FreightWaves. Echo Global Logistics cut about 5% of its workforce, also reported by FreightWaves. Additionally, several OEMs, including Daimler Trucks, Paccar, Mack, and Volvo, have halted production at their U.S. plants due to the coronavirus crisis.

Jim Meil, head of industry analysis at ACT Research, said lost or slowed business makes forecasting 2020 results difficult.

"We have no precedent for a recession caused by biomedical reasons," Meil told Transport Dive.

Meil said bankruptcies are likely as fleets face the shock of the coronavirus. Some fleets will have to adapt to temporary, new structures geared toward consumer demand.

"You will see changes in supply chains, changes in the workforce," Meil said.

"If they're just buying Netflix, that doesn't help freight."

— Rajeev Dhawan, Director of the Economic Forecasting Center at Georgia State University's business school

And, perhaps counterintuitively, Meil said some fleets will be unable to meet the challenge when the economy turns around.

As business picks up, fleets and other freight-related companies may have to borrow to re-expand and meet higher demand. Some fleets will be unable to do so, Meil said. The reason is that some banks won't extend credit, and customers of fleets or manufacturers are demanding 60- to 90-day payment terms. These new problems will drag down some companies during the economic upturn, Meil said.

Trade's self-repair will also take time. The freight industry is highly dependent on imported goods arriving at ports. When trade returns to normal, many shippers and fleets may struggle to adapt to new demand.

"When trade is affected and ports start to slow down, you start laying people off," John Esparza, president and CEO of the Texas Trucking Association, told Transport Dive on April 9. During trade downturns, large companies lay off contractors.

Esparza said the industry is familiar with the "ebb and flow" nature of trade, but the risk is always that if companies need to re-contract owner-operators during a surge in trade, they may not be available.