No Bubble Concerns for the Freight Industry in 2021: Market Resilience Amid Capacity Constraints and Strong Demand

The cycle of boom and bust affects every industry in North America, but perhaps no industry experiences the ups and downs of the economy as profoundly as the freight industry. To build a successful fleet, managers must guide carriers through economic fluctuations, which means enduring freight recessions. Over the past decade, the United States has experienced three freight recessions,according to Convoy, all of which occurred during economic expansions.

This cyclical fluctuation often leads analysts to look for signs of industry-specific bubbles. However, the current recovery in the freight industry is vastly different from a year ago when spot van rates fell to painful lows. Since then, spot rates have climbed significantly, rising from $1.59 in May 2020 to $2.66 in March of this year,according to DAT data. Such an increase within 10 months is rare amid the economic recession and the global response to the COVID-19 pandemic.

In the coming weeks, more publicly traded freight companies will report financial results. Analysts expect strong performance, and not just for the first quarter. Brent Hutto,Chief Relationship Officer at Truckstop.com, said this month that strong pricing will continue throughout 2021. Hutto stated that Truckstop.com forecasts freight volumes to jump 10% in 2021 compared to 2020. This is a freight boom.

Another sign of the recovery's authenticity is that independent drivers are applying to the FMCSA for motor carrier authority. In 2020, the FMCSA granted carrier authority to 57,978 entities, a 36% increase from 2019,according to Avery Vise, Vice President of Trucking at FTR. This contrasts with the bleak weeks of April and May 2020, when panic buying in the early days of COVID-19 in North America faded, leading to a freight depression.

But experts believe this recovery will not form a bubble ready to burst in the short term. One reason is that capacity has not been stimulated to match demand, and overcoming many obstacles is required to do so,according to Dean Croke, Chief Analyst at DAT。

Croke said fleets are struggling to find enough drivers. Even when hiring new trainees, the pandemic has extended the time to complete training and obtain licenses through government agencies. The new FMCSA Drug and Alcohol Clearinghouse has removed 50,000 drivers from the market, Croke said.

Additionally, new truck production is constrained. The global semiconductor shortage hasslowed Class 8 truck production。

For the freight industry, it is as if guardrails have been placed on the highway to prevent a swing toward boom or bust.

"Capacity constraints will last for a while," Croke said. "I don't see how they can add more trucks."

The current situation differs from 2018-2019, when the freight industry boomed due to a surge in e-commerce spending. But as carriers flooded the market with more new trucks, the available truck supply quickly exceeded demand. A wave of bankruptcies followed. Celadon, one of the largest U.S. carriers, filed for bankruptcy in December 2019.

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"Capacity constraints will last for a while. I don't see how they can add more trucks."

Dean Croke

Chief Analyst at DAT

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Currently, the industry is doing its best to meet demand with existing resources.

"The freight industry is very optimistic because capacity is king," said Nikhil Sathe, Managing Director at Logisyn Advisors. "Freight has been a big winner throughout the pandemic."

But will the winning streak last?

One large fleet has already benefited from the dynamic and booming economy. J.B. Hunt recently reported a 15% year-over-year increase in first-quarter revenue. Its net profit also jumped 39.6% to $146.6 million. Despite ongoing pandemic complications, February winter storms, and reduced intermodal volumes, performance remained high.

National bubbles

Economic bubbles form when assets are overvalued. When something pricks the bubble, assets rapidly depreciate, and the reassessment of the value of a large number of assets, such as housing or financial stocks, triggers an economic shock across the economy.

The most recent typical example is the Great Recession of 2007-2009, triggered by overvaluation in the housing sector. When housing prices collapsed, the shock to financial markets was unprecedented. Because banks and investment firms were deeply involved in housing, the recession was doubly painful and profound. The housing market is a major component of the U.S. and global economy.

In contrast, the freight industry often serves consumers. It is usually an indicator of recession rather than a cause. However, bubbles can still form within individual industries, even if they do not threaten overall economic progress.

The progress of the U.S. economy is still undecided. The economy is technically still in recession, although the effects of the pandemic appear to be slowly dissipating, and some economists say the U.S.has now entered an expansion phase。

About 916,000 jobs were added in March,according to Labor Department data, and the unemployment rate fell to 6%.

Meanwhile, parts of the economy are hot, while others are not.

"This is a bifurcated economy," said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University's business school. "Some industries are doing well, some are barely surviving."

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"Consumer spending is getting stronger and stronger."

Nikhil Sathe

Managing Director at Logisyn Advisors

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Other experts point out that the economy may be at a turning point.

Federal Reserve Chairman Jerome Powell said the economy appears to be at an "inflection point,"he said in a recent interview on "60 Minutes". Powell said the economy could begin to grow significantly, but the "major risk" of the coronavirus could spread again as people let their guard down.

Dhawan also warned against excessive optimism as vaccines are distributed in the U.S. He noted that COVID-19 cases are spreading in places like Germany.

"There is excessive optimism about the economic recovery," Dhawan said. "Look at the rest of the world, they are locking down."

But the bifurcation seems to favor the North American freight industry for now. The North American economic recovery needs the transportation industry and assists in moving pandemic-related supplies such as personal protective equipment, food, medical supplies, and household goods.

In other words, given rising spot rates, the freight industry is prepared for multiple scenarios in 2021. Freight demand this year does not appear weak or fragile.

Active bull market

Sentiment about the economy is often expressed through what British economist John Maynard Keynes called "animal spirits." Keynes believed that economic decisions are often more emotional than logical. Over time, Wall Street has also adopted two animal mascots.

The bear represents the desire to retreat and hibernate during difficult times. The bull charges forward.

In April 2020, even as COVID-19 brought the economy to a standstill, Bradley Jacobs, CEO of XPO Logistics, said he was a "pragmatic bear" in the short term, a bull in the medium term, and a"super bull" in the long term. Jacobs accurately predicted that e-commerce, which had already been growing at double-digit rates last year, could accelerate after the pandemic.

In his latest letter to shareholders, Jacobs said the bull has arrived.

“The bear has left, and the bull has arrived early," he wrote on April 13. "After a painful 12 months for almost everyone, 2021 and 2022 are shaping up to be a big rebound year for the vast majority of our customers."

But the coronavirus still worries some financial bears, while vaccines make others bullish. Sathe said he is bullish when it comes to logistics M&A.

"The buyer pool is getting bigger and bigger," Sathe said.

During the pandemic, private equity and investment firms have focused on the importance of freight and the relative resilience of fleets during difficult times. E-commerce is a major driver of freight, indicating that freight could be a stable choice for investment capital. On March 25,Roadrunner announced a $50 million private equity raise。

M&A activity was largely dormant in 2020, but as time passed and freight proved its value, deals began to emerge.TFI International acquired nine companies by the end of November 2020. In January,TFI acquired UPS Freight for $800 million。

Investors and carriers seem confident.

Recovery continues—but not bubbly

Sathe points to pent-up consumer demand, with people accumulating savings and receiving federal stimulus funds—about $2,000 for each eligible American if 2019 income was below $75,000.

Consumers have been spending since the summer, as lockdown and work-from-home policies gave them ample opportunity to renovate their homes. Inventories have been depleted, and trucks are being pulled from ports and warehouses to meet e-commerce-driven demand.

"Consumer spending is getting stronger and stronger," Sathe said.

Croke said such sustained trends surprise him. In 2020, he had doubted that the e-commerce boom would end in the first quarter of 2021, with consumers taking a break. Instead, as the economy recovered and vaccinations increased, freight business remained strong.

Croke said imports are a major contributor to this strength, up 57% year-over-year in March. Croke said he hears people comparing it to the "Roaring Twenties" a century ago, when after a pandemic and world war, the U.S. experienced a decade of unparalleled growth, followed by a terrible depression.

Croke believes contract rates will remain high for most of the year. Dry van spot rates will remain high and stable, while flatbed and reefer rates may rise in the coming months. Flatbed will benefit from the construction and residential building boom, and reefer will see strong demand as the agricultural season kicks off, he said.

The combination of factors in the freight market has temporarily rendered the traditional boom-bust formula ineffective, Croke said.

"I don't think there is a bubble," Croke said.