Freight Industry Under the Pandemic: Q2 Contraction Is a Foregone Conclusion, Recovery Path Still Uncertain

On April 1, 2020, the second quarter officially began. This quarter is widely expected to be written into economic history—but not for positive reasons. Many economists believe that the Q2 economic contraction caused by COVID-19 and related shutdowns will be significant. Goldman Sachs predicts that,Q2 GDP will contract by 24%。

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

With the COVID-19 outbreak possibly nearing its peak, the post-pandemic outlook has become a top concern for many in the transportation industry.

For Daseke, a major U.S. trucking company with a portfolio of flatbed carriers, now is the time to discuss prospects for the current quarter and beyond. Daseke executives currently meet regularly, about two to three times a week, at the Texas headquarters to discuss the economic crisis.

"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 severely impact fleets that transport industrial goods for factories, construction teams, and other large industrial shippers. For Daseke, a major company serving such industries, the outlook for COVID-19 is slightly more optimistic.

"We primarily view it as a Q2 event," Wilbur said.

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

The Trump administration expects the economy to rebound quickly as businesses reopen and move forward with plans in Q3 and Q4. Daseke is studying whether and how much of its business has been deferred.

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

The federal response

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

Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University's Robinson College of Business, told Transport Dive in early Marchthatif businesses shut down and stopped paying banks, the ripple effects could be far-reaching. If banks were then shaken, the Q2 event could evolve into a financial recession—one of the worst types of recessions.

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

"The Fed came out strong and fixed the problem," Dhawan told Transport Dive. "What took them a year during the Great Recession, they did in a month this time."

However, Dhawan said the pandemic could change consumer habits over the long term. As consumers view e-commerce as more reliable and safer, retail malls could suffer greatly from this sharp shift.

"The reallocation of capital, funds, or property—what Schumpeter called the creative destruction force of capitalism—will accelerate in this area due to the virus... Money will shift 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, while having little impact on the actual volume of goods moved over long distances. But Dhawan said other long-term changes could hurt overall goods demand. Dhawan noted that consumer purchases in certain areas will slow. For example, hotels will buy fewer linens, and restaurants will order less food. Fleets transporting such goods for retailers and restaurants could continue to suffer in the coming months.

Currently, fleets transporting everyday consumer goods are performing well. Americans have increased some spending, but Dhawan said this could be limited to a narrow range of consumer products.

"If they only buy Netflix, that doesn't help freight," Dhawan said.

A predicted difficult period

Just as before COVID-19 hit the United States, experts remain uncertain about the rest of 2020—whether in Q2 or beyond.

In a conference call with analysts on April 9, FTR Transportation Intelligence economist Bill Witte said the coronavirus event is 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 isolation period is short, the economic "restart" should come quickly, possibly in May or June. He said federal stimulus programs are designed to get people back on payrolls.

But looking at thefederal unemployment claims datareleased 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 goods GDP to fall 44.5% in the second quarter. He also said Q2 industrial production will decline 24%. Q2 mortgage originations will fall, but refinancing will rise slightly.

Starks said Q3 will see a rebound, but a "significant rebound" will come later in the year, in Q4. The recovery is "not an overnight return to normal," he said.

But Witte and Starks said that if a rebound occurs in Q3, executives should be prepared to recall workers. FTR expects Q3 growth of 22.1%. Starks said if that happens, executives' ability to recall workers will be "very, very high."

Witte also cautioned executives and analysts not to compare the Q2 recession to the Great Recession of 2007-2009. However, concerns about a slow recovery stem from fears of the deep Q2 economic hole.

"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 staff in the week ending April 10,according to FreightWaves. Echo Global Logistics cut about 5% of its workforce, FreightWaves also reported. Additionally, several OEMs—including Daimler Trucks, Paccar, Mack, and Volvo—have suspended 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 difficult.

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

Meil said that as fleets face the impact of the coronavirus, the possibility of bankruptcies is significant. Some fleets will have to adapt to temporary, consumer-demand-focused new structures.

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

Meil said that, and perhaps counterintuitively, when the economy improves, some fleets will be unable to handle the challenge.

As business picks up, fleets and other freight-related companies may need to borrow to re-expand to meet higher demand. Meil said some fleets will not be able to do so. The reason is that some banks will not extend credit, while fleet or manufacturer customers demand 60- to 90-day payment terms. Meil said these new problems will break some companies during the economic upturn.

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 begin to slow down, you start laying people off," John Esparza, president and CEO of the Texas Trucking Association, told Transport Dive on April 9. Large companies will release contractors during trade downturns.

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 when trade surges, they may not be able to get them.