1 Month Later, 2 Revised Truckload Market Scenarios: April Update from Coyote's CSO
Chris Pickett, Coyote’s Chief Strategy Officer has decades of experience helping shippers navigate market volatility.
In mid-March, he shared his perspective on how COVID-19 could impact the truckload market. A month later, now that the market — and the world — look very different, he is back with updated insight and a new outlook.
When I outlined two potential truckload market scenarios back on March 15th, the U.S. was already experiencing some supply chain disruptions — primarily due to the severing of trans-Pacific trade flows with China — but containment efforts had only just begun.
The economy, and its underlying transportation networks, were still generally healthy.
What a difference a month makes.
As the COVID-19 pandemic continues to spread across markets, infect populations, and paralyze economies, global supply chain professionals are trying to gauge how it will affect their businesses now, and through the rest of the year.
Let's quickly recap our assertions from back in March, before diving into the current state and updated outlook.
March Predictions: Quick Recap
In the short-term
2 to 3 months
- Even if U.S. coronavirus containment efforts were successful, China-related supply chain disruptions would continue to ripple across networks over the coming weeks.
- Consumption patterns would shift, driving a surge in the demand for cleaning, hygiene, and medical supplies, as well as perishable and non-perishable foodstuffs.
- Demand surges would outweigh any broader slowdown in consumption due to containment measures.
- The compound effects of potentially massive supply and demand dislocations, coming during the early stages of the inflationary leg of the market capacity cycle, would drive up spot market rates and disrupt routing guides.
In the long-term
~Q3 2020 & beyond
- "Glass Half Full" Scenario from March: No Recession
If containment efforts are relatively short-lived, government stimulus and monetary policy are effective, and employees emerge with their jobs and paychecks intact, then we likely avoid a recession.
Shippers’ short-term challenges would likely become long-term, remaining through the end of the year as spot truckload market rates accelerate higher.
- "Glass Half Empty" Scenario from March: Recession
If COVID-19-related containment efforts ultimately force employers to lay off employees, government policies prove ineffective, and the reduction in consumption tips the economy into recession.
The inflationary peak in spot truckload rates arrives sooner and at a lower level than it would in a healthy economy (use 2008-2009 recession as reference point).
Well, So Much for “Glass Half Full”
Implementation of widespread, federal and state “shelter-in-place” orders did drive a short-term surge in overall consumption, driving truckload volume and spot market rates higher.
Instead of lasting 2-3 months, the short-term ended up only being 2-3 weeks.
While there remains strong demand for the production and distribution of essential goods, the swift decline across other sectors that were forced to shut down took over as the stronger market force.
This drove total market volumes lower, as a result.
What’s Next for the Economy?
As containment efforts are extended, and April likely turns into May (and possibly June or later), "non-essential” sectors will continue to see revenues evaporate.
Many businesses will be faced with very difficult decisions — for many, this is already true, and they are currently struggling to survive long enough for the economy to be re-opened.
While federal stimulus programs of unprecedented size of scope continue to roll out, the financial support isn’t coming quickly enough to prevent the layoffs and furloughs, which are also reaching unprecedented levels.
As more and more consumers find themselves unemployed and uncertain about their futures, consumption levels will almost certainly deteriorate.
Diminished consumer spending will lead to a reduction in industrial production, which will ultimately lead to less demand for truckload transportation (shipment volume).
How Long Will This Last?
Unfortunately, this downward spiral will continue until we make enough progress with containment efforts to flatten the U.S. infection curve.
Simultaneously, we will need to make sufficient progress in testing, treatment, and vaccine research. Only then will the currently shuttered sectors of the economy begin to safely re-open.
In other words, the virus will continue to dictate the timetable.
The Diesel Effect: The Great Recession vs. Today
In the meantime, we have also seen the energy sector continue its collapse, sending oil prices under $25/barrel and diesel under $2.55/gallon.
The Q2 outlook for fuel demand is grim, and likely to pull prices even lower before production cuts eventually stabilize the market.
It is this one-two punch of plunging diesel prices and a severe economic contraction that makes this impending recession different from 2008 (in regard to the U.S. truckload market).
Here’s why the Great Recession truckload environment is different than today:
- In 2008, we experienced runaway oil prices which peaked in Q2 (+56% Y/Y, $4.40/gallon) before turning lower, finally going year-over-year deflationary in Q4.
- By that point, we were already 60% of the way through the recession.
- This spike in fuel rose much faster than truckload rates, forcing enough carrier capacity out of the market that it compensated for the drop in volume.
During the Great Recession, shipper demand fell off a cliff, but supply fell even faster as carriers were forced to exit the market because fuel was so expensive.
That is not what is happening now. Diesel is already year-over-year deflationary and poised to drop even lower this quarter.
In short, the same inflationary force (expensive diesel) that could counterbalance the drop in demand just isn’t there.
Balancing Act: Supply and Demand
We haven’t found the floor in market rates yet, which signals we are not quite at the point of unprofitable operation for most carriers.
That said, I believe we are already pretty close.
There isn't much more room for rates to drop, but there isn't anything likely to drive them higher either.
It is unlikely that there is much more room for market rates to go lower from here — regardless of how low diesel prices ultimately drop.
But until there is a recovery in underlying demand, driven by an economic recovery running on COVID-19 time, there won’t be anything to drive rates much higher either.
The only catalyst to drive rates higher will be if the pace of supply (carriers) exiting the market exceeds the pace of volume decline — like it did in 2008.
Updating the Forecast
While it’s quite clear that we’re not going to get the “glass half full” truckload market scenario, we’re not likely going to get the “glass half empty” version either — at least not in the way we initially expected.
Instead, assuming economic activity in Q2 2020 is as depressed as most economists predict, we could get a U.S. truckload market (and corresponding Coyote Curve®) as follows:
Join Chris in mid-May for another in-depth market update. In the meantime, you can access weekly COVID-19 updates and insights at resources.coyote.com/coronavirus.
Steep declines in consumption, industrial production, and truckload demand set in much faster than the Great Recession, but are ultimately less severe in magnitude, and ultimately quicker to recover.
A deflationary diesel market (< -25% Y/Y) slows down the rate of carrier exits compared to the last recession, but enough supply drops out to keep spot market rates somewhat range-bound between + 5% Y/Y.
The spot market chops along in this range until the rate of carrier exits rapidly accelerates (like it did in 2008), which would push spot market rates higher.
Either that, or— what is perhaps more likely — demand outpaces supply when the market rides the wave of post-recession economic recovery into the next inflationary leg of the capacity cycle in 2021.
Until then, spot and contract market rates will likely converge, relieving most routing guides from the duress we initially projected for this year.
Though, many shippers will still likely re-price contract rates as networks continue to shift due to evolving consumption patterns.
If we get the U-shaped economic recovery that many expect, demand would eventually recover around the end of 2020.
In the meantime, enough carrier capacity will have likely exited the market to set up the next inflationary leg of the cycle in 2021.
In that scenario, most everything that was supposed to happen in 2020 gets pushed into next year.
New Base Case: Flattening the Coyote Curve
It’s still quite possible that we see some version of the original “glass half empty” version of 2020, with a moderately inflationary spot market and routing guide duress, but it would likely require some combination of:
- A much stronger 2020 economy than is currently forecast
- A sudden reversal and spike higher in diesel prices
- One or two major hurricanes in Q3
I wouldn’t characterize any one of those conditions as likely, so the combination of two or more is highly improbable.
So the 2020-2023 scenario described here becomes our base case going forward.
We predict that the Coyote Curve will be effectively flattened for the next few quarters as we navigate our way through a sharp, pandemic-induced economic recession.
We can only hope that the COVID-19 infection curve does the same thing, that the greatest healthcare crisis of our time is resolved decisively, and that the work of economic recovery can soon begin in earnest.
Watch Chris discuss how the COVID-19 pandemic is affecting the U.S. truckload market in this live panel discussion with fellow executives from Coyote and the Consumer Brands Association.