Q3 2020 Coyote Curve Market Guide: Where Do We Go From Here?

Chris Pickett has decades of experience helping shippers navigate market volatility.

He has published updates examining the COVID-19 pandemic's impact to the U.S. truckload market in March and April, and contributed to our Q2 Coyote Curve® market guide. 

With second quarter results in the books, and the path forward coming into sharper focus, he shares his insight on the Q3 truckload market ahead of our October 1st webinar, including:

• Q2 Coyote Curve Final Results
• Spot Rate Trends
• Contract Rate Trends
• Macroeconomic Trends
• Updated Q3 Forecast

As the COVID-19 pandemic swept across markets and paralyzed economies, global supply chain professionals — from planners to pickers to drivers to stockers — responded in heroic fashion under incredibly difficult conditions.

Consumption patterns shifted rapidly, driving unprecedented volatility on the demand side (shippers).

Coupled with a sharp economic recession that wreaked havoc on the supply side (carriers), it was difficult to anticipate what the next day would bring.

This volatility was reflected in U.S. truckload market activity throughout most of Q2, as spot truckload rates cycled ferociously from one week to the next.

With the economic recovery now in progress (albeit unevenly distributed across sectors and geographies) and with the potential for a vaccine on the horizon, global supply chain professionals are trying to chart a path forward.

Let’s take a look at a potential map to where the market is likely heading throughout the remainder of 2020 and into 2021.

The Q2 Truckload Market was a roller coaster ride. In Q3, supply chain professionals are looking for a path forward.

COVID-19 Disruption to Spot Rate Activity: Relatively Benign (So Far)

At the onset of the pandemic, it felt like the world (and the truckload market) as we knew it was ending; in many respects, it still does.

With such an unexpected shock, it would be tempting to think that forecasting models that relied on historical patterns would become suddenly obsolete — if everything is in “unprecedented” territory, how could they provide any predictive value?

Now that Q2 is in the books and Q3 is well underway, we can get better sense the net impact of the pandemic (insofar) to the market.

Despite the extreme volatility, the pattern of the truckload market capacity cycle (as measured by the Coyote Curve) remained relatively consistent. 

Surprisingly, our proprietary spot index closed out Q2, to quote T.S. Eliot, “Not with a bang, but with a whimper.”

Instead of a wholesale change in direction, COVID-19 pandemic disruption caused only a brief and relatively modest kink in the trajectory.

In short, the market behaved much like it has during previous natural disasters.

Despite extreme volatility, the U.S. truckload market continues to move in the same pattern it always does.

Need to build a more resilient supply chain? Learn how across 4 key areas of operations with insight from Coyote's VP of Supply Chain and Data Science in this free guide. 

Q2 Spot Truckload Rates Trended Down 

The Coyote Curve (green line), which measures the year-over-year (Y/Y) change in spot truckload rates, went on a roller coaster ride throughout the quarter, but closed (somewhat ironically) at dead even.

• Q2 2020 Actual: 0.0% Y/Y
• Down from Q1 (+5.3% Y/Y)
• Well above our revised forecast (-5.0-7.5%)

Q2 Contract Truckload Rates Trended Slightly Up

Contract truckload pricing, as measured by the Cass Linehaul Index, did not see near as much change, as is typical with these longer term rates.

• Q2 2020 Actual: -6.0% Y/Y
• Slightly higher than Q1 (-6.3%)
• We have likely seen an inflection point, and rates should trend higher in the coming quarters

The Contract vs. Spot Divergence Was Put on Hold

In Q1, spot rates were inflating, while contract rates were deflating. Usually, when these two forces are heading in opposite directions, it creates pressure on routing guides and drives the spot market further into inflation.

In Q2, nationwide COVID-19 mitigation efforts put this divergence on hold, and the gap between the spot and contract rates narrowed substantially.

We expect normal market cycle behavior to re-take the reins from here on out (provided the economy avoids another shutdown that is in any way comparable to April).

The widening gap between contract and spot truckload rates took a quarter off — expect that trend to pick back up in Q3.

Macroeconomic Indicators Were as Bad as Expected

Though the overall impact to our index was relatively modest, the state of macroeconomic indicators was another story.

We expected steep declines in consumption, industrial production, imports, exports and truckload demand in Q2, and that is exactly what we got (all figures represented as Y/Y change):  

• Overall Consumption: -10.7%
• Consumer Spending (Services): -14.7%
• Consumer Spending (Durable Goods): -1.4%
• Consumer Spending (Non-Durable Goods): -2.0%
• Industrial Production: -14.2%

The decline in consumption was well below the Great Recession trough in Q2 2009 (-10.7% vs. -2.3%).

The Services sector was hit especially hard, but Durable Goods and Non-Durable Goods only dipped slightly.

This could partially explain the strength of the U.S. truckload market during this period, since both of these industries tend to spend relatively more on truckload freight.

Industrial Production also fell to levels not seen since the trough of the Great Recession — the only difference this time is we got there in one quarter as opposed to the five.

This of course assumes that Q2 represented the COVID-10 recession’s trough and numbers will improve from here.

While the current trajectory of monthly data supports this, there is still plenty that could go wrong in the months ahead to derail the recovery.

Though the economy dipped below Great Recession levels, consumer spending on Durable and Non-Durable Goods likely buoyed the truckload market.

Updated Q3 Forecast: And Now, Back to Our Regularly Scheduled Programming

Assuming (and hoping) that Q2 represented the worst of the worst, we will likely proceed into an inflationary leg of the cycle.

Some version of an economic recovery will stimulate overall truckload demand from shippers.

On other side of the market, overhang from a painful economic recession will continue to force poorly positioned carriers (supply) out of the market — either partially or completely, temporarily or permanently.

Both of these inflationary forces will compound, driving market rates increasingly higher through the back half of 2020.

This will start 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).

A sufficiently major storm between now and the end of the year would only accelerate and amplify this.

Revised 2020-2023 Forecast Highlights:

• Spot market rates to peak around +30-35% Y/Y as early as Q4 2020
• Begin to inflect lower by Q1 2021
• Remain inflationary through the end of 2021

Keep in mind the pace of the economic recovery, and whether it’s a V, U or W-shaped recovery, will determine how high the truckload market peak and how long it stays inflationary.

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), we still expect our index to remain inflationary through at least the next several quarters.

What’s Going to Happen with Contract Truckload Rates?

As primary tender acceptance erodes and shippers face more and more unplanned exposure to the spot market, contract rates will have no choice but to reset higher over the coming months as pricing is renegotiated.

With the normal calendar-driven procurement cycle (aka bid season) upcoming, transportation networks adjusting to shifting consumer patterns, changes to vendor networks and internal re-calibrations, there will be plenty of opportunities for negotiations.

We expect contract rates to break inflationary by Q4 2020 and surge higher into 2021, hitting their respective peak of +5-7% by the end of next year.

The Recovery Is Coming into Focus — Are You Ready?

Plenty of uncertainties remain, from public health to economic to geo-political to socio-cultural to a presidential election in November.

As the U.S. continues to grind its way through an uneven and volatile COVID-19 recovery, the trajectory of the US trucking market is coming into sharper focus.

Some of the fog has lifted, and the prevailing historical market dynamics appear to once again illuminate the road ahead.

Now that we can see the road, the focus should shift to how best to navigate the curves and keep between the lines.

While the focus has rightfully been on basic survival over the past several months, you need to begin asking yourself these crucial questions:

• 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?

Once you get your answers, make sure you have a plan in place that will allow you to adapt quickly and engineer the best outcomes for your organization as the market evolves.

Need to build a more resilient supply chain? Learn how across 4 key areas of operations with insight from Coyote's VP of Supply Chain and Data Science in this free guide.