The global shutdowns caused by the COVID-19 pandemic continue to wreak havoc in economic forecasting.
Most major freight indexes confirm a bottoming in economic activity sometime in mid-to-late April. Because of the lag in monthly data reported by government organizations, we are relying more on weekly data such as that from the American Association of Railroads, DAT, and Truckstop.com, to give us a more real-time feel for the recovery.
If we look at U.S.-originated railroad carloads, including intermodal and adjusted for coal and grain, that correlates well with industrial production in about a 3:2 ratio. Those carloads bottomed the week of April 18, down about 20%, and as of June 6 had recovered to down 13.5%. This implies an industrial production figure of about negative 12-13% for May and a decline of 7-8% for June at this pace. Intermodal traffic, which mirrors truck freight volumes, was down a similar 20% in mid-April, but began June down only 9.6%. Similarly, using diesel fuel gallons consumed as a proxy for freight miles, fuel gallons sold at Pilot/Flying J truck stops were down 19% at the end of April, but only down about 10% at the end of May. In other words, we expect to have recovered halfway by the end of June.
It’s still too early to figure out the shape of the recovery – and there are many letters of the alphabet being used:
The V: This is the most optimistic scenario, where the slope of recovery is sharp, and we largely get back to where we started sometime toward year-end. So far, truck spot rates and the market demand index published by Truckstop.com are bearing out this scenario.
The U: Slightly less optimistic than the V, this implies a longer rounded bottom and a bit of a slow jog out of the abyss, before finding a steeper upward slope of recovery late this year into early next year.
The W: This is a combination of twin Vs – a partial sharp recovery, followed by a modest second wave of slowdown, smaller than the first one, and a smaller recovery, albeit on a slope similar to the first stage of recovery. I also refer to this as the tennis-ball-bounce test recovery.
The L: The least optimistic scenario, this involves a sleep drop, a leveling off, and a recovery that occurs at a glacial pace, as there is a systemic problem in the recovery, such as extended unemployment or a freeze in the banking system.
I’m in the W camp at this time, largely because of unemployment. As of the end of May, there were about 30 million Americans claiming unemployment. So far, we have seen a largely blue-collar group of layoffs, and white-collar wage reductions, but based on recent announcements, the executive-focused layoffs are now happening at a larger pace. There are a number of businesses that either aren’t coming back at all (an estimated one in five restaurants or mall-based retailers), or are going to come back very slowly (airline travel, hotels and hospitality).
My view is that we will recover in a V fashion to a point, likely later this summer, and then stall for a while, with a risk of decline if we get a second wave of COVID-19 or other crisis, creating the possibility of a W recovery.
It’s like a tennis ball dropped from 6 feet. The initial bounce may be 4 of those 6 feet, but gravity will kick in and begin the next lesser drop before a lesser bounce. The sum of the two bounces may be just a little less than the original 6 feet. Only when the economy transforms so those jobs lost to the pandemic can be replaced can we bounce all the way back up to pre-COVID levels.