While some industry pundits have predicted a cliff-event drop in spot rates like we saw in 2018, we are getting increasing anecdotal evidence that what we may instead see is more of a contract rate extended plateau, similar to what we saw in 2011-2012.

This is an outcome that neither investors nor fleet executives seem to include in their forecasts, as share prices of truckload companies are under pressure in the stock market, despite better than expected first quarter earnings results. But it’s one that is looking more and more likely. 

Many individuals tend to see things through the lens of recent experience – in this case, 2018. The last time spot rates crossed the 20% year-over-year increase level and truck orders surpassed 300,000 units, it was followed by a two-year drought in rates and volumes, caused by the industrial recession of 2019 and the Covid recession of 2020.

However, that environment bears little resemblance to the current situation. 2018 marked the end of a three-year period of prosperity and an overbuild of inventory that lost steam in the fall of 2018.

In the current environment, we have yet to cross into positive territory in two key growth metrics – industrial production (still negative) and growth in business inventories (still negative). Rather, given inventory shortages, a modest re-opening of the economy, and ISM (Institute for Supply Management) manufacturing index readings in the 60+ range (implying high future growth expectations), the economy may be at the front end of an 18- to 24-month growth cusp.

Charting meaningful growth rates will be difficult over the next four to five months, given we are now comparing against last year’s Covid-related global economics closure. Sequential growth analysis may be more helpful. On that basis, using rail carloads as a proxy, we are only recently approaching volume levels that we saw back in January. Rail carloads are clocking +25% year-over-year in the most recent week, but based on our sequential analysis, we are only back to levels where we began the year.

So far this year, three truckload divisions have reported first-quarter earnings (Marten, J.B. Hunt and Knight-Swift). The net capacity increase remains negative. Why so? Although carriers are seeing higher rates now (Knight-Swift reported 16% higher revenue per mile), that has only been the case recently.  With extended unemployment benefits delaying new hires, truck driver training schools running at limited capacity, and the national Drug and Alcohol Clearinghouse taking 4,000-5,000 drivers per month out of the truck driver population, growth will be difficult at any reasonable price – no matter how many trucks OEMs produce.

Furthermore, we are hearing anecdotal stories of desperate shippers, unable to effectively use rail or airfreight networks, turning to truck networks to move goods we typically don’t see in longer haul truck routes – scrap metal, pharmaceuticals, and hot-shot cross country moves in lieu of backed-up intermodal. Volumes are increasing, not decreasing. Without additional air cargo capacity or a more fluid rail system with less port congestion, there doesn’t appear to be a catalyst to balance the market in at least the next three to six months.

This leads us to our final point. With limited ability to get goods to where they are going on a timely basis, and new constraints on production of goods related to semiconductor chip shortages, inventories are unlikely to be rebuilt as quickly as originally thought.

In addition, we are beginning to hear increasing anecdotes that shippers may look to try to overbuild product inventory ahead of the holiday and winter season, just in case there’s another healthcare-related slowdown.

When we add all of this up, it implies that the market for trucking capacity is likely to remain tight into the end of the year. If the economy grows at about a 5-6% rate this year, and at a 3% rate next year, there is likely to still be support for rate growth in 2022, resulting in an environment more similar to 2011-2012, where rates were supported for two years past the peak in spot rates.

This commentary originally appeared in the May 2021 issue of Heavy Duty Trucking magazine.