If the pandemic-triggered boom times were the party, what we’ve been experiencing for the past year is the hangover, said Bob Costello, American Trucking Associations chief economist, in a session at ATA’s management conference in Austin, Texas, this week.

“We are going to continue to see more supply leave this industry, and even though demand is not going to pick up much, I think come a quarter, a couple of quarters from now, things are going to start to feel a little better for you. Not 2021, by no stretch… but all the evidence, both macro as well as industry-specific, points to, things are going to get better for our industry.”

However, it’s going to be painful to get there for parts of the industry, especially fleets that depend on the spot market, because in order for the industry to get back into balance, excess capacity must exit the market.

The Macro Economy

Looking at real Gross Domestic Product (GDP adjusted for inflation), Costello said, over the long run the U.S. sees an average 2% growth. But in 2021 we almost had 6% growth. The government pumped trillions of dollars into the economy.

“I’ll call that the party,” he said. “Now is the hangover. We’re going to revert to the mean and see slower economic growth.”

Because that party also led in part to high inflation, the Federal Reserve has implemented the most aggressive monetary policy in 40 years to try to curb it.

Costello said he’s been waiting for a recession (as a great many economic watchers have), but so far it hasn’t happened, and at this point if it does, it’s likely to be mild.

Looking at inflation, Costello said he doesn’t believe the Fed is going to be able to bring inflation down to its 2% target. “I think we ultimately are going to settle at a higher rate than we’ve been used to, 2.5 to 3% a year, because of the labor market.”

Wages have risen as companies struggle to find workers, and that’s affecting inflation. He doesn’t see that trend reversing because of demographic trends.

“We simply don’t have enough population growth, which ultimately will keep the labor market tighter,” he said. “We’re not having enough kids and not enough people coming to this country legally to live and work” to support the kind of population growth we’ve had isn the past.

Goods vs. Services

When looking at the economic environment for freight, however, GDP doesn’t tell the whole story, because it includes both goods and services. Goods mean more freight moves than services do.

So looking at the goods side of the economy, Costello shared some numbers on the three major areas that affect trucking freight: Consumer goods, construction, and factory/industrial production.

Consumer spending got out of whack during the pandemic, because people weren’t spending on services, such as vacations, concerts, and eating out. Instead, they poured money into goods, taking on home remodeling projects, for instance, buying new appliances and furniture.

When consumers were able to spend on services again, that spending shifted, and that shift was a big part of what caused the freight recession.

A lot of the Covid-19 relief money from the government went into savings. The population accumulated excess savings of $2.1 trillion. “They have not worked that completely off,” Costello said.

“The good news is households are still pretty good financially. The delinquency rate on loans is still low from a historical perspective. But there’s no extra oomph in spending coming.”

That means spending on goods will be below par for the near future.

Another economic indicator that is important for freight is the inventory to sales ratio. Freight was so good during the pandemic because inventories were so lean, and the supply chain got scrambled, eventually leading to inventories that were too high. As retailers have worked down those inventories, there was less freight to haul.

The good news, Costello said, is inventories appear to be getting back closer to normal. Some big-box retailers have publicly announced that they have inventories back down where they want them.

“There’s still some to go,” he said. “When inventories are in good shape, I think freight will start to feel better.”

Construction and Industrial

The Fed’s aggressive raising of interest rates to curb inflation has affected home building and existing home sales, as mortgage rates make it harder or less attractive to buy a house.

This year we are going to see housing starts fall almost 9%, Costello said, and existing-home sales are down 17%.

Non-residential construction, however, is a different story, up 15% this year, although he expects it to drop back to more normal levels the next couple of years.

A lot of this is infrastructure, Costello said, thanks to a boost from federal infrastructure spending. But it’s also building factories, including new types of factories like semiconductors.

And that ties into the factory and industrial indicators.

“I am very bullish on North American manufacturing,” Costello said. “This idea of nearshoring, reshoring, it’s real, it is happening. It doesn’t happen overnight but we know it’s happening.

“Mexico is now the U.S.’ largest trading partner, not China,” he said, noting that we’ve had two administrations, one Republican and one Democrat, pushing policies to make this happen.

He pointed out that while truckload volumes are down 3, 4, 5% year over year, truckloads coming in from Mexico are up 2.3Z% this year.

Trucking Indicators

The pandemic-induced freight boom spurred a red-hot spot market, with the spt market doubling in size and rates hitting record highs as shippers who were trying to get their goods to market had to turn to the spot market when regular contract carriers couldn’t provide the extra capacity.

Costello recalled having dinner with the head of truck transportation for a large shipper in the Fall of 2021. Before the pandemic, this shipper moved no more than 2% of its loads in the spot market. At that point in the Fall of 2021, they were at 21%.

But what goes up must come down and as the economy slowed, there was no longer all that excess freight fighting for capacity. The spot market has plummeted 78% from its peak.

Contract freight, in contrast, is down 2 or 3%. A freight recession, to be sure, but not nearly as bad as the spot rates.

Carriers that rely on the spot market for the bulk of their freight, “those are the companies in trouble.”

Capacity: ‘This is Not a Demand-Side Story.’

“Any turnaround in the marketplace is going to be supply driven,” Costello said. There’s too many trucks chasing the freight, resulting in an overcapacity situation and a freight recession.

He believes that capacity is going to tighten, as lower rates and higher cost pressures drive some carriers out of business.

During the boom of the pandemic, many drivers and owner-operators left the fleets they were working for, getting their operating authority to cash in on the spot market. With the collapse of that hot spot market, many of those new carriers are struggling to survive, he said.

At the same time they’re faced with less revenue, they are dealing with cost pressures, including higher wages (“we’ve seen the largest cumulative increase in driver pay we’ve ever seen”) and fuel prices (“I think this is the catalyst to driving capacity out of the industry.”)

On top of that, many of those newly minted fleets bought used trucks and trailers at very high prices. “I know some of you were selling used equipment for nearly what you paid for it,” Costello told the audience. Those used-truck values have since dropped.

In short, “There’s going to be more and more folks going out of business,” Costello said. Carrier failures will continue, bringing supply and demand closer to balance.

“I hate saying it; other people’s pain is our gain. But it needs to happen and it is in fact happening.”