COVID-19 Impact: As of 04/02/20 there were over a million confirmed cases of coronavirus with 234,000 in the U.S. alone. Nearly 80% of Americans are under a stay at home order. Those under such orders are told to only go outside to work in essential business or buy necessities such as food and medicine. Truck carriers, which are considered essential move 74.1% of the nation’s freight and gross $796.7 billion in revenue annually. So how is COVID-19 impacting the freight industry?
Shipping: Although domestic volumes are high due to the consumption of food, cleaners, and paper products, imports are down. China is just now bringing most factories back online. The Chinese factories which have been shut down for several months will need to be online for a period of time to build up stock before they are ready to export the goods they produce. With State-specific shut-downs of shopping malls, restaurants, and other businesses many imported items are not being shipped anyway. April is expected to repeat February’s blanked (canceled) sailings from Asia when the Coronavirus shut down Chinese exports. This time though, spot market rates are not expected to hold up. U.S. shipping rates are expected to fall 15% on the West Coast and 13% on the East Coast in March-May. Reduced shipping rates will have a delayed impact on the U.S. domestic freight market.
Domestic Trucking: Despite shipments of items such as electronics and health and beauty products being delayed, trucking capacity is tight as demand surges from retailers and manufacturers rushing to replenish stores and distribution centers cleaned out by shoppers stockpiling food, paper products, and cleaning supplies. The average rate to hire a truck on the spot market has increased by 12% in just 24 days. Tighter capacity is good news for freight brokers who are seeing very high demand for their services right now, but the tight capacity can make it difficult to find carriers on some loads. The sudden ups and downs in demand are leaving freight brokers astonished. Regular lanes and products that the broker would normally have no trouble filling are being upended in favor of the essential products consumers are now demanding. Trucks moving these vital shipments of are having trouble finding cargo to fill trailers on the return trip, leading to more backhaul. With all of the uncertainty going on now, it is difficult to predict next week, let alone next year.
Predicting the Economic Impact of COVID-19 on Freight: Predicting the economic impact on freight, or any other industry, is very difficult since we have not had a global pandemic since 1918. The extent of the disruption to the economy will depend in part on how quickly we can stop the spread, and get people back to work. Research on the 1918 pandemic provides insight into the impact of social distancing. In the 1918 pandemic U.S. cities that ordered social distancing sooner and for longer periods of time slowed infection rates and experienced lower death rates. This study also showed that lessening social distancing measures too soon often resulted in a second spike of infections.
According to McKinsey and Company, there are two possible economic scenarios coming out of the COVID-19 crisis. The first scenario is a delayed recovery. In this scenario, social distancing and increased testing works. The virus proves to be seasonal, public sentiment becomes more optimistic by mid-May. When the virus returns in the fall/winter, we are better prepared to deal with it. The economic impact of this scenario results in a second-quarter recession lasting through the third quarter with a decrease in consumer and business spending. The economic downturn will cause increased unemployment and layoffs, and an increase in corporate bankruptcies. Low interest rates and monetary policies will do little to help. The impact on freight will be strong with lower Carrier volumes and increased carrier bankruptcies.
In the second scenario, weak adoption of social distancing, slow testing rates, and the viruses' lack of seasonality results in the virus not peaking in the U.S. until May. In this scenario, the virus will continue to impact African and Asian countries as it spreads throughout the year. The economic impact of this scenario results in consumers continuing to cut spending for the remainder of 2020. Layoffs and corporate bankruptcies will continue to rise throughout the year. The banking sector will suffer distress that could reach levels of the 2008 global financial crisis. Fiscal and Economic policies will have little impact. Recovery will not start until the second quarter of 2021. This scenario will result in a stronger impact on freight with imports and exports dropping and consumer and business demand falling severely resulting in decreasing freight volume for the next year.
Regardless of which scenario plays out domestic freight is in for a rocky ride in the near future and logistic companies should plan accordingly.