COVID-19 Impacts on Freight Volumes: Adapting Strategies Through Weak Demand

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As many businesses experiencing a more enduring slow of economic activity as a result of the spread of the novel strain of coronavirus (COVID-19) and its prescribed social distancing, others are facing very different challenges. Small businesses, the restaurant industry, tourism, and travel are taking massive hits as many U.S. citizens are opting to stay home to prevent further spread.

Read an in-depth analysis of how both fuel and freight markets are responding to the coronavirus outbreak here.

These shifting dynamics manifest differently across freight verticals. While durable goods and other non-essential items have been significantly suppressed, this behavior translates into an influx in other industries. Those that enable self-sufficiency from the comforts of home and those that supply essential workers with goods that make their jobs possible surged through march. Data supports this assertion. As consumers emptied store shelves to stock up on essentials, like toilet paper, health products, cleaning supplies, food products, and other consumer packaged goods freight demand in the Breakthrough Network for consumer packaged goods, food & beverage, paper & packaging, and retail goods spiked.  Freight demand for these nondurable goods rose nearly 23 percent at its peak compared to the prior year’s level.  

For these sectors, this behavior surpassed 2018 levels when the U.S. was economically thriving. For others, volumes have dipped significantly, altering the dynamics of their freight procurement strategies. When much of the commentary in the marketplace is concerned about plummeting stock prices and slowed economic activity, what can shippers expect for their supply chain?

What does global economic uncertainty mean for your transportation supply chain?

Uncertainty across the globe continues, and the end is nowhere in sight, despite the emergence of some groups pushing back on the stay-at-home protocols. Forward-buying behaviors manifested in freight volumes early, but as these conditions endure that surge will recede, which as consequences for the full supply chain to varying degrees.

As the variability in consumer demand remains in flux, each link across a good’s journey to the store shelf becomes ever-more unpredictable, and transportation is not immune to this phenomenon. This is commonly known as the “bullwhip effect” and it can lead to a myriad of challenges in forecasting accuracies and planning in times of disruption.

Learn how to navigate massive fluctuations in diesel fuel prices, and how your fuel reimbursements are costing you millions in unnecessary costs here.

How will Increased Freight Volumes Respond to Normal Conditions Down the Road?

It is important to keep the uniqueness of the COVID-19 outbreak, at the forefront of analyses of current freight trends. Demand for all goods could remain weaker than expected for a longer period than would be typical under normal recessionary circumstances. As mass layoffs continue and jobless claims set record highs in response to slowing economic conditions, we could expect consumer spending to remain uncharacteristically low in the face of ongoing uncertainty.

That being said, we have seen freight demand shift at different rates for both nondurables and durable goods in the near term. 

 Nondurable Goods and the Bullwhip Effect

The initial increase in freight demand seen through mid-March to early April reflects the rush to stock up. Now, we can assume that the end consumer will utilize most of its safety stock before repurchasing which translates into a sudden decrease in freight demand for the same goods. This is a prime example of the bullwhip effect in action. 

Looking ahead, a fair estimate to make is that the increase in freight volume demand is likely to equally and oppositely decrease under normal circumstances for each week the increase occurred. Its duration may also echo this pattern, enduring for a similarly equivalent time opposite of the increase. If increased freight volumes in nondurable goods last one month, we can conclude that one month of the decreased volume is likely to follow once circumstances return to normal accounting for a reasonable standard deviation.

Suppressed Demand For Durable Goods Freight

While freight demand for nondurable goods spiked due to consumers stockpiling essential household goods, freight demand for durable goods responded oppositely.  In the Breakthrough Network, durable goods did not have an initial spike, but a decrease of nearly 42 percent year-over-year.  

This behavior is common in the durable goods space while the economy is entering a downturn.  With mass layoffs and furloughs, consumers are limiting their spending on big-ticket items like appliances and home improvement.  The uncertainty and the sharp reaction to the pandemic seen in the labor market may push freight demand for durables into a deeper fall, and will likely last longer than the anticipated nondurable goods downturn based on historical recessionary events.  

Learn more about consumer behavior and the relationship between durable and nondurable goods in an economic downturn here.

Prepare Your Network for an Ebb and Flow in Coming Months

Looking ahead, we expect freight demand to continue to weaken as we enter the downturn of the bullwhip effect, and circumstances preclude consumers from investing in durables.  While states are in lockdown and more consumers are being furloughed or laid off, the spending will remain low and its accompanying freight will continue to decline at a rapid rate.

As state governments begin to seriously plan to open economies it will be important to monitor how this influences consumer behavior in geographies pertinent to a shipper’s unique transportation network. Ultimately, however, the spread or containment of COVID-19 will dictate longer-term trends in freight demand. 

Uncertainty is the key tenet of most reporting related to freight and COVID-19, but when held against market fundamentals and accurate, complete data the outlook becomes relatively clearer.

Staying in tune with changes in the market is in the best interest of your transportation network, and shippers who position themselves to quickly adapt with agility will ensure they are keeping pace with and surpassing their competitors.

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