Freight

6 mins

4 Drivers of Tight Trucking Capacity Heading into 2021

By

Matt Muenster
December 4, 2020

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Without question, shippers are extremely cognizant of today’s competitive freight market and have their hands full managing the costs and efficiencies of supply chains. They also have their hands full of data. This article helps cut through the overabundance of market noise and brings attention to some of the most relevant economic indicators driving Breakthrough’s freight rate forecasts heading into 2021.

Key Factors Driving Trucking Capacity in 2021

Breakthrough is watching 4 Drivers of 2021 trucking capacity projection, among others:

  1. Retail Inventories

  2. Trucking Employment

  3. Consumer Confidence

  4. Consumer Spending

Read more about how 2020’s coronavirus pandemic has influenced the freight industry for shippers here.

1. Taking stock of inventories

Inventory to sales ratios for retailers and manufacturers soared in April and May, respectively, before inventories were quickly tapped into by consumers with pent-up demand for goods. The need to rebuild inventories caused freight demand to surge higher for longer during 2020’s peak season.

Source: U.S. Census Bureau

While manufacturing inventories have recovered to pre-pandemic levels, retail inventories remain low which will continue to drive import traffic to replenish them. The Port of Los Angeles experienced its greatest year-over-year increase of import volumes for October in its 114-year history. The massive import volumes will continue to put a strain on surface transportation into 2021.

Freight demand will likely stay robust through 2021’s Chinese New Year because shippers will try to mitigate the inventory imbalances they experienced throughout 2020. Imports will continue to be higher year-over-year until retail inventory levels rebuild to pre-pandemic levels. We expect these conditions will continue to put pressure on truckload freight capacity until at least the end of Q1 2020. This makes the retail inventory to sales ratio one of our key metrics to watch.

2. The trucking employment rebound

Transportation trade media headlines routinely feature a trucking labor shortage. Outlets typically cite the discrepancy between trucking employment numbers from before the pandemic and compare them to today to verify this shortage. But when you compare current trucking employment metrics with other labor market benchmarks—especially other industries that generally compete for the same labor pool, like construction—you can better deduce the reality of this shortage.

For example, as a broad benchmark, how does trucking employment compare to total nonfarm employment? How does trucking compare to similar industries that compete for its blue-collar workforce, such as construction or warehousing and storage jobs? These kinds of comparisons offer helpful guidance when it comes to assessing labor market tightness.

Source: U.S. Bureau of Labor Statistics

The graph above takes these comparisons into consideration. Total nonfarm employment fell quickly through April, reaching its trough in May. Trucking employment followed the same pattern. Since June, the trucking industry’s pace of employment growth has matched the broader total nonfarm employment trend.

So, although headlines discuss major shortages in trucking employment, the reality is, trucking employment growth has kept pace with other labor markets.

Sustained demand for goods during the pandemic has given trucking companies the desire to hire. Truckload rates have climbed high enough to provide a level of comfort for companies offering financial incentives to attract and retain drivers.

Increasing wages and continued operation of CDL training centers that were closed during periods of lockdown will continue to improve trucking employment as 2021 begins. Although there is potential for further stimulus to bring headwinds to trucking employment back into the market, we anticipate the tight trucking labor market will gradually see an increase in drivers, which will improve overall capacity.

3. Consumer confidence versus a climbing coronavirus case count

The personal savings rate skyrocketed in April during the spring pandemic lockdowns and brought the ratio of personal savings to disposable personal income to over 33 percent. In October, the most recent month of available data, the personal savings rate remained over 13 percent, more than 6 percentage points above the five-year average.

Source: U.S. Bureau of Economic Analysis

Meanwhile, consumers have looked to decrease their debt load. The average U.S. credit card debt per household fell over 8 percent year-over-year during Q2 2020.

Government transfer payments, the CARES Act stimulus, supplemental unemployment income, and tax refunds profoundly impacted these metrics. Consumer behavior has continued to model risk aversion, however, which could slow freight markets if spending on goods slows after the holidays.

Bloomberg Economics estimates that a deceleration in household credit growth—to zero from about 3-4 percent over the past few years—could subtract at least 1 percentage point from GDP growth in 2021. The current state of consumer spending would mean much of the contraction in growth would affect goods consumption and lead to weaker freight demand.

Thus, near-term consumer confidence in the labor market and consumers’ willingness to spend will continue to be an influential indicator of freight capacity.

4. An uncertain future for personal consumption with the promise of a vaccine

The pandemic caused the sharpest decline in the U.S. economy in the postwar era. The most common measurement of this economic change is the real gross domestic product (real GDP). When GDP falls far below expectations and creates an output gap below its potential, personal consumption is often the explanation.

This year’s output gap is driven by an extreme swing in personal consumption. Real personal consumption expenditures remain about 4-5 percent lower than what they would be if the pandemic had not happened based on our model that considers consumption growth over time.

Source: U.S. Bureau of Economic Analysis

The consumption gap shown above is generated by an anomalous recession scenario. Instead of consumption being disrupted across goods and services as is typical during economic recessions, only the demand for services has suffered while goods demand has soared above its expected growth rate.

For a full analysis of how consumer spending habits have changed, read our blog about the shift from services to physical goods. 

Moving forward, the rollout of vaccines will create higher degrees of consumer comfort to return to purchasing services left behind during the pandemic. Entertainment and travel expenditures will particularly experience robust growth over the next 1-2 years. This return toward normal will decrease the inflated share of spending that nondurable and durable goods have enjoyed for much of 2020. Freight demand will gradually slow during this development and will create slack in freight market capacity.

Understanding the Factors that Drive Trucking Capacity

As shippers continue to roll with the pandemic’s punches, much remains uncertain when it comes to transportation and freight impacts. Although the U.S. economy has demonstrated recessionary behaviors, the unique combination of a population preparing for turbulent economic waters while continuing to spend robustly on goods has created an interesting ripple effect in trucking capacity.

As these behaviors persist, shippers should position their freight strategies to ebb and flow with changing markets. Sourcing the right carriers for the right lanes and keeping freight contract agreements amendable to changes in the market will help both shippers and carriers establish stability throughout their budgets and network performance.

For more information about Breakthrough’s freight forecast or transportation management solutions, contact us.

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