On April 1, the second quarter of 2020 kicked off, a quarter widely seen as one that will go down in the economic history books — and not for good reasons. Many economists believe the Q2 contraction, caused by COVID-19 and the associated work stoppages and slowdowns, will be substantial. Goldman Sachs believes GDP will shrink by 24% in Q2.
It is already apparent to trucking officials that the second quarter will be bleak. But what comes next? Will the slowdowns and shutdowns cause a financial crisis, deepening the recession? Or will the federal response, the loans, the stimulus payments and the Federal Reserve's widening of credit isolate the COVID-19 response to the second quarter?
With COVID-19 perhaps peaking, what comes after the pandemic is now foremost on the minds of many in the transport sector.
For Daseke, a major U.S. trucking company that has a portfolio of flatbed haulers, it's time to meet and discuss this quarter and the quarters that come after it. Daseke officials now meet regularly, about two to three times a week at the Texas headquarters, about the economic crisis.
"It's all hands on deck," said John Wilbur, Daseke's transformation officer, speaking to Transport Dive.
If problems extend further into 2020, the economy could cripple fleets that transport industrial freight for factories, construction crew and other large industrial shippers. For Daseke, a major servicer of such industries, the COVID-19 outlook is somewhat optimistic.
"We're viewing it as primarily a Q2 event," said Wilbur.
Wilbur said the company's diverse fleet portfolio, including haulers of wind turbine parts and transporters of high-security inventories, is helping the Texas-based conglomerate of mostly flatbed fleets weather the storm. The company's officials meet two to three times a week about the national crisis, and they go over outlooks and projections.
"We are trying to look at what is demand destruction and what is delayed demand."
Daseke transformation officer
The Trump administration is hoping for an immediate rebound, as businesses open and get on with plans in Q3 and Q4. Daseke is examining if and how much business has been postponed.
"We are trying to look at what is demand destruction and what is delayed demand," Wilbur said.
The federal response
Economic forecasters had worried about the COVID-19 scenario since early February. One economist, speaking to Transport Dive in early March, compared it to a hurricane of sorts, sitting offshore after shutting down parts of China and Europe. What would the damage be in North America?
Rajeev Dhawan, director of the Economic Forecasting Center at the College of Business at Georgia State University, told Transport Dive in early March that the implications down the road could be profound if businesses idle, and then pass on making payments to banks. Banks then wobble, and then a Q2 event becomes a financial recession, one of the worst kind of recessions.
"It is not a business cycle event. It's completely an artificial event."
Economy expert, FTR
Much of what Dhawan articulated to Transport Dive in early March largely came to pass. Federal officials, wary of another Great Recession, moved quickly to plug the holes in the financial dam.
"The Fed came strongly out of the gate and took care of it," Dhawan told Transport Dive. "What they did in the Great Recession, in a year, they did in a month."
Yet consumer habits will likely change in the long term because of the pandemic, Dhawan said. Retail malls could be hit hard by the rapid change, as consumers decide e-commerce is more dependable and safer.
"Redeployment of capital or funds or property, aka Schumpeter’s creative force of destruction in capitalism, will get accelerated by this virus in this sector ... Money will shift online," said Dhawan. "What was going to happen in five years will happen in the next five months."
For trucking, that could accelerate the need for final mile delivery, having little effect on the actual amount of goods transported over long distances. But other long-term changes could harm demand for overall goods, Dhawan said. Consumer purchases in some sectors will slow, Dhawan said. Hotels will buy fewer linens, for example. Restaurants will order less food. Fleets that haul such goods, for retailers and restaurants, could be hurt for many more months.
For now, fleets that haul consumer staples have done well. Americans have stepped up some spending but Dhawan said it could remain within a narrow field of consumer goods.
"If all they're buying is Netflix, it doesn't help freight," said Dhawan.
A hard time to forecast
Just as before COVID-19 hit the United States, experts are still unsure about what remains for 2020, during Q2 or after it.
During a call-in briefing with analysts on April 9, economist Bill Witte, of FTR Transportation Intelligence, said the coronavirus event is somewhat unique to economic history and, thus, difficult to analyze.
"It is not a business cycle event," said Witte. "It's completely an artificial event."
If the containment period is short, the economic "restart" should be swift, Witte said, possibly in May or June. And the federal stimulus programs are designed to get people back on the payrolls, he said.
But looking over the federal jobless claims that came immediately after many employers and schools began to close down, with 6.6 million filing for the week ending April 4, Witte noted the severity of the crisis.
"These numbers are really bad," said Witte.
Eric Starks, FTR CEO, told analysts and transport officials he foresees a 44.5% drop in the sector of GDP that is goods, for the second quarter. There will also be a 24% decline in industrial production in Q2, he said. Mortgages will decline in Q2, but refinancing will tick up.
Starks said there will be an uptick in Q3 but the "noticeable bump" is later in the year, in Q4. The recovery is "not a return to normal overnight," he said.
But executives should be ready to recall employees if there is Q3 rebound, Witte and Starks said. FTR expects a 22.1% growth for Q3. If that happens, the ability for executives to recall workers will be "very, very high," Starks said.
Witte also cautioned executives and analysts about comparing the Q2 recession to the Great Recession of 2007-2009. Yet a concern about a slow recovery is stirred by fears the Q2 hole will be very deep.
"The next three months will be horrendous by any metric," Dhawan told Transport Dive.
Fleets, OEMs react
Some fleets and logistics firms have made tough calls.
Saia, an LTL fleet, furloughed some sales staff for the week ended April 10, according to Freightwaves. Echo Global Logistics reduced about 5% of its staff, Freightwaves also reported. And a number of OEMs — including Daimler Trucks, Paccar, Mack and Volvo — have idled their U.S. plants because of the coronavirus crisis.
The loss or slowdown in business makes it difficult to predict how 2020 will turn out, according to Jim Meil, ACT Research principal for industry analysis.
"We don't have a precedent for a recession caused by a biomedical cause," Meil told Transport Dive.
Meil said there is a great likelihood some bankruptcies could happen as fleets face the fallout of the coronavirus. Some fleets will have to have adjust to a temporary and new structure to consumer demand.
"You are going to see changes in the supply chain, changes in the workforce," said Meil.
"If all they're buying is Netflix, it doesn't help freight."
Director, Economic Forecasting Center at the College of Business, Georgia State University
And, perhaps counterintuitively, some fleets won't be able to rise to the challenge of the upturn in the economy when that happens, Meil said.
As business turns upward, fleets and other trucking-related companies will likely have to borrow money to expand anew to meet higher demand. Some fleets won't be able to do that, Meil said. The reason is some banks won't extend credit, all while fleet or manufacturers' customers are asking for 60 to 90 days to pay. Those new problems will sink some businesses during the upturn, Meil said.
It will also take time for trade to repair itself. Trucking is heavily dependent on incoming goods arriving at ports. When trade returns to normal, many shippers and fleets may have trouble adjusting to new demands.
"When trade is impacted, and the ports start to slow down, you start laying people off," said Texas Trucking Association President and CEO John Esparza, speaking to Transport Dive on April 9. Larger companies let go of contractors during a trade slump.
The industry is familiar with that "ebb and flow" nature of trade, Esparza said, but the risk is always that, if a company needs to recontract owner-operators during a spike in trade, they may not be available.