How would a Recession Affect the Trucking Industry?
Talks of recession have recently been the main stay of your morning news and we couldn’t help but ask: what will a recession look like for the trucking industry? The economy is in a never-before-seen position with unique shipping issues that continue to fluctuate while grappling with some of the highest inflation we’ve seen. How has and how will a recession affect our sector in the coming quarters?
Are we in it or near it?
Regarding if we are in a recession or not, it depends on who you ask and what they believe constitutes a recession. For instance, if you are going by a more generic, traditional definition it states that a recession is occurring if there are two back-to-back quarters of negative gross domestic product (GDP). If going by that definition, the U.S. has been in a recession since early summer of 2022.
“’We have a hard time believing the economy is in recession today, given a strong labor market and corporate earnings growth,” said Tim Holland, chief investment officer at Orion Advisor Solutions. “We also remind ourselves that recessions are uncommon, as our economy was in recession just 8% of the time over the past 30 years.’” – forbes.com
But if we are considering the National Bureau of Economic Research (NBER) as the main judge of whether we are in a recession or not, it gets a little more complex. The short answer is no but it doesn’t mean we’re not on the ragged edge. The Bureau considers multiple factors to decide if the country is officially in a recession or not. Depth, diffusion, and duration are the metrics used by the NBER.
These metrics don’t necessarily have to be setting off the alarms all at once for a recession to be considered. If one is hitting an extreme hard enough it can throw the economy into a recession, though that is rare. They classify the periods of ups and downs as peaks and troughs. This doesn’t necessarily mean that it looks like the ridged trace lines of an electrocardiogram but rather, what they call expansions and contractions. Once an economy peaks, if it doesn’t plateau, it is then going into a recession. Historically, once inflation sets in and forces the economy, both consumers and businesses to adjust accordingly, a recession will begin, presumably stopping inflation.
If we go by that observation alone, then no, we are not in a recession just yet as we still see prices on goods increasing through multiple industries. But you can still count on us being very close to one. So, what will happen, specifically to the trucking industry once the other boot drops?
Again, depends on who you ask…
The freight market can always be an interesting, and sometimes key indicator of how the economy is doing. While that is all fine and good for everyone else outside the market, it can mean chaos for the trucking industry. As a recession takes place, consumer demand is down which means freight has decreased.
“The indicators are pointing to a K-shaped market for the trucking industry. Large trucking companies, which have long-standing contracts with their clients, will be able to weather the crash in spot market rates — even as contract rates begin to dip. Meanwhile, the small-time truck drivers who have flooded the market since the pandemic began are set to struggle.” – freightwaves.com
As the beginning of a recession starts to take shape, mid-sized to larger carrier companies that have a decent sized fleets are more likely able to whether the storm with some loss but will have a better chance of survival.
Mega-carriers that hold numerous contracts with big-name businesses notoriously fair better during recessions since they are in a locked in commitment and have not only the capacity, but the repertoire of their business.
The most heavily impacted are those that rely on the spot market for their revenue. The spot market will ultimately decrease in volume as well as rates. This can spell bankruptcy for the owner operators and smaller mom-and-pops that rely on load boards and the over-flow that they can catch from any of their connections. This decrease in freight volume that lasts longer than a month or two will ultimately cause smaller carriers to close their doors. Throw in our current issues with diesel prices, general inflation for services and parts, it becomes nearly impossible to keep up with the expenses of running a small business while losing revenue.
Another major impact recessions have had on the trucking industry is employment and decrease in the workforce. Naturally, unemployment is nothing new to any industry during a recession as companies downsize and fight to keep their heads above water. In the trucking world though, it becomes a little more than just layoffs.
The pandemic spurred an influx of drivers becoming owner operators and running independent. The spot market was hot and there were periods of influx with freight, and it served the small business owners, newcomers and seasoned drivers, well. Owner operators that have partnered with carriers and larger freight brokerages will start to feel the cold shoulder as rates decrease.
A secondary effect of unemployment is the burn out that drivers of the companies that are surviving may feel. Say that a mid to large size company needed to slim their fleet during the recession and you’re one of the lucky ones that got to stay on. Now you’re running almost twice as hard under incredible pressure with possibly less support from HQ (likely due to office personnel layoffs). History has shown us that though finding a job might be difficult during recession times, truckers have quit due to the deteriorating working conditions.
A recession would affect everyone in the trucking industry but in different ways. There are only so many predictors of when exactly a company may cross the threshold and began making changes to adapt to tighter budgets, but are there things that carriers, big and small, can do to prepare now?
While no one can truly “recession-proof” their company, there are steps that they may take in order to make it possible to not only survive but walk away with minimal loss. While lay-offs seem to be the only thing the public hears about when companies are suffering from the blows of a recession, there are many things outside that drastic decision that may assist in cushioning an organization.
The first is to pay attention to the market, more than you normally would and be on the lookout for what larger companies are doing to prepare themselves. The actions they take will give you a clue as how eminent a recession is. Look at freight markets and CPI while reviewing your operations, expenses, and revenue. You are likely already doing all of this but knowing it is for the purpose of preparing for a recession may motivate you to pay even closer attention and strategize early on.
Look at valuable assets that could sell quickly and for a decent price that aren’t crucial to run your business. By eliminating these, whether it’s extra tractors or trailers, not only are you saving on maintenance and insurance costs, but from the sales you can build up a little extra cushion for when things began to get a bit heavy.
Cutting expenses that are not required to run your company appropriately. This may sound like common sense, but it’s still worth mentioning.
If you are going to spend on anything, make sure it is to advance and streamline your operations. Some examples could be investing in better accounting software, a TMS, or a tool to better your customer experience.
Shifting your commodity before hand may also help safeguard your revenue in turbulent times such as grocery items and beverage items. These are typically a little more stable during recession times and less cyclitic.
Speaking of spending, ensure that your drivers and employees are getting the pay they need to stay stable in these times. A company that does it’s best to look out for their people during the tough times tend to have a better culture and less turn over when things eventually correct themselves.
This too shall pass
The only thing we know for sure about recessions is that they do come to an end eventually. They can take a few months or sometimes a year but doing your best to educate yourself and take actions to prepare for one is in your organizations’ best interests.
With the shifting market and the unpredictability of the supply chain, it’s critical to have a partner that focuses on long-term strategy. With Meadow Lark we have forty years’ experience in the industry and have been able to adapt to not just survive but thrive in difficult times. Asset-based 3PLs can assist your organization with its transportation needs in staying afloat as it will be less costly to you.
If you’ve got freight headaches and need a solution, call us, and see what we can do for you.