Economists may disagree about when or even if the national economy will enter into a recession, but the trucking industry knows a freight recession is already here.
“We have been in a freight recession in many ways for at least nine months,” said Jack Atkins, managing director and transportation research analyst at Stephens Inc. in Little Rock.
Shelley Simpson, president of J.B. Hunt Transport Services Inc. of Lowell, put it bluntly during an April conference call with analysts to discuss the company’s first-quarter earnings for fiscal 2023.
“To start, we’re in a challenging freight environment where there is deflationary price pressure for an industry that continues to face inflationary cost pressures,” Simpson said during the call. “Simply stated, we’re in a freight recession.”
J.B. Hunt reported its trucking division had quarterly revenue of $205.9 million, down 8% from $229.5 million the previous year, while operating income was $4.99 million, down 83% from $28.9 million.
The segment had more total loads but revenue per load dropped from $2,518 to $2,084.
A freight recession isn’t necessarily dire news for the broader U.S. economy.
Convoy, an industry software company in Seattle, said there have been 12 freight recessions since 1972, more than twice the number of economic recessions.
The average length of a freight recession is about 10 months, while a freight growth phase can last 31 months on average, according to Convoy.
“We are either winding up to a peak or winding down to a trough,” said Atkins of Stephens. “It is a roller coaster. We are not seeing any contraction in the overall economy.
“That may come later this year or the next year,” Atkins said. “This is being driven by inventory destocking and freight levels that were unusually high resetting to more normalized levels.”
Experts said there isn’t one culprit behind the current freight recession.
Rising inflation is a factor, more expensive costs for labor and equipment are another, as well as the national consumer’s return to more balanced spending habits after the worst of the COVID-19 pandemic.
Simpson, in an interview with Arkansas Business, said the freight recession is more of an inventory correction.
When people were stuck at home, they bought things.
Now that the pandemic is less of a concern, people want to go out and do things.
“Since the pandemic things have been unpredictable, more unpredictable than maybe in our past,” Simpson said. “Part of that is us as consumers — what do we want to buy? A lot of what we see happening right now is we [as consumers] are getting back to a more normal environment from a personal perspective.”
The freight recession comes after a prosperous two years for trucking and transportation companies.
Capacity was limited while shipments were in demand so industry profits soared.
With capacity not an issue but demand waning amid cost increases, it’s no wonder that carriers are feeling the pinch.
ArcBest Corp. of Fort Smith, reporting its first-quarter earnings in April, said its trucking division experienced an 8.8% increase in total shipments but a 8.5% decrease in revenue per shipment.
Quarterly operating income for the division dropped from $80 million to $47.5 million.
“We’ve seen some reduced customer demand primarily based on declines in their businesses, though some are more insulated from economic changes due to their industry or business model,” said Steven Leonard, ArcBest’s chief commercial officer. “One thing many customers are focused on is managing costs, and because we’re a company that listens and works to anticipate the needs of our customers in any given market, we get to be part of those conversations.”
Smaller Firms at Risk
A large, global company such as J.B. Hunt has the resources and scale to weather the freight recession. But smaller companies with tighter profit margins face a greater threat.
The American Trucking Associations said that nearly 96% of trucking companies operate 10 or fewer trucks.
Butch Rice, CEO of 110-truck Stallion Transportation Group of Beebe, said his company has seen a 15% drop in volume during the current recession.
Rice, a former chairman of the Arkansas Trucking Association, has lived through previous freight recessions, including the one in 2008-09 that was accompanied by the Great Recession nationally.
“It is a lot milder for us than ’08, ’09; we learned our lesson,” Rice said.
About 80% of Stallion’s customers are contracted partnerships, as opposed to spot market freight. Spot market, simplified, is freight that finds carriers on an ad hoc basis.
In good times, spot rates can be robust and appealing — such as 2021 and 2022 when capacity was in high demand.
During the current recession, spot rates have dropped as much as 15% below a carrier’s operating cost, Atkins said, as carriers compete for less freight in a high-capacity environment.
“For the last three years the spot market has been really high,” Rice said. “Everybody knows you can’t live on these highs forever.”
Rice said he and Chief Financial Officer Jeff Holt have been preparing Stallion for leaner times since the boom that started in 2020 when the pandemic increased demand for goods.
“I can tell that the carriers who have planned for this, those are the ones that will survive it,” Rice said. “We will lose a lot of carriers, I believe, during this time.
“If you didn’t plan, that is going to be a hard row to hoe to come out of. You’re in dire straits.”
The Road Back: National Recession Could Roil Recovery But Execs Are Optimistic
Neither Shelley Simpson, president of J.B. Hunt Transport Services Inc. of Lowell, nor Butch Rice, CEO of Stallion Transportation Group of Beebe, veteran industry executives, would venture a guess as to how long the current freight recession will last.
J.B. Hunt CEO John Roberts, during the first-quarter conference call, said the freight recession’s recovery was a question of when rather than if. Simpson is equally optimistic.
“We have said our customers are resetting their inventory; they’re trying to determine what we are going to buy,” Simpson said. “They are working through a bloated inventory level, and we think that is going to take our customers a bit of time to work through that. We’re not sure. From a crystal ball perspective, it has been foggy.
“We are certain about one thing: Things are going to rebound.”
Jack Atkins, managing director and transportation research analyst at Stephens Inc. of Little Rock, said he believes the freight recession is in the last third of its current evolution. A national economic recession could spoil things, of course.
“As the service economy opened back up, you had this drawdown in freight activity,” Atkins said. “We went very quickly from having not enough inventory to having too much inventory. Some retailers are almost done [with reducing stock]; some have more to do. It is a pretty meaningful contraction in the freight economy.”
Shannon Newton, the president of the Arkansas Trucking Association of Little Rock, said she believes the freight recession will not be as deep as previous freight recessions, such as that in 2019, which saw a rash of bankruptcies among carriers nationwide.
“Assuming that element of the economy is status quo, I would anticipate that the recession would be relatively mild and short,” Newton said. “I think the prosperity of the last 2½ years makes this downturn [more] survivable than what we saw in 2018 and 2019. It hasn’t been as sharp, and the drop has not been as steep.
“Companies have built up some resiliency, if not in cash reserves then in their mentality over the last 2½ years. If this is mild and short, I think we will look back on this as a market correction and be better for it in 2024.”
Newton said there may be unintended positive consequences from the pandemic-related supply chain disruptions of the past three years. Carriers complained during that time how expensive and hard it was to find equipment and drivers, making it difficult to expand during the freight boom time.
Now, those carriers that didn’t overgrow or burden themselves with debt because they bought a bunch of new tractors and expanded are happy they didn’t.
“Over the last 2½ years constraints on new equipment and constraints on labor have held our ability to meet that demand in check,” Newton said. “That constraint in our ability to expand the supply has helped mute this reduction in demand for our services. We didn’t grow too fast, and we don’t have too many trucks and too many drivers.”