As of June 2016, the U.S. economic outlook is uncertain. There are hopeful signs: employers are still hiring new workers, more jobs and cheaper gas have led to a small bump in consumer spending, and home builders are in full swing. MarketWatch predicts 2.5% GDP growth in the second quarter of 2016.
And, there are signs of an impending recession: consumer spending was severely hampered by education and healthcare costs despite cheap gas, overall inventory to sales ratios are high and continue to rise, and the Chinese economy is stumbling.
With conflicting signs, nobody can say with certainty where the U.S. economy is headed. But given the damage the 2008 recession did to the freight transportation industry, questions have to be asked – what happens if there’s another recession? How will this impact freight transport, and how can that impact be mitigated?
The Freight Shipper’s Recession
During a recession, when freight volumes are low, shippers have negotiation leverage and carriers must lower their prices. This is a favorable pricing condition, but when all other factors are accounted for, the freight market is far from favorable for a shipper.
Slow demand creates high inventory levels and subsequently high overall logistics costs for shippers, a hard pill to swallow during a recession. In difficult times, shippers typically downsize transportation and logistics departments, leaving just a few employees with the responsibility of finding freight savings.
During an economic recession, carriers try to shift as much business as possible to non-cyclical items such as food and beverage. This can leave shippers of durable and discretionary goods without reliable capacity or paying inflated freight costs. Consumer packaged goods (CPG) shippers and retailers are left shipping partial loads – a much slower and worse service than shipping full truckload or door-to-door service.
The impact of a recession depends heavily on the type of freight being shipped. On a general level, though, shippers are faced with worse service, sky-high inventory costs leading to lower priced products and understaffed logistics and transportation departments to manage the movement of goods.
Solutions for Freight Shippers
When times are really bad, just as when times are really good, shippers of all kinds turn to 3PLs for assistance with logistics management.
Typically, when a logistics provider is tasked with managing freight during a recession, the first step is to implement a TMS, which is almost always free with logistics management services. From there, previously hidden cost savings opportunities are found and applied immediately.
3PLs are of particular value during a recession because they can act like an in-house transportation department at a lower, scalable cost; but they can also serve a more asset-oriented option, taking direction from a transportation department. The transportation solutions can be custom made to help a specific business get through a tough time.
The Freight Carrier’s Recession
An economic recession is hard on carriers. Around 800 trucking companies went out of business in the Great Recession, while many more had to significantly downsize. Another recession, after the impact of the 2008 downturn, would be harmful. Lower freight volumes paired with necessarily lower freight rates are devastating to carriers’ profit margins.
Trucking employment closely follows the state of the economy – not many industries are hurt by swings in economic activity like freight transportation. When consumer demand is down, freight volume is down, carrier revenues are down, and less personnel is needed to move available freight, so carriers must let go of employees in large numbers. This complicates operations, hinders their ability to handle any fluctuations in freight volume and makes it more difficult to rebound after the recession is over.
On top of this, many truck drivers quit during down economic times. Since carriers are competing for freight to haul, it can often lead to unfriendly routes or lots of time away from home, but mostly, it means lower pay for the drivers.
A recession limits carriers’ ability to invest in new equipment and technology. This is a problem because the government constantly has new equipment mandates for carriers to comply with environmental and safety regulations. Carriers are forced to invest in new equipment all at once, again making it harder to ever properly bounce back from a recession.
Solutions for Freight Carriers
There are two things carriers can do to try and stay afloat during a recession. Which solution a carrier leans toward depends on their current business model and vision for the future of the company.
One solution is to integrate a TMS. In 2008, LaValley Transportation loaded up on assets in the worst part of the downturn. This might seem crazy, but it worked. By buying more trucks, they collected business from other carriers who were going bankrupt, and set themselves up for further success as soon as the economy started picking up again.
Another solution is to dump assets. A carrier can receive an initial lump sum for doing so, which can be helpful to get through unprofitable times. Also, many of the most profitable carriers are making moves towards being more like an asset-light transportation provider, as opposed to an asset-heavy trucking company. There’s less risk involved in an asset-light business model and it’s more scalable.
Shippers and carriers both will be hit hard if there’s another recession, especially due to the prolonged effects of the Great Recession. Transportation strategies will have to be altered to adapt to a drastically different freight market.