Economic Recovery and the Future of the Freight Transportation Industry – Part 1

The recovery of the North American transportation industry is contingent upon the revival of the economies of the United States and Canada. The movement of auto parts, housing supplies, manufactured goods, food stuffs. and a host of other products drive the economy. If there are any impediments to the smooth operation of North American supply chains, this has a direct impact on the Transportation industry. This blog will focus on the forces shaping the revival of the two economies. Part 2 will focus on what the freight transportation industry will look like after the recovery.

Since the beginning of the Covid-19 crisis, Canada has lost about 3 million jobs while the U.S. has lost about 40 million jobs. Many of the unemployed have been forced to stay at home due to the contagious nature of the virus. For the past week, the United States has also been rocked by protests in over 75 major cities because of the killing in Minneapolis, Minnesota of an African American man, George Floyd, by a white police officer.

Most U.S. states and Canadian provinces are in “the restart” period. With no vaccine for probably nine months or more, companies need to generate revenue and profits during the “next normal” phase. Businesses and consumers are having to learn to adapt to the public health guidelines in each jurisdiction (i.e. social distancing, handwashing, mask wearing, drive to work rather than take public transportation etc.) and the new operating procedures (i.e. curbside pickup, controlled entry to stores and businesses, working from home etc.).

In the space of a few months, we have discovered that jobs that no one thought could be done remotely can be handled very effectively with a laptop computer and video conferencing. Cash-strapped businesses are learning that they can cut costs through the reduction or elimination of office space and its attendant costs. Teleconferencing reduces the need for business travel, another cost saver. Commuting costs can be cut – a walk to the home office beats hours in a car or on public transit. Of course, not everyone can work from home.

The “mirage"of a quick return to normal

Some optimistic economists predict that the economy will snap back in the 4th quarter of this year and during 2021. With warmer weather in North America, people are now able to spend more time outdoors. The virus may be less potent and possibly dissipate during the summer months. To Steven Rattner, the Chairman and CEO of Willett Advisors LLC, “the prospect of large numbers of Americans returning to their workplaces seems to recede like a mirage.”

Some forecasters expect the recovery will look like a “jagged mountain range,” a series of ascents and descents as outbreaks occur in some locations while people in other jurisdictions return to work. Several experts believe the economic impacts of this type of fitful recovery will be “devastating.” Because the restart will be gradual, with certain places and industries opening earlier than others, it will, be complicated. The U.S. and Canadian economies are a complex web of supply chains whose dynamics do not necessarily align neatly with epidemiologists’ recommendations.

Looking at the people protesting on the streets, many near one another, often without masks, this begs the question of whether this will spark a resurgence of Covid-19. Even under the most optimistic estimates, it will be months, and possibly years, before Canadians and Americans can again safely crowd into bars, squeeze onto subway cars, and fill sports arenas the way they did before the pandemic struck. “It’s going to take much longer to thaw the economy than it took to freeze it,” said Diane Swonk, chief economist for the accounting firm Grant Thornton.

The Virus Returns

It is the view of this observer that the second wave of the virus, or the reversal of the downward slope of the first wave of the virus, will take place sooner than later. Looking at the crowds of protesters and of other citizens congregating in parks and on beaches, less than six feet from one another, some medical experts suggest that the virus will likely return with a vengeance, forcing more stay-at-home orders.

Demand for Products and Services will be Muted

Forty-three million Canadians and Americans were forced out of work by the virus. Many of these people have spouses and children (and other family members) living with them. The true impact of the terminations and furloughs is probably closer to 80 to 100 million people. This takes an enormous amount of purchasing power out of the economy.

Some people will be rehired on a phased basis; other job losses will be permanent. For many people who have lost their jobs, they will need time to repay outstanding loans and bills. The sale of “big ticket” items will be reduced during the recovery period.

There are certain business segments that will take years to recover. One industry that comes immediately to mind is the travel and hospitality sector. Cruise ships, airlines, hotels, and restaurants are facing major hurdles in adjusting to the “next normal.” Even with plans to place plexiglass dividers in restaurants and airplanes, this will limit seating capacity and make it difficult for many firms to remain profitable. It is very questionable if consumers will feel safe returning to these services in the short to medium term.

In addition, chief executives are planning on cutting capital expenditures, another drag on economic recovery and employment. Many companies will need to make a significant number of changes for their companies to operate safely. These proposed changes are highlighted in the CDC Interim Guidance for Businesses and Employers. Then there are the companies that have gone out of business or will go out of business in the coming months. Some “big name’ businesses (i.e. J. Crew, Neiman Marcus, Hertz) have closed or are in the process of restructuring. These closures will remove many jobs.

Summary

To avoid another “Great Depression” or strong recession, there is an urgent need for companies to reopen safely, for citizens to go back to work safely, and for consumers to buy products and services at more elevated levels, in a safe environment. But are consumers ready to return to pre Covid-19 purchasing levels? Moving forward on modernizing the nation’s physical plant — from roads to buildings — makes particular sense now and not just because of weak economic conditions. The government can now borrow money for 30 years at record low rates of about 1.4 percent.

However, without an effective vaccine that is universally available, and with the demonstrated lack of respect for the virus by many citizens of North America, one should be realistic about the likely outcome. The pre Covid-19 vaccine (“Next Normal”) period is likely going to be a protracted series of sharp peaks and valleys, that will put a damper on demand. This will limit the recovery of North America’s freight transportation industry for at least the next 9 months to a year, and possibly longer.

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