A healthy freight market relies on a delicate balance of supply and demand between shippers who want to move freight and trucking companies with the capacity to carry those goods. When the number of available trucks outstrips the demand by shippers for that capacity, a freight recession results. That’s been the market dynamic since early 2022, and this current freight recession has cut deeper and lasted longer than many in the industry expected. What causes a freight recession, and what should shippers know and do to manage their supply chains during one?
The Current State of the Freight Market
Freight recessions happen when the volume of goods that must be shipped rapidly decreases. That drives down prices for hauling freight, since demand dips. The reasons behind a decrease in freight can include macroeconomic factors like tariffs, business decisions to offshore production, a reduction in consumer demand, or even erratic weather that interrupts production. When shippers produce fewer goods, there’s less demand to transport them.
The supply side of the equation is important, as well. When trucking companies add too many trucks or drivers, the market can become saturated with excess capacity. Rates can fall even if shipper demand is constant because there are now too many trucks fighting to haul that freight. Inevitably, trucking companies will undercut one another on pricing to find the equilibrium in the supply and demand curves.
The onset of the COVID pandemic saw a major influx of truckers and capacity into the market. When consumers were stuck at home with stimulus money to spend, demand for goods soared. People ordered sofas and refrigerators, renovated their homes, and reset their wardrobes with loungewear. All of this increased the amount of freight flowing through the nation and attracted new upstart trucking companies. Demand for qualified drivers spiked in 2020 and 2021, and shippers saw prices rapidly rise as trucking companies struggled to fill cab seats with qualified drivers who could handle this onslaught of new freight. A seasoned driver with a strong safety record could practically name their price during that time and have multiple job offers – and still, the capacity side of the market couldn’t keep up.
As the COVID economic recovery drew on, however, and the world and economy stabilized, consumer demand for goods softened as people shifted spending back toward experiences (travel, restaurants) that had been off-limits during the pandemic. Inflation spiked rapidly and geopolitical threats emerged after the Russian invasion of Ukraine.
All these factors combined — along with several others — to flip the market into a freight recession. Suddenly there were far more available trucks than freight to fill them, and rates plummeted. Many trucking companies couldn’t make the numbers work and just closed shop. Some truck drivers who had jumped behind the wheel during a period of high demand decided to instead return to jobs closer to home, in industries like construction, that were again thriving. While these exits have thinned capacity, the supply and demand sides of the market equation have yet to equalize.
The Ripple Effect: How Businesses are Impacted by a Recession
For shippers, a freight recession probably sounds great: “Rates are low! I can have my pick of carriers bidding on my freight and undercutting each other because they’re desperate to win back volumes!”
But, like any highly cyclical industry, it’s bound to flip again. And when it does, shippers who haven’t maintained or built relationships in good faith with trusted carriers will find it hard to move their goods. When capacity tightens, it’s important to have a reliable logistics partner who understands market dynamics and can find options that meet a shipper’s criteria.
One way that many shippers manage the vicissitudes of the freight market is by relying on contracted capacity instead of always using the spot market. For shippers with regular or predictable volumes and lanes, awarding freight for a fixed period of time in exchange for a fixed rate can take some volatility out of their planning. Trucking companies are happy to have freight volumes they can plan for and count on, and shippers know that they’re locked into a set price and won’t be subject to the ups and downs of the spot market as rates jump around.
Of course, locking in low rates during a freight recession is more advantageous to shippers than the opposite: putting freight out to bid when rates are high and then having to pay those higher rates when a freight recession hits and spot rates are lower.
However, pricing is only a single component of running a reliable logistics operation. Shippers also must ensure that their freight is being managed and handled by partners who understand their critical success factors, like on-time commitments to a shipper’s own customers, and can pair those needs with a deep knowledge of the nuances of logistics. Smart logistics partners aren’t simply finding the lowest-priced truck for a particular shipment; they’re working through routing strategies, matching up freight with backhauls to optimize costs, assessing the safety and reliability of carriers, planning for permits or escorts when needed – the list goes on.
When shippers and logistics partners operate from a position of good faith – knowing that it’s in everyone’s best interest to work together during freight recessions or times of capacity constraint – a strong relationship emerges that can weather the ups and downs.
Strategies for Success: Navigating the Downturn
While a shipper may enjoy depressed freight rates during a freight recession, here are our recommendations for how to maintain solid relationships with logistics partners:
- Keep your logistics and trucking partners up to speed on your freight volumes and needs. Talk openly with them about your metrics and needs, and expect the same candor from them.
- Talk with your logistics providers about longer-term contract opportunities. They may be willing (and even excited!) to commit to preferable rates or lanes for a longer period of time to ensure they can keep their trucks filled.
- But don’t always rush to rebid freight when rates are low. It can be tempting, but changing vendors constantly can brand you as a difficult shipper, and when the market flips, you won’t have built any goodwill – and you’ll need it!
- Make sure you and your logistics partners are well-versed in industry dynamics and watching data and metrics closely. Your partners should be able to educate you on key indicators they’re noting that might signal a change in the market.
- Take note of which logistics providers maintain excellent service even during a freight recession when they’re likely hurting. Partners who don’t let service falter even when the market is down for them are the ones who are committed professionals.
A Look Ahead: Reasons for Optimism
Despite the current freight recession environment, it will turn around. The question is always when. Recently, there have been signs of increased demand for freight. A recommitment to onshore US manufacturing and infrastructure projects could spark a resurgence of goods moving throughout the country.
Stay Ahead of the Curve
Worried about how the freight recession could impact your distribution needs? Let our logistics experts help you navigate. Contact us today for a free consultation.