Two Less-Obvious Reasons Why Trucking Capacity Has Remained So Tight

A note from Steve Raetz, C.H. Robinson director of research and market intelligence: C.H. Robinson’s relationships with research firms and universities, combined with our data from the largest network in the freight industry, help our customers stay on top of the trends that are influencing their supply chains. So we invited Jason Miller, associate professor of supply chain management at Michigan State University, to offer his perspective on the current state of trucking capacity.

Shippers are likely to remember 2021 as the year with the tightest trucking capacity they’ve encountered in a long time. By some measures, this seemed to contradict the typical supply and demand equation. My index of for-hire truck transportation demand suggests that freight demand in 2021 was 1% below 2018 levels and similar to 2019. In parallel, there’s some evidence that when the number of self-employed owner-operators is considered in addition to employment statistics, the number of for-hire truck drivers is above pre-COVID levels.

With less or similar demand and more supply than before the pandemic, why did truckload capacity stay so tight?

Two supply-side factors help explain why. First, the upheaval caused by the onset of COVID-19 is far more extreme than it appeared. Second, the surge of new trucking establishments creates its own kind of disruption. (In the meantime, capacity has taken an additional hit from the sudden surge of the Omicron variant, and you can read about that in a new report from C.H. Robinson.)

How the pandemic was more disruptive to trucking than the headlines indicated

From February to April 2020, the U.S. Bureau of Labor Statistics (BLS) reported that seasonally adjusted employment in truck transportation fell by 96,400 workers. That’s the sum of jobs gained at new or expanding firms minus jobs lost at existing firms that closed or contracted. The net change in employment is an important indicator. But the same net change, say +1,000, can occur with very different magnitudes: 1,500 jobs gained and 500 lost vs. 10,000 jobs gained and 9,000 lost.

The BLS, through a lesser-known program called Business Employment Dynamics, uses unemployment insurance filings to calculate this magnitude of change, called “job flows.” The graph below illustrates how the spike in truck transportation jobs lost in Q2 2020 was unprecedented, followed by the largest spikes in job gains in a decade.

This second graph estimates that job flows affected 16.3% of the industry’s total employment that quarter, which is 38.2% greater than observed from 2011 through 2019. While decreasing from the high point in Q2 2020, job flows have remained at elevated levels since.

What this means for shippers is that the immense fluctuation of employment in the trucking sector, with the reshuffling of jobs across carriers at the most rapid rate in decades, put a crimp on capacity.

To understand why, consider your own carrier network. Imagine one carrier lost a key customer that went out of business as the pandemic wore on, which forced it to lay off 10% of its drivers. This loss of capacity then affected the carrier’s ability to accept your tenders, sending you deeper into your route guide and possibly into the spot market, where you’re vying for a limited number of trucks in any given lane on any given day. Even if some of those drivers migrated to other carriers, recruiting, hiring, and onboarding new employees takes time and lowers the productivity of the fleet.

Multiply that scenario across tens of thousands of carriers and you can see how disruptive it was to trucking capacity across the sector.

The surge of new owner-operators created inefficiency

Compounding the disruption created by the job flows is the shift of capacity towards small, new establishments.

Using data from the Quarterly Census of Employment and Wages, which counts for-hire trucking establishments with at least one employee, the graph below shows a sharp increase in the number of establishments in operation since Q3 2020. In fact, Q2 2021 saw the largest increase in the number of new establishments in the program’s history. Concomitantly, the average number of employees per establishment has fallen. This could only happen if these new establishments are far smaller than the average before the pandemic.

These small new trucking companies don’t start out with an established portfolio of freight. They need to experiment to find lanes and freight that are profitable for them and fit the needs of their drivers. This takes time, inherently involves trial and error.

In instances where an employee driver working for a large truckload carrier decides to become an independent owner-operator, total capacity might not change, but the set of loads the driver pursues is likely to be substantially different from the loads they hauled when working as an employee. This creates further disruptions for shippers.

Lastly, not all the new firms are doing long-haul trucking. Though the biggest increase in new establishments is in long haul, some have been attracted to the lifestyle benefits of short haul. Before the pandemic, about 23% of new establishments were in local delivery. In 2020 and 2021, that rose to 30%. So even though the industry may have more licensed drivers than before the pandemic, not all of them are necessarily working, working as much, or working in long haul.

Implications and advice for shippers

What are the implications for shippers facing an increasingly fragmented, volatile truckload market? I offer the following:

  • Establish strong relations with truck brokerages. Industry reports indicate that many new carriers in the truckload sector are focusing on hauling spot loads. Brokers are the lynchpin between these small carriers and shippers. The trend towards greater fragmentation will benefit brokers by increasing the size of their carrier stables, which in turn allows them to provide better coverage.
  • Keep track of route guide integrity. For lanes where tender acceptance is unacceptably low, strategically leverage mini-bids.
  • Recognize that if spot prices turn, new carriers may be financially strained. This is true especially for those who purchased equipment at elevated prices. This could shift some capacity back to established carriers.

For additional timely updates and information about current market conditions, check out C.H. Robinson’s North American Freight Market Insights and Global Freight Market Insights. To answer your specific supply chain questions or navigate changing market conditions, connect with an expert.

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