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Echo CEO: Recession coming, but next capacity crunch is baked in

Will truck shortages precipitate the next trucking bull cycle?

(Photo: FreightWaves / Jim Allen)

The CEO of Echo Global Logistics, a leading 3PL provider and freight brokerage in the U.S., sees a serious macroeconomic recession on the horizon but thinks the prognosis for the trucking market is a bit more complicated.

Doug Waggoner, who has served at Echo’s helm since 2006, taking the company public in 2009 and private again last year, spoke with FreightWaves this week about how U.S. freight markets have fared in the third quarter.

“2022 has been a blowout year,” said Waggoner, noting that even though spot and contract rates have come down, Echo’s performance will exceed its plan for both gross revenue and profitability.

As of June 30, Echo’s trailing 12-month (TTM) revenue was $4.5 billion, and earnings before interest, tax, depreciation and amortization came to $204.4 million. Those figures include Echo’s acquisition of Roadtex, a value-added warehousing provider with a national network of temperature-controlled facilities and crossdocks. Waggoner said that Echo’s third quarter numbers will accelerate beyond its TTM pace. 

Waggoner said that softening demand, at least partly caused by the normalization of consumer spending back toward services and experiences as the economy reopened, coupled with excessive spot capacity, has weakened trucking rates.

FreightWaves’ Outbound Tender Rejection Index, which measures the percentage of truckload shipments tendered by shippers and rejected by carriers, has fallen precipitously in 2022.


(Chart: FreightWaves SONAR. Rejections as a percentage of all loads tendered. To learn more about FreightWaves SONAR, click here.)

As the spread between spot and contract rates narrowed, trucking carriers accepted more contract freight and are now rejecting just 5% of loads. Now shippers are sharply reducing contract rates, looking to claw back some of the transportation costs that grew out of control during the pandemic. FreightWaves’ initial contract rate report is down 9.7% since its peak in early June.

(Chart: FreightWaves SONAR. Initial averages of contract truckload rates in USD per mile. To learn more about FreightWaves SONAR, click here.)

“Is the market rational? Shippers are going to transportation providers are saying, ‘Drop my prices,’” Waggoner said. “But the industry needs to think about ways to manage this volatility together. How do shippers and transportation partners navigate these volatile price cycles together?”

Waggoner pointed out that Echo had some cost-plus contracts and contracts linked to Department of Labor transportation indexes but that business had to be conducted with trusted partners and was only a small part of the company’s overall portfolio.

The larger concern was the Federal Reserve and how persistently high inflation and full employment are forcing its hand and raising the prospects of continuing interest rate hikes until inflation is brought under control. 

“The Fed will feel empowered to keep raising rates to slow down the economy, and that will eventually be felt in our industry,” Waggoner said. “We haven’t really seen it yet. We’re heading into a recession now if we’re not already there, which will slow demand over time, but we all know that it will pop back at some point.

“There’s always something that causes demand to resurge and when that happens, between now and 2025 we’re going to have really tight capacity because we’ll have a shortage of trucks.”

Waggoner said automotive supply chains, including those of truck manufacturers, are still challenged by persistent shortages, preventing new rigs from reaching the market and enterprise carriers from replenishing and growing their fleets.

Last week, Ford Motor Company warned that its third-quarter earnings would be negatively affected by ongoing supply chain issues that have left tens of thousands of trucks and SUVs unfinished near its production facilities. 

New truck orders in August were down 46% year over year, but OEMs expect their orderbooks to build through the fall. Still, increases in production capacity will be required to relieve the pent-up demand for new trucks that has grown in the past two years.

That could mean the next great trucking capacity crunch is already baked in. When the next external catalyst arrives that tips the market toward tightening, the industry will still be constrained in its ability to add new trucks. In other words, Waggoner’s view is that while the market is headed into a significant downturn, it’s still on a hair-trigger primed for another bull cycle.

Despite the uncertainty — or maybe in preparation for it — Echo is back in the mergers and acquisitions game, Waggoner said. While it was a public company, Echo made 21 acquisitions, and Waggoner said that following Roadtex, his company is finalizing another deal, working on a second and has a robust pipeline.

“As a buyer, it’s a target-rich environment, and the reason is obvious when you think about it,” Waggoner said. “Most logistics companies had a great 2021, and if you know you’re going to sell, there’s no better time to do it than at peak earnings. You have to make sure that as a buyer, if you’re buying at peak earnings, you’re mindful of the multiple you’re paying and understand how realistic their forward projections are.”

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John Paul Hampstead

John Paul conducts research on multimodal freight markets and holds a Ph.D. in English literature from the University of Michigan. Prior to building a research team at FreightWaves, JP spent two years on the editorial side covering trucking markets, freight brokerage, and M&A.