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U.S. Xpress sees current fundamentals lasting well into 2021

Contract rates to climb 8% to 15% in 2021

(Photo: Jim Allen/FreightWaves)

U.S. Xpress’ (NYSE: USX) 2021 economic outlook, released Wednesday, sees many of the same fundamentals that were in place during the second half of 2020 sticking around through at least the third quarter.

“Freight markets (and the overall economy) have moved in a manner consistent with our expectations. Driver shortages, capacity crunches, and ample freight (driven by evolutions in buying habits) were the common themes of 2020. By and large, 2021 looks to offer more of the same.”

The Chattanooga, Tennessee-based truckload carrier’s proprietary shipper survey data showed that inventory levels are at all-time lows for the dataset’s 15-year history. The report pointed to earnings reports from retailers, which showed sales increasing at twice the pace of inventory additions, and the recent upward revision to the National Retail Federation’s container imports forecast as indications that inventory replenishment could take another five to six months.  

The report said that it remains to be seen if the recent jump in Class 8 truck orders, approximately 50,000 units in November and December, is for fleet replacement or growth. The expectation is the former as “driver shortages will persist for the foreseeable future” and “the structural barriers to driver employment will likely keep capacity in check for the time being.”

Acknowledging a recent ruling easing CDL instruction and testing rules, the report said hiring likely won’t occur at a pace quick enough to change the tight TL capacity dynamic. Low driver school enrollment, prohibitive insurance costs (and the potential for increased coverage minimums), an estimated 200,000 fewer CDLs issued in 2020 and roughly 50,000 drivers with Drug & Alcohol Clearinghouse issues (only 12% of whom have completed return-to-duty protocol) remain the hurdles to capacity additions.  

“The shippers that thrive in this environment will be those who have access to carriers with superior operating models — those that can attract and retain good drivers. The same can be said for shippers who are able to work with the brokerage operations that can aggregate capacity to fill the gaps in coverage,” the report added.

While a new infrastructure plan could provide incremental freight opportunities, the report noted that it is also likely a detractor to driver employment as “construction projects across the country could induce drivers to leave the labor market for jobs closer to home.” The expectation is that any infrastructure deal wouldn’t have a material impact on the market until late 2021 at the earliest.

The report also cited concerns with Congress releasing additional stimulus money or enhanced unemployment benefits again as headwinds to driver employment, potentially keeping new drivers from entering the market and current drivers at home.

“The resultant cash infusion into the economy will present somewhat of a double-edged sword for carriers — it’ll stimulate consumption (and thus bolster freight volumes) while sidelining drivers who would have otherwise entered the labor market.”

The forecast is for inventory restocking and economic growth to sustain elevated TL volumes in the first four to six months of the year with demand cooling as early as the third quarter or as late as first quarter 2022. The determination will center around the trajectory of COVID and when consumers are able to transition spending toward services again, from goods.

TL capacity constraints are expected to keep spot rates high for the “foreseeable future,” generating contract rate increases in the 8% to 15% range during the year. The report calls for spot rates to ease in the fall before climbing again during the 2021 peak holiday season.

“In sum, we believe the trajectory of the 2021 freight market will ultimately hinge on inventory restocking, the available supply of drivers and the overall health of the country’s economy (and its people, as well). We expect the inflationary rate environment to persist for most of 2021 before a slight easing in freight volumes late 3rd quarter. The key caveat in all of this, of course, is the spread of COVID-19 and the attendant public health measures taken to mitigate the toll of the virus.”

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Todd Maiden

Based in Richmond, VA, Todd is the finance editor at FreightWaves. Prior to joining FreightWaves, he covered the TLs, LTLs, railroads and brokers for RBC Capital Markets and BB&T Capital Markets. Todd began his career in banking and finance before moving over to transportation equity research where he provided stock recommendations for publicly traded transportation companies.