Editor’s note: Written by Aaron Terrazas, director of economic research at Convoy, a digital freight network. This is one in a series of periodic guest columns by industry thought leaders.
After an unprecedented boom, a crisis struck suddenly sparking a cascade of bankruptcies that wiped out the long-tail of small businesses that were the backbone of the industry — the same businesses that had previously been in the most agile and dynamic corner of the market, expanding quickly to meet growing demand.
To anyone who has been around the trucking industry over the past few months, that script sounds painfully familiar. Except that it also describes the homebuilding industry during the years leading up to, and during, the housing bust a decade ago.
As Mark Twain said: History doesn’t repeat itself, but it rhymes.
What happened next in the homebuilding industry could be instructive as the trucking industry looks out toward the months and years ahead. The path the homebuilding industry took following its bust could provide a blueprint for what trucking can expect as it recovers from a similarly severe downturn. The lesson is that carriers may be particularly slow to add capacity as the freight economy emerges from the Covid-19 recession.
Demand for new homes eventually returned after the 2008 Financial Crisis; many home builders did not. By the mid-2010s, home prices were starting to increase quickly. Normally, this would have been a clear signal that demand for homes was outpacing supply and that there was an opportunity for homebuilders to start building more homes. But home builders were slow to return to the market, and when they did, only did so cautiously.
By most accounts, the risk-taking homebuilders that expanded aggressively in the boom years were the ones who had quit, leaving the industry dominated by larger, risk-averse businesses. That is a phenomenon economists call “survivorship bias.” Having seen their peers burned by the crisis, the survivors were reluctant to expand output too quickly. The market share of the 20 largest homebuilders increased from about 20 percent during the housing boom years from 2003 to 2007 to almost 30 percent by the late 2010s. There were also other factors that hindered the return of small home builders during the 2010s, such as new regulatory limits on bank lending for real estate development.
In the trucking industry, there is little doubt that bankruptcies are currently taking a toll on carrier supply in freight markets. Bankruptcies among truckload carriers surged in April and May as the Covid-19 pandemic shut down the U.S. and global economies. According to Convoy estimates, the number of carriers declaring bankruptcy or shutting down reached a recent high in April 2020 around two to three times the pace reported the year prior. Bankruptcies have been concentrated among small carriers. The exit rate among carriers with one to five trucks was more than three times higher in April 2020 compared to April 2019. Among very large carriers — those with 200 trucks or more — exits were essentially unchanged over the same time period.
Carrier bankruptcies were rising even before the pandemic. A year-and-a-half into the current freight recession, the most vulnerable carriers likely had already called it quits before Covid-19 sparked a transformation in the way Americans live and consume. But the restructuring of the American economy prompted by the crisis created new pressures.
In the trucking industry, we often think of carrier bankruptcies as primarily having the effect of decreasing supply in the market. But one lesson that the trucking industry can learn from the experience of homebuilders a decade ago is that the more important effect might be how bankruptcies change the risk appetite of the supply that remains.
No one quite knows how the trucking industry is going to emerge from this crisis — the economic outlook remains uncertain and it’s likely there will be bumps in the road. But if we look to lessons from home builders over the past decade, it’s likely that many carriers in the trucking industry will take a relatively conservative approach to expansion once demand does start to heat up.
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