Freight Industry Recessions and the Business Cycle | Convoy
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Freight Industry Recessions and the Business Cycle

  • The freight industry is currently experiencing a recession, which began in October 2018.
  • From peak to peak, the freight industry typically experiences a full industry-specific business cycle about every four years; the typical freight recession lasts around 10 months.
  • While freight industry downturns often lead macroeconomic downturns by several months, about half of freight industry recessions over the past four decades did not spill over to the broader economy or coincide with a macro recession. 
  • When freight recessions do not coincide with broader economic downturns, they tend to be even more short-lived, typically lasting only seven months.

Anyone who has been around the freight industry for long enough has felt the industry’s ups and downs. The industry’s most familiar headline metrics — truck rates, shipments, truck orders — reveal an obvious cyclicality.

In some ways, this is not surprising. The broader economy moves in cycles too, with periodic booms (expansions) and busts (recessions) — a pattern economists call the business cycle. Since it provides a service to businesses and consumers, the freight industry is vulnerable to these macroeconomic ebbs and flows. 

But the freight industry also has its own rhythm independent of the broader business cycle — a phenomenon we call the freight industry business cycle.

What’s in a Name?

There is no universal definition of a recession. The National Bureau of Economic Research (NBER) — a nonprofit that is the most widely-recognized arbiter of the business cycle in the United States — considers somewhat-subjective thresholds over several economic statistics to make the call. 

At a very high level, expansions are when the economy is growing and recessions are when it is contracting. In practice, recessions are generally considered to be a temporary period of contracting economic activity and almost always start with two consecutive quarters of declining real Gross Domestic Product (GDP). 

This bird’s-eye view abstracts away from more complex states of the economy that still manage to inflict real turmoil on firms and individuals — for instance, regional or sector-specific contractions, short-lived contractions, and slowdowns in activity that do not turn into outright contractions. The freight industry business cycle is one example of a sector-specific pattern of expansions and contractions.

A Business Cycle for the Freight Industry

To identify the freight industry business cycle, we replicate common techniques used to model the broader economic business cycle. 

Instead of the aggregate output measure (real GDP) used to identify the macroeconomic business cycle, we create a Freight-Weighted Industrial Production index based on seasonally-adjusted factory output and retail sales that takes into account differences in the types of goods that come out of U.S. factories and the types of goods that travel on the country’s freight network. (There are more details on how we did this in the related Freight Research article, “Identifying the Freight Industry Business Cycle.”) 

We are then able to identify turning points in the Freight-Weighted Industrial Production index: When the index is increasing, the freight economy is expanding, and when the index reports six months or more of declines, then the freight economy shifts to a recession.[1] 

The chart below shows the Freight-Weighted Industrial Production index with a shaded background for months when the overall economy is in a recession, when the freight industry is in a recession, or when both coincide.


When the broader U.S. economy is in a recession, the freight industry is almost always (85 percent of the months since 1972) in a recession as well. But the opposite is not true: In a majority of the months (62 percent) when the freight industry has been in a recession, the broader U.S. economy has continued to expand.

According to this analysis, the freight industry has experienced 12 recessions since 1972, twice as many as the overall economy. 

  • The typical freight industry recession over this period lasted 10 months, slightly shorter than the typical economic recession (12 months). 
  • When a freight industry recession has not overlapped with a broader economic recession, these periods of contracting freight activity are even more short-lived, typically lasting only seven months. 
  • The typical freight industry expansion over this period lasted 31 months, about half the length of the typical economic expansion (66 months). 
  • The typical full business cycle — from peak to the subsequent peak — has been 42 months for the freight industry versus 78 months for the overall business cycle. 

The figure below is another way to visualize the overlap of macroeconomic and freight industry recessions.


Show me the Supply

Demand for trucking services is an important component of what drives the freight economy, but it is hardly the only moving part. The speed at which supply responds to changes in demand plays a big role in driving movements in prices — and for the participants in any freight marketplace (e.g., shippers and carriers), prices are what really matter. When industry insiders talk about freight’s ups and downs, they are typically thinking of prices.

To get a sense of how quickly supply responds in the freight industry — and, in turn, spills over to prices — we took a similar approach to how we identified turning points in freight demand. We looked for common underlying trends in heavy truck and trailer production, and in long-distance full-truckload freight prices, and then identified turning points in those trends. (There are more details on how we did this in the related Freight Research article, “Identifying the Freight Industry Business Cycle.”) 

The results closely track the cyclical peaks and troughs identified by the Freight Weighted Industrial Production index, suggesting 11 freight industry cycles since 1972. [2] 

Each cycle is unique in its proximate causes, severity, and resolution. But looking at freight recessions over the past two decades, the supply trend on average begins to soften about five months after demand, and prices usually stop contracting and turn a corner anywhere between three and 10 months after demand. For the current period, a critical unknown is how quickly demand will begin to improve. The current economic climate does not suggest it is imminent. 

Of course, adding trucks and trailers is not the only way supply responds. Drivers can decrease the hours they work during a downturn (though they still need to cover the costs of their equipment, and as a result, may be more likely to maintain hours even as rates fall), the industry can attract new drivers (or drivers can leave to work in other jobs), and drivers can become more (or less) efficient in their work.


Does Freight Lead the Business Cycle?

Leading up to four of the six macroeconomic recessions since 1972, and leading up to the most recent three recessions (the economic recessions that began in July 1990, March 2001 and December 2007) the freight economy has entered recession before the rest of the economy — leading those cycles by anywhere between one and 21 months. [3] 

So while freight can lead the broader business cycle — similar to other early warnings of a business cycle turning points — it can be an imperfect leading indicator. Half of the times that the freight economy has shifted to contraction over the past four decades, the rest of the economy has continued to expand. This decoupling of the freight economy and the broader economy cycle has become particularly pronounced since the 1980s as the service sector — which has a more indirect connection to the country’s freight network — has become a larger and larger part of the United States economy.[4] 

Conclusion

In a competitive market, imbalances — either an excess (or shortfall) of demand prompting prices to spike, or an excess (or shortfall) of supply prompting prices to fall — rarely last very long. Demand and supply play a constant cat-and-mouse game driving prices up and down. 

This is particularly true in the freight industry, where both shippers and carriers have become accustomed to ups and downs and can adjust relatively quickly (though not painlessly). Anyone with their pulse on the industry for more than a couple years has felt the market shift — both for the better and for the worse. 

Like any recession, these periodic freight industry recessions cause real turmoil for the people who work in freight: Businesses go bankrupt, people lose their livelihoods, and families are disrupted. But when they do not coincide with broader economic downturns, they tend to be relatively short-lived. From this perspective, the relatively quick adjustment of the freight industry to rising (or falling) prices is a critical advantage allowing it to respond in real time to an ever-evolving economy.


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[1] Most economists use the two-quarter definition of recessions since real Gross Domestic Product data are produced in quarterly intervals. The Industrial Production (IP) data we use to identify freight industry business cycles are monthly, allowing us a finer temporal unit of analysis. If we aggregate the IP data at the quarterly level, and identify turning points using a similar approach, the results suggest 14 freight industry recessions since 1972 rather than the 12 identified using the monthly data.

[2] The supply data do not yet capture the most recent freight downturn, which began in October 2018 according to the Freight-Weighted Industrial Production index, with supply contracting starting in April 2019 — still too short a period as of this writing to meet the six-month minimum. About three-quarters (74 percent) of the times since 1972 when the supply trend has contracted for four consecutive months — as it had through June 2019, the most recent data — it has gone on to contract for six months or longer, so it is very likely that the truck and trailer production data will soon point to an industry downturn as well.

[3] The freight cycle led the recession that began in January 1980 by two months, the recession that began in July 1990 by one month, the recession that began in March 2001 by 13 months, and the recession that began in December 2007 by 21 months. The recession that began in December 2007 is particularly difficult to date since it began with a slowdown in the construction sector that began to (at least partially) recover before spilling over to the financial sector — and from there, to the broader economy — in mid-2008.

[4] It is also plausible that regulatory changes in the late 1970s and early 1980s contributed to a higher frequency business cycle in the freight industry.

Aaron Terrazas is Director of Economic Research at Convoy where he researches and comments on freight markets and what freight reveals about the broader economy. Prior to joining Convoy, Aaron was a Senior Economist and Director of Economic Research at Zillow. Before that, he was an Economist at the U.S. Treasury Department’s Office of Economic Policy in Washington, D.C. He was educated at Georgetown University and Johns Hopkins University. Aaron has been a runner since age 13 and is a sucker for all endurance sports.