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Economic recovery may hinge on freight capacity

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A large number of freight companies are currently cutting costs due to a widespread decrease in “freight-spend,” the amount of money companies spend on moving freight inbound and outbound. Freight-spend is a leading indicator of the health and overall direction of the economy, as well as a key factor in its recovery. If freight companies reduce costs so drastically that they cannot keep up with the demand when the U.S. economy begins to improve, it could severely impede economic revival.

Volume changes within the freight industry are indicative of the current and future state of the economy because as the economy starts to decline, freight demand is decreased as consumers buy fewer products. As the demand for these goods diminishes, retailers purchase less manufactured products and manufacturers order smaller quantities of raw materials – all of which contribute to the drop in freight shipped by truck, rail, ocean and air.

The reduction in freight volume is growing, as evidenced by prominent freight-carrying companies, such as YRC Worldwide, one of the nation’s largest less-than-truckload trucking companies, and Union Pacific Corp., a leading U.S. railroad company. According to media reports, YRC Worldwide’s first quarter freight volume fell 29% from last year’s figures and Union Pacific recently pulled 50,000 rail cars from active status and furloughed thousands of employees.

Because freight volume has been reduced so drastically, many transportation companies do not have enough business to continue operating the way they did prior to the economic recession. They can’t afford to make bank-note payments or meet insurance premiums on vehicles that aren’t being used. Many are laying-off workers, keeping used trucks, rail cars, ships and planes in service longer and selling the excess equipment overseas. Others are simply going out of business. The result is a decreased freight capacity that could hinder economic growth when consumer spending resumes.

As the economy starts to recover, consumers will increase purchasing levels and in response, manufacturers and retailers will order additional materials and products. There will be an immediate need for additional freight-spend that may catch freight carriers unaware; with so many companies cutting back on their transportation fleets or going out of business all together, there may not be enough capacity to handle the demand.

If this happens, cargo will take longer to reach its destination, inflating freight-spend, which in turn, will increase manufacturing costs that will be passed along to retailers and consumers. In addition, this reduced freight capacity could force retailers, manufacturers and/or distributors out of business because they may not be able to supply their customers with the goods they wish to purchase. Thus, if the freight industry does not have enough capacity to keep up with the demand, it could substantially delay economic revival.

To ask freight companies to maintain a certain level of freight-spend during an economic downturn as severe as this one is an untenable request. By doing so, they may put their entire enterprise at imminent risk; but to disregard the effect drastically low freight-spend will have on the overall U.S. economy is shortsighted. Owners and operators with sufficient liquidity should consider a long-range, strategic plan that acknowledges the impact of freight-spend on the U.S. economy and better balances freight capacity with current and future demand. A plan such as this will facilitate, rather than impede, our economic recovery.