What Q1 Tells Us About 2021

Many of the largest carriers have produced their 2021 Quarter 1 Earnings Statements and the prevalent theme is surprisingly good. The original estimates had the industry performing very well, however, they were quickly reduced in response to the crippling winter weather storms that covered all of the Midwest and Texas in February. It was a nice surprise that the adverse weather did not have a negative effect on the earnings of most carriers, overall. Just to name a few: Saia, J.B. Hunt, UPS, Old Dominion, & Ryder all posted higher-than-expected first-quarter earnings. Tight capacity coupled with businesses and consumers alike ramping up their spending spurred a large increase in demand keeping prices elevated and trucks running non-stop. The question now is whether or not the first quarter is indicative of what will happen for the remainder of the year.

Key Factors for the Remainder of 2021

Driver shortage issues cannot be overstated. With as many as 200,000+ unfilled driver positions, capacity is as tight as it has ever been. The already short driver supply was extremely exacerbated by early retirements brought on by COVID as well as a historical low of new drivers coming out of driving schools. While most carriers are increasing driver pay and benefits to retain talent or bring in drivers, the best-case scenario is still bleak for making a dent in the driver shortage problem.

Many career-minded individuals in their 20s worry that the need for professional truck drivers will plummet in the near future with the introduction of an autonomous vehicle. However, there are no hard dates from any of the leading companies developing autonomous vehicles on when a vehicle could replace a Class 8 truck. Furthermore, the regulatory hurdles make it even more difficult to phase out professional drivers for Artificial Intelligence and automated trucks. Regulators are once again looking into allowing drivers under the age of 21 to cross state lines. This could bring new divers into the fold, but with rising insurance costs it is unknown how many big carriers would jump at the option to hire on the high-risk drivers.

Contract Rates are already up by double digits. The tight capacity, surging demand, driver shortage, increase in costs including driver pay, increased insurance rates, etc. have all played a part in the higher shipping costs seen across the board. Spot market rates soared in quarter one along with contract rates. J.B. Hunt announced contract renewals were up 14% on average. While there is an expectation that rates will level out in the 3rd quarter, that is just in time for the peak holiday season which will pick the rates right back up. It is difficult to see rates falling substantially in 2021.

Manufacturing output is expected to surge for the remainder of the year. Sans the current shortage of semiconductors that have slowed production at some factories (most notably in the automotive sector), U.S. manufacturers are ramping up production to above pre-COVID levels. While many in service industries struggled to make ends meet over the past year, others whose employment was not impacted by COVID saved money during the lockdown. Those savings coupled with government stimulus payments has left many with more discretionary spending power. Economists are estimating an overall increase in GDP of 8% over 2021 which is much higher than the average of the past several years.

Service Industries are hoping for the boost of a lifetime. While we can already see big gains in retail spending, it is much more difficult to make projections for the service industry. Even as the majority of the nation has received the vaccine, and it is performing better than anticipated, people’s behaviors are still unpredictable. It is not likely everyone will return to all of the activities they may have engaged in prior to COVID all at once. Many state and local governments are reviewing their mask mandates and COVID protocols with the goal of easing restrictions as early as possible. While many are still uncomfortable with the idea of flying or international travel for vacation this summer, others are calling this summer the return of the great American vacation; families piling into a car for a road trip with a relaxing or adventurous destination.

Other factors that could play a role include extreme weather, regulatory changes, and international trade changes. We certainly hope for a quiet hurricane and tornado season. However, a hurricane in the gulf could have tremendous effects on the Houston port for example. With President Biden’s cabinet now sworn in, we have yet to see the impact of possible new regulations or changes to trade policy, particularly the infrastructure bills currently being debated in congress.