Predicting the Unpredictable: Attempting to plot out the economic recovery

BLOOMINGTON, Ind. – The sudden, devastating economic collapse caused by the Covid-19 pandemic was so unprecedented, that even seasoned economists admit it’s difficult to predict what the recovery will look like.

But two such economists, Laura Speake, chief economist, energy and transportation with Caterpillar and Bill Witte, chief economist for industry forecaster FTR, both indicated it will be 2022 before the U.S. economy fully recovers to pre-pandemic levels. And many businesses will never recover at all.

“Coming out of the other end, whenever that is, I think there’s going to be some real permanent damage to the economy,” Witte said, noting employment may never equal pre-pandemic levels. “That’s not the most optimistic forecast I’ve ever made.”

But predicting the recovery isn’t easy, since there’s no historical recession that’s comparable. “There are no past patterns for an economy that just experienced a 30% drop,” Witte noted.

“The economy will be driven by how the virus behaves, and policy response,” he added, noting neither factor is predictable.

Covid recession hit ‘like a natural disaster’

“When we came into this year, we felt very differently about where we thought we were going to be, to what has occurred,” Speake said. Early in 2020, GDP was expected to grow, U.S. employment was at record levels, a Phase 1 trade deal was reached with China, and oil prices were strong enough to support U.S. shale growth – a growing part of the U.S. economy.

Caterpillar economist Laura Speake. (Screen grab)

“There were lots of positives coming into the year,” said Speake. “By March, everything had changed, and changed quickly.”

While the economy is in recession, it’s a different type of recession. Witte compared it to a natural disaster.

“This is non-economic,” he said. “It’s more like a natural disaster that comes out of the blue, hits the economy, and when you have an area that’s hit by a natural disaster it’s really whacked.”

Trucking feels the pain

The trucking industry felt an impact even greater than the broader economy, pointed out Clay Slaughter, FTR’s chief strategy officer. When U.S. GDP plunged 32.9% in the second quarter, the goods transport sector dropped 42.2%.

“We have a bigger hole to dig out of,” Slaughter said.

FTR’s Clay Slaughter shows the goods transport sector was hit worse than the overall economy. (Screen grab)

But the good news is, trucking is digging out quite rapidly. FTR’s Truck Freight Recovery Index indicates trucking has already emerged from the full recovery phase, thanks to rising freight volumes and rates. The recovery hasn’t been evenly spread among segments, however, with dry van leading the way and refrigerated and flatbed following.

By contrast, the rail industry is still stuck in the restart phase. Intermodal is somewhere in between, about halfway through the full recovery phase.

Plotting the economic recovery

FTR’s Witte is projecting a 20% bounce in GDP in the third quarter, but that’s from Q2’s stunning 33% loss. While 20% growth “sounds pretty good,” Witte cautioned, “we shouldn’t get carried away,” as the economy will still be well off pre-pandemic levels.

“By the end of this year, we will still be well below the peak we reached prior to the decline,” Witte warned. “At the end of next year, we will be 3% below the previous trend. It’s not until the beginning of 2022 that we get back to the previous peak. So, it takes us a full two years to get back to the peak and we will still be 3% below where we thought we would’ve been.”

Witte doesn’t expect another Q2-type dip, but expects the recovery to be slow, with periods of plateaus as the virus continues to rear its head.

Caterpillar’s Speake agreed another widespread economic shutdown is unlikely, even if the virus persists.

“I don’t think we will see widespread shutdowns like what we saw earlier this year,” Speake said. “That’s not the best way to go for the overall economy and peoples’ general welfare. We will see areas that shut down again, maybe at the state or regional levels. And we will see tighter regulations, but not enough to force us into the kind of economic activity seen earlier in the year.”

Bill Witte outlines what the U.S. economic recovery will look like. (Screen grab)

Like Witte, Speake said it’ll be 2022 before the U.S. economy recovers to pre-pandemic levels. And she also warns of a second wave – not of Covid-19, but of job losses.

“We will see more people get laid off,” she acknowledged. “There is a second round of employment challenges that are coming.”

Payments from the U.S. Payroll Protection Act, implemented to save jobs, will stop coming and some businesses that have recalled workers will fold.

“There’s going to be a substantial number of people laid off as a result of that. There are going to be businesses that don’t recover because of this. There is another wave of this coming, but don’t take that as an overall indictment that the economy is getting worse. It’s part of what is built into this forecast – we know it’s going to happen.”

Lasting impact

When the economy does recover from this unprecedented recession, there will be permanent changes to how we work and live. They will affect the trucking business. For instance, many employees will continue working from home. If this is true of even one in five employees, that represents a 20% drop in oil demand related to commuting, Speake noted.

“You start to think about those kinds of changes we know are going to happen,” she added. As an example, she said we may have reached peak oil, considering less commuting going forward and the retirement of many large, inefficient aircraft.

“This has caused the birth of a new consumer.”

Clay Slaughter, FTR

Working from home also means an effect on housing, with more families potentially moving further from city centers, but into larger homes to accommodate workspaces and more home time. Commercial real estate will also be affected, with businesses reducing their workplace footprints. Slaughter also noted there could be ongoing changes to how education is delivered, with more online learning.

The pandemic has also accelerated the adoption of e-commerce.

“This has caused the birth of a new consumer,” Slaughter said. “This has been a perfect storm to accelerate us from what might have taken several years to do, and we are going to do it in months.”

FTR’s Engage series of virtual speaking series will continue in coming weeks. Register here.

James Menzies

James Menzies is editor of Today's Trucking. He has been covering the Canadian trucking industry for more than 18 years and holds a CDL. Reach him at james@newcom.ca or follow him on Twitter at @JamesMenzies.

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