A study by consultancy McKinsey & Co. looking at recessions over a 30-year period said there is no guarantee U.S. freight activity will track with overall economic upturns after a recession, and that “no natural law” mandates a relationship between freight patterns and post-recession rebounds.
The findings, published last Thursday, are a cautionary tale for those who assume freight is destined to expand in concert with any economic recovery from the COVID-19 pandemic. In its report, US freight after COVID-19: What’s next?, McKinsey studied patterns of U.S. recessions in 1990, 2000 and 2010. Freight activity rebounded along with the broader economy following the 2007-2009 global financial crisis, the report said. However, freight volumes stagnated in the years after the dot-com crash in 2000-01 and the Sept. 11, 2001, terrorist attacks, while the economy strongly rebounded, McKinsey said. During the 1990-91 recession, freight growth tracked with the economy for the first couple of years but then slowed significantly, according to the report.
The decoupling between freight and the overall economy has not been confined to periods of downturns, McKinsey said. The firm’s measure of “freight intensity,” the ratio of freight tonnage per dollar of gross output, has fallen steadily since 1990, it said. U.S. freight “has not kept up with the broader economy” over that time, the firm said. The firm measured road, rail and water activity in its findings.
Those looking to read the freight tea leaves during and after the pandemic should instead focus on four factors: a secular shift from “freight-heavy” to “freight-light” economic activity as the U.S. economy becomes ever more reliant on services than manufacturing; the globalization of North American supply chains; the rise of e-commerce; and the growth of domestic energy activity. These trends, none of which are new, will serve as a collective road map to determine how freight flows evolve as the U.S. copes with the current crisis, McKinsey said.
Of the four, the last three are in a state of flux. Today’s economic leaders grew up during an extraordinary 18-year period when trade grew at twice the rate of gross domestic product. However, trade has actually grown 1.4 times the rate of real, or inflation-adjusted, GDP for the past 150 years. A post-pandemic world may look quite different as businesses, emphasizing supply chain resilience over cost and efficiency, bring more of their production and distribution closer to their end customers, blunting global growth.
The report’s authors see post-pandemic trade activity contracting much like it did during the Great Depression and the global financial crisis. It would then revert to its 150-year historical norms, McKinsey said.
On the other end of the spectrum is e-commerce, which has grown exponentially during the crisis as public health measures to control the virus led to stay-at-home orders and store closures, making online ordering effectively the only non-grocery option for consumers. The McKinsey report said e-commerce, which accounted for 14.9% of U.S. retail sales in 2019, may have just scratched the surface. In China, e-commerce accounts for about a quarter of all retail sales, indicating that online activity is “underpenetrated” in the U.S. In addition, e-commerce growth did not slow after 9/11 or the global financial crisis, the report said.
Since the last recession, the U.S. energy sector embarked on an ambitious oil and gas fracking program that made the country the world ladder in oil production and led to a significant boost in freight tonnage. At the same time, coal production fell to 756 million tons in 2018 from 1.2 billion tons in 2008 as the commodity faced severe headwinds on the pricing front and was subject to stiff and expensive environmental regulations.
The report held a dim view of coal’s role in a post-COVID-19 world, and said oil and gas growth “represent a wildcard.” Both commodities experienced enormous demand destruction during the pandemic as air, rail and passenger vehicle transport was curbed. Today, they struggle with a 30% drop in demand.
Oil and gas growth will “resume at some point, but its timing and strength are going to depend heavily on the shape of the U.S. economic recovery, the global recovery and other macro forces,” the report said.