How Economic Recessions and Freight Recessions Coincide
Every economy experiences fluctuations of booms (expansions) and contractions (recessions), commonly referred to as the business cycle. Similarly, the freight industry experiences its own ebbs and flows. While independent of the broader economy, history has shown correlations between a country's overall economic output and the state of its freight industry.
In this blog post, we explore economic and freight recessions, comparing how the two relate to each other.
What Is an Economic Recession?
An economic recession is a slowdown in business growth, often represented by a struggling economy, higher rates of unemployment, lower sales and profit margins for companies, and a decline in a country's overall economic output. Recessions often last for several months or years. Although everyone dreads periods of recession, they're an unavoidable part of the business cycle.
A country is often thought to be in a recession or heading toward one after two consecutive quarters of economic decline as measured by GDP. However, there is no official definition of recession. The National Bureau of Economic Research (NBER), the organization tasked with officially declaring when the U.S. enters and exits periods of recession, frequently looks at monthly indicators of a sputtering economy, such as a rise in unemployment, a decline in real income, and a decline in consumer spending.
Although a recession is evidence of a poorly performing economy, it doesn't hit all industries equally. Individual sectors, including transportation and logistics, may perform better or worse than the overall economy.
What Is a Freight Recession?
Consecutive quarters of declining freight volumes is the key indicator that the freight industry is in a recession. Like economic recessions, freight recessions are unique in their causes, severity, and resolution. Low freight volumes and tender rejection rates often indicate overcapacity in the industry. In this scenario, carriers can see their profits diminish, and portions of their fleets are left idle.
According to FreightWaves, manufacturing is a key segment to monitor when measuring the health of the freight market. A contraction in year-over-year industrial production growth typically coincides with freight volume declines. Another way to evaluate whether we're in a freight recession is to look at railroad traffic volumes, excluding coal and grain (which are impacted by noncyclical factors). What's left is a fairly representative sample of the freight economy.
What Is the Correlation Between Economic and Freight Recessions?
The freight industry is almost always in recession when the broader economy is in recession. However, the overall U.S. economy has continued to expand the majority of the time the freight industry has been in recession.
According to Convoy, 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 ten months, slightly shorter than the standard 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 standard economic expansion (66 months).
- The typical complete business cycle — from peak to the subsequent peak — has been 42 months for the freight industry versus 78 months for the overall business cycle.
While freight can lead the broader business cycle, it can be an imperfect indicator since the economy has continued to expand half the times that the freight economy has contracted. This decoupling of the freight economy and the broader economic cycle has become more pronounced since the 1980s as the service sector, which has a less direct connection to the country's freight network, has become a larger part of the United States economy.
Staying Informed 🤝 Better Adapting to a Changing Market
Market fluctuations are a fact of life, and supply and demand will continue to drive prices and employment up or down accordingly. The freight industry is no exception, and transportation professionals who've been in the game for more than a few years have become accustomed to an ever-changing logistics landscape.
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About Taylor Borum
Taylor joined Armstrong in 2021, serving as the team's Marketing Coordinator. A native of North Carolina, she moved to Charlotte in 2018 after graduating from Appalachian State University with her bachelor’s in Communication Studies. She's a passionate writer, having curated a diverse range of blog posts, articles, press releases, feature stories, webpage copy, social media posts, and more.