Q&A: Aaron Terrazas, Director of Economic Research, Convoy

Logistics Management Group News Editor Jeff Berman recently spoke with Aaron Terrazas, Director of Economic Research, for Seattle-based digital freight network Convoy, about various topics, including the impact of the ongoing COVID-19 pandemic on freight transportation operations, truckload capacity, and Peak Season, among other topics. Their conversation follows below. 

Logistics Management (LM): How would you describe how last year ended up, given the extreme nature and unusual situations and challenges the year presented, as it relates to your business?

Aaron Terrazas: Despite the gloomy expectations in the second quarter of last year, everyone was surprised by the degree to which the freight economy bounced back strongly over the third and fourth quarters. I was recently looking back at some GDP forecasts from the early days of the pandemic, which presented the idea that it was going to be a very hard recession and it was going to impact consumer spending. Obviously, what nobody anticipated was the degree to which it was going to be such a strong six months, driven by the degree of policy response from the Federal Reserve and Congress. That at least changed the trajectory of what happened on the good side, in terms of the spending side of the economy. I think that was a real paradigm shift…maybe not so much for the freight sector but for economists broadly, in that we could have a still remarkably weak labor market but have consumer spending still going very strong. That is what we saw in the third and fourth quarters, with GDP numbers having consistently come in above what was forecasted. So, you have to wonder if that pattern is going to continue into 2021. For what is happening right now, it seems like historical precedence is a poor guide, as so much has changed. This is kind of a unique moment in time, not only on the policy side, with a much more aggressive policy response, but the mentality that many of these jobs’ losses are temporary in nature…with both sides of the labor market waiting for things to return to normal.

LM: Once the majority of Americans that plan on getting the COVID-19 vaccination shot have done so and things get closer to “normal,” with people going to restaurants, concerts, sporting events, and on vacations, among other services-related things, do you think there stands to reason that there might be a situation in which there could be a lull in certain aspects of the freight market, with people spending more of their disposable incomes on non-goods-related things?      

Terrazas: If you look at where employment was relative to before the pandemic, the industries most similar to trucking—like warehousing, parcel delivery, construction, and others—were closer to full employment than the industries that are much different [from trucking] had pretty strong employment numbers. But with the potential for a surge in services later on in the year and what it might mean for truckload demand, it is important to remember that the shift towards goods spending was not only a shift from one category to another. There was the influence of stimulus money that propelled goods spending. The savings rate is still exceptionally high and is as high as it has been at any point since the 1980s, with around $2 trillion in savings sitting on the sidelines of the economy. As that begins to work its way through the economy, that is going to reflect a decline in the demand for goods, as people go to concerts and vacations. It is still goods consumption, obviously a different kind of goods consumption, and it replaces different distribution channels. It is not necessarily a doom and gloom situation for goods consumption, with the potential for a surge in service spending later on this year.    

LM: Looking at the current state of imports being so high, how do you view what means for the services Convoy is active in.   

Terrazas: It has created a real surge in demand for goods to get moving through the ports, rather than moving goods from the ports to next destination. Demand is strong but not seeing spikes. I would say we are probably starting to see more of the West Coast port traffic shift to alternative ports, given the challenges at the Port of Los Angeles and Port of Long Beach, where it may not be as much of a challenge. The Northwest Seaport Alliance, for the ports of Seattle and Tacoma, have not seen that same degree of delays and chaos, as the Southern California ports have. There is also traffic being diverted to Charleston and Savannah and the Gulf ports. I don’t think the mayhem out West, at the ports, is going to last that long into the spring.

LM: Looking at the 2020 Peak Season, how did things play out, from a Convoy perspective and how would you assess may be in store for this year?  

Terrazas: We certainly anticipated things getting gnarly in December and prepared for that. And we were pleasantly surprised and humbled that some of the doomsday scenarios did not quite pan out. In our network, it had to do with planning and getting ahead of the situation. Some of that was related to consumers doing holiday shopping sooner and earlier than in the past, with things that typically occurred in a December surge coming earlier in November. That distorted pattern is indicative of what we have seen throughout this pandemic period. And what we are seeing is that normal seasonality is not really playing out in the way we have historically come to expect it. That is because any of the big seasonal surges, for things like the end of the year holidays or the start of produce season, are shifting a little bit, because production and consumption patterns are not the same, at the moment, as they were in 2019 or 2018.

LM: What about the related impacts of that on truckload pricing and capacity?

Terrazas: The industry right now is battling with this big debate, with Class 8 truck orders rising, with some eye-popping order numbers at the end of 2020, and contracts beginning to normalize, with a big gap between contract and spot that has narrowed. A big question in the industry is if that will be enough to calm things down. There are two different views when it comes to that. One camp believes that supply is the core driver of the market, and another view has to do with more of a tango between supply and demand. If you take the latter view, you still have to recognize that there are all of these unknowns about how demand is going to play out this year. And even if supply catches up, it could be a question of “catches up to what?” if that demand market is not so hot. There are also things that can impact demand like the rising numbers of big weather events in recent years, which can complicate everything. Every year throws its own unique curveball in that sense.

LM: How are things looking early into 2021 compared to a year ago, prior to the onset of the pandemic, based on Convoy’s core metrics it uses to identify progress?

Terrazas: The beginning of 2021 could be viewed as two different periods: dealing with the storms and coming down from the holiday peak. We were seeing the market normalize after a busy holiday season over the first six weeks of the year, followed by the storms. In terms of a year-over-year comparison, I would say things are probably pretty similar, in terms of getting back to where we were this time last year just before the pandemic started making things crazy. The market was starting to tighten in January after a year that had a bit of a down cycle, and were starting to see kind of very early signals of tightening market back in January 2020 before the pandemic hit. In some ways they are kind of opposite ends of the cycle…as everything has been distorted.

LM: What are some of the things, or lessons learned, from this huge Covid-related mess we have been in for almost a full year? Has it fundamentally changed the way you approach your operations, in terms of seeing permanent shifts?

Terrazas: I think the biggest thing, for us and really everyone, is just being more conscious of how fragile the whole freight ecosystem is. Nobody thinks that a once in a century pandemic is going to be something that we are going to have to deal with on a repeated basis. But when you put it in context with 2017, 2018, and 2019, I think what is clear to me is that that the pandemic in 2020 was this extraordinary event, but every year has had its own crisis and dislocation in the market. Why is it that each year, or every couple of years, seems to throw these transformative curveballs at the industry? The lesson I internalize from it is that the industry has built very fragile systems, in that it sets plans and when things don’t go according to those plans, dominoes cascade. We have to build a more robust freight system that can adapt and absorb these shocks. One of the things we are talking a lot about internally and openly in the industry is that any of the big domains, where long-horizon predictions matter for decisions, over the past two or three decades, they moved away from the idea that you can throw a dart two or three years into the future and things in the world will play out like that. Instead of pretending that we are kind of omniscient and have perfect foresight into the future, we should be actively building systems that are reactive and responsive and in real time in an automated way. The reason for that is that the future does not come overnight.