Q&A – The 2021 Outlook

By | December 18, 2020

Following The 2021 Outlook, the final session of the FTR Engage virtual speaking series, the FTR Experts sat down to answer listener questions beyond what was covered during the Q&A within the presentation.

Listen to the full discussion on the State of Freight Podcast (also included at the bottom of this post) or read below for the fully transcribed Q&A.

Table of Contents:

  • Q1: Is the vaccine enough for consumers to return to pre-pandemic levels of comfort and spending?
  • Q2: How will vaccine distribution impact OTR transportation?
  • Q3: How will work-from-home impact B2B-only delivery policies?
  • Q4: How do you reconcile forecasted recovery in rail equipment without significant improvement in utilization?
  • Q5: Which is a stronger driver of freight volume: low inventories or consumer spending? At what point next year do you anticipate inventory replenishment will be complete?
  • Q6: How does the federal debt impact the national and global economies?
  • Q7: How realistic is it to expect government budget and tax changes? 
  • Q8: Any sense on how long intermodal demand will stay strong?  What is significant about Lunar New Year other than it’s mid-Feb?
  • Q9: Can you compare the labor participation rate now to a period when “traditional” families provided for one parent working outside the home?
  • Q10: With a Biden administration, what might change to the regulatory landscape for trucking over the next 24 months?  Does the answer change with a Democrat majority in the Senate?

DISCLAIMER: This text was automatically transcribed from an audio recording and may include typographic, grammatical, and contextual errors that differ from the speaker’s intention.

Question 1: Is the vaccine enough for consumers to return to pre-pandemic levels of comfort and spending?

Eric Starks: Well, it is great to be back with everybody, but we had a fantastic Engage session the other day, so now it’s time for us to look at the questions that we weren’t able to get to and pontificate on where we see the world going. So I’m delighted to have all of you back with us. One of the things we didn’t get a chance really to talk about a whole lot is about the vaccine. So I want to kind of start talking about some of the questions that came up so Clay, and Bill put your thinking cap on as I start asking some of these questions. So one person kind of brought up the whole concept of people being motivated by game theory and the kind of wait and see and be the last to take the vaccine. You know, you can go first, I’ll wait, how are you kind of viewing this? Do you see that people are going to wait and get the vaccine? Is it just having the vaccine enough to make people feel comfortable? How kind of are reviewing this so that we can kind of start putting this in context of what may be the impact will be on the markets. So Clay let’s start with you.

Clay Slaughter: Sure, thanks, Eric. I think there are going to be some folks that are going to be motivated by as they call it, game theory and have that mentality that other folks can go first. But I think there’s going to be an equal number of folks that are already made up their mind. They’re ready for the vaccine right now. They see it as a safe option and a way for them to quickly or as quickly as possible return doing things that they wanted to do and is a ticket, if you will, back to the old normal. So I do think that while some folks may be in the wait and see, you go first kind of concept, I think there’s a sizable group that is going to be quick to say, I’m ready for the vaccine, go ahead and give it to me. And I think there are other folks that shouldn’t be ignored that say I’m not going to take the vaccine regardless. I think the real question here is when will folks return to the activities that they were doing? Because that’s what we’re really interested in, because that’s what’s going to drive economic revenue, is what’s going to drive freight is what’s going to drive all those things. And that’s really going to be when folks comfortable going out and about. And if you weren’t going to take the vaccine, you’re comfortable going out and about probably pretty quickly. If you’re ready to go out and about right now and you’re ready to take the vaccine, you’re probably going to be ready as soon as you can get it. So it’s really going to be how big is that group that says I’m going to wait and see?  I think it’s a real group, but I’m not convinced that it’s going to be large enough that it’s going to hinder the economic recovery or people going back out to spend money.

Eric Starks: So, Bill, are you kind of seeing it the same way?

Bill Witte: Yes, Eric, pretty much, I guess I can speak as one of the older members, the oldest member of this group, and I sit in each week or every couple of weeks with sessions that include people of my seniority. And there it was, pretty much what Clay said. We spent about 20 minutes a week ago talking about what will you do when the vaccine becomes available? And for people my age, it will probably be fairly far up in the queue. So it could be, you know, within the next month and a half or two that will really have to make the decision. But the people at that session, probably about 30 people seem to be split. Some of them were really apprehensive about taking it, but others were ready to take it right away.  In terms of when enough people have taken the vaccine, that it really starts to impact the way people behave in the economy. That’s a real good question. I think that the people that are reluctant to engage now, and I think that’s still probably a majority will it be the people that listen to what the doctors and the health experts say. And when I hear them saying, is it that we don’t really have herd immunity until we’ve had a vaccination level that gets up to 60 or 70 percent at least. So I think that means we’re not looking until probably the middle of next year before we get those kinds of people engaging. As you said, Eric, there are a lot of people who are already ready to engage. So I think we’re going to see improvements as we go through the year. Countering that, of course, is the surge, which is still rampant this time and shows so far, no real signs of receding. And certainly, if that situation continues, people’s reluctance will be enhanced.

Question 2: How will vaccine distribution impact OTR transportation?

Eric Starks: Yeah, I mean, that’s the thing that’s really hard right now is because everybody’s getting the sense that the vaccine is out, right? It’s going out and being delivered right now. And yet at the same time, we’re seeing the surge happening. So it’s going to be this disconnect. Avery, let me kind of bring you in really quick. So you’ve got the impact that we really didn’t talk about during the session or maybe lack of impact on over the road transportation as it relates to vaccine distribution. I think kind of getting your take on how your view in that part of the world will be really helpful.

Avery Vise: Sure. You know, as we look at it, it’s hard to see this having an impact on the over the road trucking market. The volumes we’re talking about, while extraordinary for the vaccine are not the types of volumes, you know, especially given what we’re talking about, you know, how many doses you can get in a container and how many containers you could get on a trailer, it’s just not going to move the needle for over the road transportation. And, you know, early on, there was some thought, well, it’s going to be problematic because you’re going to need refrigerated. Well, the Pfizer vaccine doesn’t work that way. You know, it’s packed in self-contained containers and dry ice. It has its own logistical nightmares attached to it. But it isn’t going to affect, you know, reefer capacity, you know, as we think of it, where they’re potentially could be, you know, a significant effect is in parcel. And really, I say that only because parcel is already so stressed. I think in a normal situation, even parcel probably would not have a problem with this. But parcel, as we talked about during the Engage session, is just really on edge right now in terms of being able to satisfy its requirements. It doesn’t have enough equipment. You know, you had you see UPS, drivers showing up in Pinsk trucks. And it’s just a very stressed environment right now. And then this is added to it. And, of course, this has to take precedence and that creates a whole another thing. So I think there is going to be a segment, I think airfreight and, you know, in local delivery could be stressed. But I really don’t think over the road transportation is going to be meaningfully affected by this.

Eric Starks: Yeah. So then I guess one of the things I kind of worry about is and I would agree 100 percent with the stress situation on capacity. But does it potentially impact rates? You know, because as you know, as we start seeing more happen, I guess the kind of how I’m viewing it is if we start seeing a large surge in the amount of vaccination production and it all starts going out quickly. Let’s say it does in the first quarter, does that potentially have an impact on how the market is going to start pricing in? But it’s hard to say. I could easily see where that might see some bump, but my gut says maybe not.

Avery Vise: And again, I don’t think we will see that in truckload, you know, surpass all type of. But yeah, I can see that in parcel. I mean, you already have situations where you have established carriers who are refusing to take shipments from certain, you know, long, long-standing customers because of their past inconsistencies in reliability in terms of giving them shipments and being able to meet their needs. It truly is a very stressful environment now. One thing I think we could see because of that is a follow on effect of things that would normally move parcel now getting consolidated in some way, getting bundled up, getting palletized, and being shipped LTL or truckload. That’s possible. I still find that unlikely to think that the volume of that to move the market. But, you know, we’ll see. I mean, this is unchartered territory so. Well, and I think I’m willing to admit that I could be wrong on this.

Question 3: How will work-from-home impact B2B-only delivery policies?

Eric Starks: Oh, I’m willing to bet I’m wrong all the time. Just don’t tell my wife. Yeah. So the things that we’ve been looking at is about the retail market we talked about during the Engage session. One of the things we didn’t really talk about a whole lot, though, was B2B. And Todd, I’m going to bring you, sorry, I take that back, Todd. I’m going to hold off on you. I’m going to bring in Clay. Don’t worry, I got plenty of questions for you Todd, so I going to bring in Clay. So typically B2B side, they don’t recognize businesses if they’re delivering to home. How is the whole stay at home or work from home type of an environment now changing how B2B works and does that have an impact on transportation?

Clay Slaughter: Well, I think that what the question identifies is one that I’ve personally experienced when you run a business, but it’s also out of your residence, you sometimes have folks that won’t ship to you. A lot of times, though, that’s because they’re looking for a particular thing. They need a loading dock. They need a wide enough street. They need a place to turn around a truck. They need some things like that. And I think you’re going to see folks who are still going to say, yeah, we’re not willing to deal with the headache. And you’re going to see other folks who are going to say, we’re willing to work with the customer, we’re willing to ship where that needs to go, where we’re willing to be flexible in making that happen. And what is one person’s headache will be another person’s business opportunity. So I do think there is an opportunity there and it is going to be a changing landscape we may see folks who are going to have to get shipped to their residence, but the residents are going to have to be approved for shipping and things like that, but I think there are opportunities out there for the folks who want to do business in that new environment.

Question 4: How do you reconcile forecasted recovery in rail equipment without significant improvement in utilization?

Eric Starks: Now, I agree. I mean, I think the businesses just have to adapt. That’s the one thing that was forced upon everybody, is you had to adapt. So, Todd, let me bring in we’re going to switch gears just a tad bit more to be more specific on rail. So you talked earlier Engage session about the rail side of the business. What you showed was a utilization number that is pretty anemic for the foreseeable future for rail. So how do you reconcile your forecasted recovery in the rail equipment space when you have rail utilization that is just abysmal to be polite.

Todd Tranausky: Sure, Eric. You know, when you look at utilization, it’s got a couple of things dragging it down. You’ve got two car types that are vastly oversupplied for the needs of the business. And those are open-top hoppers to move coal. And they are small cube covered hoppers to move sand. Now, the coal cars are generally aluminum sided open-top hoppers and gondolas that have exactly one use to move coal. Look at where coal demand is and where it’s going. It’s not coming back and those cars were all generally built between 1993 and 2007. So those cars are pretty ripe for scrappage at some point. The problem we’ve had is that you’ve had people not willing to take that big write-off on their books and you’ve had folks, you know, not have a scrap price that is advantageous enough for them to do that. Normally you see scrap prices move up coming out of a downturn. So as we get into 2021,2022 and beyond, you expect to see some additional scrapping of those cars. And until you see additional scrapping of those cars, it’s going to be hard for utilization to move. People forget the coal is the largest cartload commodity. So there are a lot of railcars out there to service that business.  A great many of those cars are idle today and a great many of those cars will never turn another loaded mile. So in order for utilization to take off, we have to sort of flush those cars out of the system. In terms of the small, covered hopper, it’s a more difficult equation to get to scrapping. It’s a very young fleet. You’re not going to take the kind of large write down necessary to move those cars off the books in mass. They’re going to need to find some other service. So either the price of crude is going to have to go up to a level on a sustained basis that supports long haul movement of white sand back the drilling fields, or you’re going to have to see demand for other products. Now, luckily for the small cubed hopper, there are a couple of other markets for it. Can move into cement and the cement fleets is an older fleet. There is a replacement opportunity there. There’s been a lot of talk about an infrastructure bill. So you could see some additional cement demand coming into the market for that. That could absorb some of those cars. But it’s going to take those two fleets to resolve themselves to move utilization noticeably where you’re seeing the order activity come from. It’s those car types that have sort of been crowded out over the last decade from building slots. I’m thinking food service cars, specialty tankers, the people who could not get in there and get slots when you had all the ethanol cars and all the tank cars going in there to build, you also have jumbo covered hoppers. You have folks in the green car space who now have certainty with the trade tensions with China and everything else coming to a close. Now, they can feel good about investing in those cars. So you see those cars that maybe couldn’t get into builders’ lines or didn’t have enough certainty in the underlying economics to pull the trigger on those cars. Now they can come into the market and that they can make those orders that they have been waiting on for the last, you know, in some cases five or 10 years to make they can get in there and do that. So it’s really fulfilling particular needs, whereas utilization looks at the whole marketplace and has to overcome a significant Ankers on overall utilization.

Question 5: Which is a stronger driver of freight volume: low inventories or consumer spending? At what point next year do you anticipate inventory replenishment will be complete?

Eric Starks: Now, that’s helpful. I really appreciate that. Let’s take let’s stick with you for a minute, Todd. In fact, the next questions I have I guarantee you I’m going to have a handful of people here want to pounce on these questions because it’s just a juicy question, right?  So which is the stronger driver of freight volume? Is it low inventories are consumer spending? So that’s the first part of it and then the second part of that is at what point in time next year do you anticipate the inventory replenishment will be complete? So let’s put out your crystal ball. Ready? Go.

Todd Tranausky: Well, that is a really tough baby to divide because if you look at the last several months, you know, we’ve had strong imports, but inventory to sales hasn’t moved a whole lot. So those goods that have come in have gone directly through the system to the consumer. They haven’t filled any inventories, haven’t filled the distribution centers. Now, when consumer spending cuts off, that’s a great question and that’s a real hard one to figure out. You’ve got some things here that could trigger that early in the first quarter. You’ve got a lot of folks on unemployment. You’ve got talk of additional shutdowns with no real still uncertainty around stimulus payments, around extend unemployment. You know, there still isn’t a deal in Washington to extend those by the end of the year. You have a little bit of a natural cliff event there in terms of how much the consumer is willing to spend in the marketplace. So we’ll have to see when consumer spending cuts off in terms of how long it takes for inventory. So we expect the inventory situation to go on for about another quarter or two beyond when the economy picks up when consumer spending starts to pick up, you start to take another quarter or two for folks to rebuild their inventories, rebuild their distribution centers, get them back to a level that they that they’re comfortable with because they’re just they’re so very low right now. It’s going to take time to get those rebuilt. So the inventory levels, the import levels have been very strong. We expect them to continue to be strong over the next several weeks. You normally see a tapering down of Intermodal the manner demand of imports. We don’t think that’s going to happen this year. We think you’re going to keep running right all the way through the Lunar New Year and then sort of folks can evaluate where they are, where they are in inventories, where they are in orders, and see where they go from here. And that has implications. As you think about intermodal demand for 2021 in terms of how you write out the volumes going forward. But in terms of when consumer spending cuts off, that’s a great question. We think the inventory question will take a quarter or two beyond that point before you sort of level things out closer to freight demand with the underlying economics

Eric Starks: Avery, I am coming to you next. But one thing I want to point out, though, too, is we have to be careful when we talk about consumer spending.  You have a service component here, too? So some of it is about goods versus services. So Avery let me throw that at you. Why don’t you get it?

Avery Vise: Well, you did just complicate my answer. Because I actually was going to just interpret the question as being spending on goods. So I’m going to continue.

Eric Starks: That’s how I took it, too. So that’s not an accident. We’re talking apples to apples.

Avery Vise: Well, because I think the question really goes to something more not quite as broad and philosophical and more, you know, is it the retail sales or is it retail inventory that drives it? And I think that in a normal economy, the answer to that is quite clear. It’s in sales. And the reason is that you can have an increase in freight just based on sales alone without any change in inventories. And also, you’re not necessarily going to have much of a change in freight with some modest increase in inventories without the increase in sales. Now, that’s normally we’re in I think, largely unprecedented. I have not calculated how far retail inventories went from top to bottom in the Great Recession. But what I do know is that in essentially two months we dropped more than 12 percent in inventories in retail, and that has an impact even if sales flatten out. So I think that the level of inventories at this point is so extraordinarily low that it will, you know, increase that it will lead to an increase in freight volume, which is the basis of the question. You know, as we talked about during the Engage session there are some caveats to this. And one is the potential for there to be a sort of a structural change that’s facilitated by this. And during the Engage session, Clay talked about that in terms of automotive. And, you know, I sort of mentioned that to so. It’s not as straightforward as it seems, because just because we’re down 12 percent doesn’t mean we’re going to get help to get back to that level that we were at in February. We may not. In fact, I’m going to go out on a limb and say we’re not going to get to that level by the end of next year, probably. So I think there are just too many.

Eric Starks: You heard it here first.

Avery Vise: That is going to impede that, one is that we’re just not going to have the sales growth that we’ve had to continue. And obviously, at some point, we start to divert some of our spending from goods and services. And that’s going to have a continued impact in less pressure on replenishment. So I think we’re kind of going through right now the most that the inventory cycle is going to pressure the system and that’s going to be over fairly soon.

Eric Starks: Perfect. So you teed me right up into the next question. So we did have a really nice discussion during the Engage session, you know, about that people may purchase less goods when they start to spread their money around, like when they do the place and they go, you know, the restaurants and stadiums. I think the thought process is that they’ll need shipments. And they could  I think some people are hoping that can counter some of the loss and becomes a one-for-one switch. Avery, you want to kind of give some thoughts on that.

Avery Vise: Yeah, I mean, definitely that’s true. I think there are some you can overstate that, though, because, you know, there is. Some elements of the fact that those gains, by the way, are going to be almost all in the food and beverage side, that’s not going to affect anything really other than food and beverage. It’s clearly going to have I mean, if you look at, you know, a number of pretty large companies who are focused on institutional food service, it’s going to be their salvation, obviously. But, you know, there there’s going to be it’s not a net gain either. And if you think about it, it’s a reversal of what we saw in March and April, which is, you know, as people do spend more money at ballparks and if they spend more money at restaurants, they’re going to start in less money at home. So, you know, I don’t think it is going to be a net increase necessarily. So when we look at that shift, I think it is a fair point. The overall improvement in employment that’s going to come from this is obviously going to drive more goods consumption and I think that’s something that we need to take into account because that’s a group of people who’ve probably been fairly, you know, austere in their spending, certainly since probably July when they lost their 600 dollars a week supplement. And when they do get their jobs back in foodservice and hospitality and all that, you know, that’s going to have an effect. But, you know, as we’ve talked before, Bill has made this point multiple times. You know, that’s a double-edged sword. Number one, these are a group of people who tend to spend all the money they get. So that is a plus for the economy. The downside is they don’t tend to get a lot of money. So it just gets a little murky when we look at this topic. But I would say, you know, overall, that if you look at all those mitigating factors, it probably is no better for goods than a wash and it might end up being a slight negative.

Eric Starks: Yeah, Clay, what’s your take on this topic?

Clay Slaughter: Well, I’m probably a little more optimistic about the effect on goods transport than Avery was right there at the end where he calls it a wash. I do think that it will result in some more goods flows when folks start going out to those things. Because I do think that it’s not just the folks who are bringing that money in and then immediately spending it out. I do think that there’s a lot of other folks who have money to spend once they’re comfortable going out and spending it, and they’re going to spend it in a different way. Are they investing it right now or are they spending it in some other way or they’re sitting on cash? There’s a lot of questions there. But when folks start to now, as Todd said in the session earlier, you know, he’d love to go to a baseball game. I think there’s a lot of people in those shoes. There’s a lot of people who say, you know, I just like to go out to dinner. I just like to go to a baseball game. I just like to go to a concert. And I don’t think it’s going to be this may be a view on our culture in general, but I think that there’s a lot of folks who would like to go to more than one baseball game or more than one concert, and they’re going to be ready to do that and have a pretty good time when that opportunity comes about. So I do think that there’ll be some additional expenditure and additional goods moved. Do I think that it’ll sustain that? That’s for me a little bit murkier of a question. But I do think that we’re going to see that when that opportunity comes about.

Eric Starks: You know, the one thing that I’ve been kind of thinking about it really, you know, how many movements do you have of a good? And so let’s say that you go to a baseball game, right?  How many hot dogs can you move relet for the same price relative to a load of a brick? You know, I mean, it’s one of these things you’re trying to understand the impact on transportation. And I don’t think it’s a 1 to 1 relationship exactly. I think you move from one type of commodity group to another type of commodity group and it changes the flow here. Bill, what do you got? Can’t hear you, Bill. That’s OK. That’s probably a good day, so let’s try this again. I will keep moving on when we get Bill back. This is a live reality here, folks.

Bill Witte: OK, here I am.

Eric Starks: Oh, yeah. There you are, Bill.

Bill Witte: Sorry, I think that thinking about what happens if people start to come back as a possible negative for trucking is really too narrow. You know, if you compare it to what happens if people don’t come back, which is the real underlying alternative, that has to be a net negative. If they don’t come back, that’s going to be negative. You’ve got 10 million people that are unemployed in this country or unemployed, at least 10 million below what it was. And if we stay in that situation sooner or later, it’s going to be bad for trucking. It just can’t help but be because things are going to ratchet out of control. You’re going to start to see lots of people not making their rent, which means that you’re going to have evictions, you’re going to see businesses that people don’t go back to that closed down and then their landlords are in trouble and on and on and on. It almost guarantees a double-dip recession, another big one. And that has to be bad. So even if there is some temporary discombobulation in terms of goods transportation you have to look at opening up is really something that we have to do or the economy doesn’t survive.

Eric Starks: So I guess the one thing I would say is I don’t think that anybody’s arguing about it being a net negative. And I know I’m not. It’s more of a substitution. So, Avery, go ahead.

Avery Vise: Yeah. I want to be clear. I’m not suggesting that I was going with the question is, as I interpreted it being asked, which is, you know, where would we be relative to did to today in goods, transportation. And  that’s how I view it. I was not looking at it in terms of what are the long, longer-term, or even medium-term implications of that not happening. And I totally agree with Bill. I mean, we’ve got to get just the idea that you would have, you know, 10 million people unemployed long term on top of whatever business cycle, you know, additions we have to that in the future would be, you know, very problematic.

Question 6: How does the federal debt impact the national and global economies?

Eric Starks: So, yeah, no, I agree, because, you know, one of the things I kind of think about is that substitution. You know, what is the growth rate of something look like? Does it accelerate faster or is it a slower growth or is it purely one-to-one? And, you know, these are things that allow us to kind of think through some of the complexities here. So, Bill, talking about some of the underlying pressures, I think this is a good time to kind of talk about the federal debt. We really haven’t touched base on this a whole lot. We’ve kind of not ignored it, per se. But it’s this whole thing of, you know, so many things are going on that it’s more let the debt kind of play itself out and we’ll deal with it another day. How is the whole debt situation going to impact economic growth along with potentially we may have another trillion-dollar spending bill that could be added? You know, how is this playing through the economic scenarios?

Bill Witte: Well, it’s certainly concerning, but it’s very hard to figure out when it’s going to be concerning and exactly how it will become a real concern rather than just sort of something that people pontificate about. Clearly, the level of debt in the economy is high, and it’s not just the government debt, corporate debt as well as high and but that’s you know, and that is exactly what policy has been trying to accomplish. The Federal Reserve has been holding interest rates low to encourage people to borrow and they’ve been doing so. It looks like a bargain and the question is, sooner or later, that has to be a problem. But it will be another one of these entirely new problems that the U.S. economy, the world’s largest economy, the world’s central economy, hasn’t had a real financial problem in anybody’s memory. And this would be that. So we don’t know what happens. The most likely thing that will happen is that the debt will gradually be worked off in the way that usually occurs is through inflation. So I think that not this year, not next year, probably, but somewhere I think probably within my lifetime, which doesn’t put a really hugely long time spin on it. We’re going to see an economy that has much more significant inflation than we’ve had for really the last two or three decades. And that will be something that will be a new experience for nearly everyone that’s going through it.

Question 7: How realistic is it to expect government budget and tax changes? 

Eric Starks: Right, and that becomes a potential drag. I mean, that shows our growth potential is less, you know, in a lot of different ways. But, you know, I think a lot of this still has to play out. So let’s see if we continue to talk about debt and let’s talk about budgets for a minute. The state and local budgets are going to get hit. I guess one of the things you were talking about at Engage was kind of taken in a way to suggest that maybe they would actually reduce their budgets through tax cuts. I don’t think that’s exactly what you were saying. So this is probably a good time to kind of clear up kind of how you were thinking that the budget cuts that they’re going to have to do is that you know, are you seeing that because of tax cuts? I’m seeing it more just because of, you know, you don’t have revenue.

Bill Witte: You know, I don’t think you’ll see tax cutting at the state and local level since they have balanced budget requirements in most cases, much more likely to see them increasing tax rates, at least in an effort to make up some of the revenue. Clearly, the revenue, and at least in a lot of states, is being adversely affected, most states and at the local level as well. You know, ultimately, some of what is happening in terms of both residential and commercial real estate will show up and lower assessments and property tax revenues will take some hit.

Eric Starks: And you teed me up again, so I’m going to keep you right here, Bill, and then I’ll pull in Avery and Clay because I know that they have some thoughts on this. So one of the things that does come up is your discussion about property values going down. If we look at truly what’s happening, you know, everybody’s like, oh, my retail, I’m sorry, my home prices going up. But when we talk about property values, we’re not talking just about a home. So can you kind of talk through that? Why do you think the property values are going to go down? And can you kind of pass between the two a little bit?

Well, retail residential is harder to figure out because there are offsetting things. One of the things we’ve talked about is that the stay at home thing may lead people to put higher values on single-family houses, for example. So when people say their housing prices going up, that could be an immediate reflection of that. On the other hand, if they’re moving out of apartments and things like that, that means that the multi-family part of the residential stock may come under some pressure and certainly vacancy rates. And in some of the larger cities, I think I’ve seen some anecdotal evidence that they’re higher than they were a year ago. I think the bigger problems in terms of property values and assessments are in the commercial markets, in retail and also commercial real estate, office building kinds of things, which, again, if the stay-at-home thing really continues to be a significant phenomenon, less office buildings. There are, of course, people in commercial real estate who are good at repurposing buildings and finding other uses for them. But I think that it has to be at least a problem for them. I think that you know, if I were in commercial real estate, I would be. So probably having trouble getting to sleep at night,

Eric Starks: So, Clay, does every office building now become a warehouse? I’m being facetious, but I mean, I think the whole concept of how commercial buildings are going to be used going forward is potentially forever changed, at least in how we kind of view it at the moment. Maybe that’s reality or not.

Clay Slaughter: They’re not warehouses, their distribution centers, Eric.

Eric Starks: Oh, thank you. Thank you.

Clay Slaughter: Because when it comes to the cardboard box to my house, it’s a distribution center. Yes, I do think that there’s a fundamental change here. And you know, I’ve shared this before with some folks. I’ve got people that I work with directly and friends of mine that are business owners that are seriously saying we’re done with our commercial space. We and these are attorneys who have had a law firm for since the dawn of time. There had to be a brick and mortar business that went with it. And they’ve figured out in nine months that they no longer need a law office. That’s a pretty big switch. And I think that’s going to be across a lot of industries, a lot of places where we’re commercial real estate is just not going to be the driver that it once was. And there’s going to have to be some repurposing of commercial real estate and there’s going to have to be some serious thought about what does the city center look like? What does a shopping center look like? What do some of these things that we’ve become accustomed to look like? And I think that that was already started. Let me be very clear. I’ve said this before and I’ll continue to just stick by my position that I think this was already started. I think what we’ve seen is an acceleration of the change that would have occurred in 20 years and we’ve compressed it into a year. That’s what I really think we’re seeing, and that’s why it feels so abrupt, that’s why it feels so difficult at times, these things were already happening. We’ve just accelerated them dramatically.

Question 8: Any sense on how long intermodal demand will stay strong?  What is significant about Lunar New Year other than it’s mid-Feb?

Eric Starks: Makes a lot of sense off of that. Let’s change gears just a tad bit because we got a handful more topics to cover. I want to make sure we have some time to get through this stuff. So, Todd, I’m going to come to you. I’m going to throw you the softball that came out at us, which is great. Any sense how long intermodal demand will stay strong?

Todd Tranausky: It’ll stay strong, at least for the Lunar New Year. We expect imports to continue to not take their seasonal sort of dip here toward the end of the year. And so we expect that import volume to support intermodal times, at least through the Lunar New Year. Lunar New Year gives people some time to reset the sort of as the factories shut down in China, you get sort of a normal lull there. That’ll give people a chance to sort of evaluate where we are with COVID-19 here in the US and be able to sort of look at what is the ordering pattern going to be for the rest of 2021. And I think that will bring a lot of ways, provide a lot of color on how long intermodal continues to run at such a high level. It’s a very strong level right now, whether it’s containers or trailers, things are very, very good. You know, the good times, they will not last forever. We think they’re going to last at least through the Lunar New Year. How far beyond that really depends on COVID-19. It depends on how quickly trucking utilization tightens and stays tight. It’s certainly tightened in 2020 a lot quicker than we thought it would. And if it stays that way, if you’re not able to get additional capacity into the trucking system, that intermodal probably stays strong longer to the extent that you’re able to take delivery of a lot of new class eight trucks. To the extent that you’re able to get a state DMV back open and meant new truck drivers and older truck drivers who may have sat on the sidelines during the worst of COVID-19 come back into the marketplace and you see additional trucking capacity come in. That’s a headwind for intermodal as you get into next year. And it means intermodal is not going to stay on such a firm footing a lot quicker. If you see trucking opened up and things start to really come in quicker than we expect right now.

Eric Starks: Yeah, Avery, to the broader point about the inventory correction and with regard to intermodal, is it realistic to think that things could soften up by the Lunar New Year by February, March, or do you think it actually continues to go longer?

Avery Vise: Well, I don’t think that you know, we’re certainly not going to add back the 12 percent that we lost by June. And so it really kind of all comes down to I think, is there still any seeming pressure on sales? Because I mean, the only reason that a 12 percent decline in inventory would not continue to pressure transportation would be if there were a collapse in sales. And I don’t see any dynamic at this point that would lead to that. I mean, other than obviously we start getting into exponential growth in COVID infections that does lead to an April style contraction. But we can certainly, you know, unfortunately, I think talking in December and looking at the numbers we’re seeing, that is not an impossible scenario. Whereas I think any time before the last month we would have said, well, that’s not going to happen. And I’m not sure at this point that we can say that’s not going to happen. But the other side of that, too, is it affects intermodal is, you know, the I think a lot of people would love the rosy scenario that Todd painted of capacity because it’s just not going to happen that quickly. It’s going to take a long time. There’s a lot of headwinds. You know, the reduction in the CDL that’s not going away at the end of 2020. You know, it’s not this is going to go away once the vaccine is widely distributed. We’ve seen the Drug and Alcohol Clearinghouse take out by, by our estimate, 1.5 percent of the CDL drivers that are active. And that’s a significant amount of capacity that you’ve just taken off, taken out of the system in less than a year. And, you know, there’s more and more and more. And so this is not going to be our usual spool up, spool down kind of scenario like we saw in 17,18 like we saw in 2004. Like we saw in 14, 15, where fleets get behind the curve and they can’t get enough drivers. But then they all of a sudden, they’re getting plenty of drivers and then all of a sudden, they don’t have enough freight. I don’t think that scenario plays out that same way this way. I mean, yes, that is the beginning in the end. But at the time in the middle is much, much more difficult, I think. Yeah, it’s going to be a long term issue, I think.

 Question 9: Can you compare the labor participation rate now to a period when “traditional” families provided for one parent working outside the home?

Eric Starks: Well, I want to change gears for a minute, let’s talk about labor. The labor situation is a big deal here. We saw the labor force participation rate as we went into the COVID shutdown. It basically dropped noticeably and it’s been holding at a low level. So what is the possibility or the likelihood that we see the participation rate resetting back to these lower levels and this becomes the norm? I think, Bill, why don’t you jump in on that a little bit and kind of give some take on, because I think it has played places larger term implications on the labor force as we go forward.

Bill Witte: I am talking about the participation rate. Should I start by remembering that the underlying trend is lower because of the retirement of the baby boom and the aging of the workforce? And then on top of that, we have what’s been happening recently, and I think there are two aspects to it. One is simply the virtual collapse in a lot of areas and economic activity when the shutdown occurred. And I think that has caused significant erosion in the labor force as people who had lost the job and who now I think are increasingly seeing that it’s probably not going to come back in many cases. And they’ve gotten discouraged, particularly if they’re relatively close to retirement. And the press and they know realistically that the prospects for finding another job if you’re late 50s or early 60s are not great, especially when there are lots of younger people out there who are also looking for new jobs. And then a still separate factor is that things like school shutdowns have caused parents in the household. If it’s a single parent, it may mean that they have to drop out of the labor force. If it’s two workers in the family, one of them may have to drop out of the workforce. And how that plays out, you know, if people drop, one of the problems with labor force participation is that when people drop out, their skills and connections to the workforce start to erode. And it’s probably going to be the case that some of those that have dropped out for what are really temporary reasons, not necessarily that they simply will a job has disappeared, may also not come back. So I think we’re going to probably see some improvement from where we are now gradually over the next year. But nowhere near enough to get us back to where we were pre-pandemic. And beyond that, you have the long-run downward trend in participation.

Eric Starks: And it’s interesting when we look at the participation rate, too, when we break down some of the things, the disconnect between a high wage earner, low wage earner that seems to start to play out more and show up in the data. So it’ll be interesting to see how this impacts that as we go forward. I think some of the trends we’re seeing are pretty concerning in a lot of ways. We want to see some of this stuff coming back Clay with that the I’d like to talk a little bit more about just your thoughts on the participation rate and how you’re viewing that, but then more broadly speaking, about starting to transition into the trucking market and the transportation market field. How are you kind of viewing those changes that are happening right now?

Clay Slaughter: Well, my comments about the participation rate are very similar to what Bill said, I do think that there are some underlying issues at play about the ability to do e-learning with your kids if you’ve got children and be a full participant in the workforce. I do think a topic that hasn’t been talked about as much is as we do more work from home or I think was more appropriate to say work from anywhere. There will be folks who may not have been able to have been in the labor market who find that they can be now if they want to. And we haven’t spent a lot of talk about that little time talking about that. There are not a lot of chatter about it. But as you free up, you know, and remove those geographic bounds on employment, there are going to be folks who are available if we want to go out and tap them and if businesses are willing to do that that weren’t previously available. In terms of how that plays into trucking and to the truck market, I’m not sure that I’m the best guy to comment on that, I think that it is going to have some effect on our buying patterns in the way that we do that. I think the other part about participation that I would stress here that I’ve talked about before is that what people are doing is a double-edged sword. Are they driving a truck or are they doing something else? And are those other things that they’re doing, the things that are driving the engine of the economy. And if they’re not driving a truck, they may be building a house. And that’s good for trucking. That’s harder for people to hear. But it really is because there’s that other economic engine going out there. That means that they’re not driving a truck. And we should in all reality, we should be good with that, that we should you can’t get your stuff because we got all these other things going on.

Eric Starks: Yeah.

Clay Slaughter: Is a healthy mind to have.

Avery Vise: You know, in the 17, 18 cycles, that was exactly the dynamic we saw manufacturing and construction both doing well, both taking labor away from trucking just as trucking needed labor in order to satisfy the demands of manufacturing and construction. So, you know, and that’s good for the carriers. It’s not so great for shippers. But, you know, it is just one of those dynamics that we actually hope for, at least for transportation writ large. I mean, it does create some losers. But we also don’t want the capability for transportation to wither away. I mean, you know, it is to everyone’s advantage, carrier and shipper to have an adequate number of drivers, because while carriers might think, well, having a little bit of a driver shortage is not the worst thing in the world. You know you do potentially run the risk of getting the trucking industry into the situation that the parcel industry’s in today. And that that would be problematic.

Eric Starks: Well, this is where you kind of have a disconnect between the different industries, right? So you have some industries where people would participate in an industry in the job and now the job doesn’t exist. And they basically said I’m out of the labor force. So that’s part of the issue then, too, is you have the involuntary removal of people who say, I’m just not going to participate. There’s just not a job for me. So they just don’t show up in that. But then you have some other markets where things are tight and they need workers, that you have a labor force that then is saying, I’m just going to retire, I’m not going to go back into there. So this is the push and pull.

Avery Vise: Yeah. And just one more point. And Bill touched on this already and actually so did Clay. You know, if you look at the trend line on labor participation, it was you know, it’s been coming down and it’s you know, it’s not exactly a secret. I mean, you know why it’s the baby boom generation retiring. But it leveled off, what, 4 years ago, 2015, 2016 and it leveled off because, frankly, the strength of the economy was so strong, probably it kept a lot of people in so you could make a case that, you know, we would be somewhere between where we were in February and where we are now, you know, had we not had that happen. And I’m not at all convinced that it’s going to come back at all. I mean, you know, I think Bill is right that it’s probably going to come back. But I’m not sure of it. No one would certainly be some boost once know once we have a vaccine widely available. But is that boost of a percentage point or percentage point and a half, or is that boost three-tenths of a point? And I think it might be three-tenths of a point.

Question 10: With a Biden administration, what might change to the regulatory landscape for trucking over the next 24 months?  Does the answer change with a Democrat majority in the Senate?

Eric Starks: That’ll be interesting to see. So we will be able to track that over time, which is nice. I really have appreciated being able to sit here and chat. So let’s finish this up then with a quick regulatory discussion. Right. You got the Biden administration coming in. We talked a little bit about these things during Engage, but not a whole lot. We didn’t get into a lot of this stuff. There are so many complexities of what this still might look like over the next month or two. Do the Democrats get the Senate, all of these kinds of things? But ultimately, the big question here is with the incoming administration, does this change the regulatory landscape for transportation? And I think this is a good way to kind of Segway and kind of wrap this section up. So, Avery, if you want to give some thoughts, Todd, just a quick little thing. And then, Clay, if you have some thoughts on that, do I think that would be a good way to end this segment.

Avery Vise: Well, you know, I think very clearly that it will change things. I think the question is, is time is how long it will take for those changes to take effect. I mean, so we’re talking about-face in both environmental and labor regulation, how quickly those will show up in affecting the industry. I don’t think anything is going to happen before you know before the end of this year or next year. I mean because it just takes too long to do things.  In the safety regulatory arena, I don’t see a whole lot to be done. There really is, there’s not a lot on the table at this point. I think one of the big ones might be speed limiters coming back, that having, you know, I think some marginal impact on productivity in some upward pressure, perhaps on, you know, adding more drivers and adding more trucks. And the other big one, I think that is going to be on the table is raising the liability insurance limits for trucking companies, because that’s very much what the trial lawyers want. And I think that’s very much what the Democrats therefore want. So I think that those two issues, speed limiters, and insurance, I think within the trucking and then a whole host of things in environmental in the labor.

Eric Starks: Todd, anything on the radar for rail regulations?

Todd Tranausky: A little bit different from the standpoint of, you know, the economic regulation is largely large, big business to big business, though, it’s not Democrat or Republican in sort of the traditional way we think about those things. But the Surface Transportation Board has over the last few years, you know, become more and more progressive in terms of the ideas it has entertained, in terms of the things it has looked at to try and deal with railroad and shipper disputes. And I think now of the Biden administration, you’re going to see the board get staff and you’re going to see that progression continue. You know, from a Federal Railroad Administration perspective, I think you’re going to see more focus on safety-related initiatives. You’re going to see literally folks on two-man crews. You’re going to see those sorts of issues come to the fore because those are the issues that are supported by groups that support it, Joe Biden.

Eric Starks: Great. Clay, give it a go, man.

Clay Slaughter: Yeah, I think the question about the change of administration and specifically a question about a change in the Senate is an excellent question to ask. I would temper my answer in that even if the Senate, the Georgia runoff ends up with the Democrats getting both of those seats, I don’t think it’s a slam dunk that some people are trying to make it out to be. I do think that there are factions within both parties. I do think that there’s going to have to be some compromise that is going to change the situation, but it’s not going to be the end all be all that some folks would like it to be. The other thing that I would point out about the change in that landscape, the question was specifically about regulatory landscape. But I think that the other piece that’s going to change about the landscape is what an infrastructure bill would look like. It’s not directly regulated, but it is going to have a huge effect. And the change in administration could come to bear there about what is included in an infrastructure bill, what qualifies as infrastructure or we haul on gravel and building roads? Are we putting in broadband? Are we working on other items? What is that and what does it mean for goods transport? I do think you’re going to see that discussed and discussed extensively in the coming months and this coming year, hopefully. So I do think that there’s going to be a change there that’s going to come with the administration.

Eric Starks: Well, I want to thank all of you for joining us here. It’s been a delight. We had a nice, long, lengthy discussion here that I thought was very well needed for anybody who was stayed on this podcast to the very end. Shoot me a note at [email protected] Let me know that you made it to the end and I’ll give you a clap back. And, you know, I wish everybody a wonderful end of the year. Happy holidays. I know that most of us are happy to say goodbye to 2020. But when something goes bad, what are we going to say? I think we now are always just going to say 2020.

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