Used truck prices and labor numbers indicate capacity is flat
The FreightWaves editorial staff was all over the country last week, at various industry and financial conferences. To say the industry is bullish would be an understatement. The industry was downright giddy with glee.
Executive confidence was incredibly high with fleet and brokerage executives talking about growth and expansion. The historic rule of thumb has been that as long as GDP expands greater than 2%, we will see growth in the trucking market. Recently, the GDP has been expanding at an even faster rate.
The worry, as in past cycles, is that the industry capacity would expand too fast and lose pricing power. While carriers are buying trucks at a rapid pace, this should not be a huge concern. The reason for this is fundamental.
The industry pulled back on new truck purchases a few years ago as the world went into an industrial recession. The cause: commodity prices crashing. As prices for commodities melted away, exploration and exploitation slowed or stopped.
In the old days, fuel prices were a negative drag on the freight economy (and overall economy), but that has flipped, so that now energy is a huge driver of freight demand. This means that as oil prices go up, fracking production increases and more industrial freight enters the system. Because fracking wells are fairly low volume and fairly mobile, building out pipeline infrastructure is not economical, which makes shale the most trucking-intensive kind of oil. For truckers, oil is literally black gold. And the ‘tea’ part? Well, Texas has seen the highest growth of freight demand. Flatbeds are hotter than the Texas heat in July and the strongest lane is Houston to Lubbock.
The concern is that the industry will get ahead of itself as carriers add more trucks than the market can handle. Recent data in new truck orders would indicate this, but there are plenty of data points to suggest that the market should not be concerned. While there are a lot of data points to use to understand new capacity additions, there are two that we are watching closely: used truck pricing and labor additions.
Used truck prices are not firming, which you would expect to see if the industry was adding capacity. After all, smaller fleets would be adding capacity to take advantage of a hot freight market. In fact, according to data provided by ACT, a used truck that is three years old is currently going for an average of $56,394, roughly the equivalent price in August 2010.
Second, the labor picture is even more telling. Yes, trucking had a net growth in employment, but according to the BLS, only 5600 new jobs were added to the trucking industry. For an industry that employs millions, this is a rounding error. It is even less than could handle the capacity drain that was caused by ELDs (we estimate that the industry needed to add 51,000 new drivers to get back to pre-ELD mandate capacity levels, not to mention all the unseated trucks that permeated the industry before the mandate).
So, how do we explain record growth of Class 8 vehicles? Replacements and exports. Carriers are healthy with cash and are buying new trucks to replace older ones. They do this to replace the trucks that are less efficient on MPG, to ensure that they have newer equipment to attract new drivers, and to address maintenance costs. The used trucks do not appear to be recycling back into the industry. Many of them are being exported to other markets, but because of strict emissions regulations, these trucks are less desirable in global markets.
One more thing- this weekened we reported on record trailer sales according to FTR. Carriers bought 32,000 new trailers, marking the fifth month in a row above 30,000 units. While this is an interesting signal to watch, the additonal trailers could be driven by a combination of freight growth and fleets buying more trailers to accomodate shipper requests for bigger trailer pools in light of the ELD mandate.
Bottom line: if you want to watch the warning signals in the freight market, watch labor and used truck residual values. Also, subscribe to FreightWaves. We can help you interpret these signals as well.