Economic Trucking Trends: Loss of Capacity to Drive Recovery

Jim
May 2, 2024
1:22 pm

The freight industry is facing challenging conditions, and experts predict that these conditions will persist throughout the remainder of the year. However, when the industry does eventually recover, it will be due to a loss of capacity rather than an increase in demand. Avery Vise, the vice president of trucking at FTR, a leading industry forecaster, shared this assessment during a recent State of Freight webinar.

Vise emphasized that the recovery will be driven by a restoration of capacity utilization rather than a surge in freight demand. He pointed out that truck utilization has likely reached its lowest point and will gradually begin to climb back toward the 10-year average by 2024. The improvement in utilization will primarily result from the loss of drivers in the industry.

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Fleet bankruptcies have been on the rise in the United States, particularly among smaller carriers. However, larger fleets are also feeling the impact of these challenging conditions. In the first five months of the previous year, only 10 carriers with more than 100 trucks lost their authority. This number has increased to 31 carriers in the first five months of the current year.

In terms of rates, Vise noted that spot market rates have likely bottomed out and are now showing incremental increases. On the other hand, contract rates are not expected to reach their lowest point until later in the year. While contract rates currently resemble those seen in 2018, the costs associated with trucking have significantly increased.

Recent data from U.S. load board Truckstop indicated a decrease in load and truck postings for the week ending on June 2. This decline was expected due to the Memorial Day holiday. However, rates remained steady during this period. Truckstop projected that both dry van and refrigerated segments will experience stronger rates and volume in the second half of June, following seasonal expectations. If this projection holds, dry van rates likely reached their lowest point in early May, while refrigerated rates bottomed out in April.

FTR reported preliminary Class 8 truck orders of 13,600 units for May, showing a 9% increase compared to April and aligning closely with the figures from the previous year. Despite this positive surprise, the industry forecaster noted that these order levels fall below replacement demand.

Eric Starks, the chairman of FTR, explained that since build slots for 2023 are almost fully allocated and build slots for 2024 are not yet available, it is expected to see a low level of order activity. Starks even suggested that the number of units ordered could drop below 10,000, and such sub-10,000-unit order months may still occur during the summer. Order activity is not anticipated to surge until the Original Equipment Manufacturers (OEMs) open build slots for 2024, which might happen as early as August.

Starks further added that fleet demand for equipment remains strong as businesses still want to receive new equipment. Robust backlogs contribute to the ongoing strong demand for build slots, and FTR does not anticipate any negative impact on build activity due to recent order activity.

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According to ACT Research, May saw even higher Class 8 truck orders at 15,500 units, with Classes 5-7 orders experiencing a 27% year-over-year surge to 19,000 units.

Eric Crawford, Vice President, and Senior Analyst at ACT, explained that the high Class 8 order numbers towards the end of the year, along with the resulting backlog support, combined with the usual seasonal order patterns, indicate that order numbers are likely to moderate in the second quarter and remain relatively soft until mid-Q3 2023. The May orders align with this outlook. He also highlighted that medium-duty demand had a significant surge,

experiencing a 27% increase year over year to 19,000 units, reversing the trend of three consecutive months of declines.

In conclusion, the economic trends in the trucking industry point to a recovery driven by a loss of capacity rather than an increase in demand. The industry is facing challenges such as fleet bankruptcies and a shortage of drivers, leading to a decrease in overall capacity. As a result, capacity utilization is expected to gradually improve, leading to a recovery in the industry.

While freight conditions are currently soft and rates have bottomed out, there are signs of incremental improvement in spot market rates, indicating a potential turnaround. However, contract rates are expected to reach their lowest point later in the year. Businesses in the trucking industry must monitor these rate trends and adjust their strategies accordingly.

The Class 8 truck orders provide some optimism, with May showing a slight increase compared to the previous month. However, these order levels are still below replacement demand, and order activity is likely to remain subdued until the OEMs open build slots for 2024. Nevertheless, fleet demand for equipment remains strong, supported by backlogs and a desire to update fleets.

Moving forward, stakeholders in the trucking industry need to adapt to these economic trends. Fleets should focus on driver retention and recruitment strategies to address the ongoing driver shortage. Businesses should also carefully evaluate their pricing and contract strategies to ensure profitability and sustainability in a recovering market.

Ultimately, the recovery in the trucking industry will be driven by the restoration of capacity utilization, as opposed to a sudden surge in freight demand. By understanding and navigating these economic trucking trends, industry players can position themselves for success in the evolving landscape of the freight market. The trucking industry is expected to undergo a recovery driven by a loss of capacity rather than a significant increase in demand. The industry is currently grappling with challenges such as fleet bankruptcies and a shortage of drivers, which are leading to a decrease in overall capacity. As a result, capacity utilization is anticipated to gradually improve, catalyzing the industry’s recovery.

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