Editor’s note: Written by Aaron Terrazas, director of economic research at Convoy, a digital freight network. This is one in a series of periodic guest columns by industry thought leaders.
Few in the industry are willing to say it, but it’s a bad time to buy a truck.
It’s also not what most truckers think. When Convoy surveyed truckers in March, 48 percent responded that it’s a good time to buy a new or used truck. (An additional 21 percent responded that it’s a bad time to buy a new or used truck and 31 percent didn’t know.) A slightly smaller percentage (42 percent) responded that it’s a good time to expand a trucking business more generally.
Class 8 truck orders have held near record highs since late 2020, spurred largely by the white-hot freight market and rates that have held at historic highs despite repeated forecasts of an imminent market crash. Real-time truck registrations reported by the Federal Motor Carrier Safety Administration — which probably understates actual capacity changes since some carriers do not automatically report new equipment — suggest rising truck counts are concentrated at the poles of the industry: Among very small, one-truck owner-operators and among megalith fleets with thousands of power units.
This data aligns with conventional wisdom. The idea that the freight industry experiences periodic booms and busts is as close as there exists to Biblical truth in the freight industry. Busts happen when supply overreacts to periods of strong demand and high prices: Truckers (and trucking companies) invest in new equipment when freight market prices are high, but get caught flat-footed when demand dries up and they suddenly realize that their competitors have all made the same investments.
The problem with this conventional wisdom is that it assumes a pretty dim view of the industry’s ability to learn from past mistakes. If you believe that truckers have short memories — or that the industry is dominated by new, inexperienced truckers who have no past experiences to go by — and are likely to slip into the familiar pattern of overinvestment, then it’s a good bet that the market will soften at some point in the near future. But if you believe that the industry learns from experience, then supply alone is insufficient to explain when and how the next freight market correction will arrive.
(There is some evidence that businesses in fragmented industries like trucking do learn from the recent past, which I’ve previously written about in this outlet.)
Whether or not truckers (and, especially, trucking business owners) recall back to the industry’s most recent busts, rates are unlikely to hold at their current highs indefinitely. Freight demand has been exceptionally strong during the first few months of 2021 due to the combination of lingering pandemic-induced consumer patterns, continuing supply chain disruptions, and the exuberance of reopening. Sooner or later, demand will slip and the freight market will come down to earth. No one can say exactly when that’ll happen or how big the decline will eventually be — two critical questions to always ask about any market prediction. Even the best forecasters have a dismal record at predicting the economy’s turning points.
Although Class 8 truck orders are holding near historic highs, so are delivery delays. According to FTR Transportation Intelligence, the current lead time for new truck orders is just over a year. Semiconductor shortages and rising raw materials prices have pushed up production costs, some of which buyers will ultimately have to bear.
That means that today’s investments in new capacity won’t actually begin to touch the freight market until Spring 2022. Compound that uncertainty with the potential for new fuel economy rules, an industry-wide push into alternative-fuel vehicles, and the reality that, over the course of its expected lifespan, a new truck today will likely overlap with the gradual entry of automated and electric trucks into the freight market. The net effect of that technological revolution is an open question, but it’s indisputable that it will result in market supply that is more and more capable of absorbing periodic shocks to freight demand.
If you’re running a clunker that desperately needs to be updated, you probably have few alternatives — and the used vehicle market isn’t nearly as risky or backlogged as the market for new vehicles. But there is clearly elevated market risk from diving into fleet expansion at this point in time.
While the precise future path of the freight market remains a subject of debate, it’s a safe conclusion that truck orders booked today will be delivered into very different economic conditions in the future and will bear witness to groundshift transformations in freight markets over the course of their operating lives.
All of which is to say, it might not be the best time to buy a truck.
Editor’s note: Aaron Terrazas is director of economic research at Convoy, a digital freight network. Before joining Convoy he was an economist at Zillow and the U.S. Treasury Department.
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