Rachel Premack of FreightWaves has a new piece about the prices of used semi-trucks. After a year and a half of soaring used-truck prices, the market is cooling off. That’s a necessary, though not sufficient, condition for a freight recession.
The cause for the soaring prices was a combination of increased demand and reduced supply. With freight rates going through the roof, many new entrants into the trucking market wanted to purchase trucks to capture the outsize profits. That process is exactly what we’d expect to see in a market with low barriers to entry, which trucking is. The largest single expense is buying a truck, and with low interest rates, financing was easy.
The increased demand coincided with a reduction in the supply of new trucks because of the computer-chip shortage and other Covid-related disruptions. Buyers who may have wanted new trucks had to go into the used-truck market instead, further increasing prices.
The way people purchased used trucks changed during the pandemic as well. Used trucks are usually purchased at a dealership or at auction. Premack writes:
Trucks are pricier at a dealership, but you’ll know what you’re buying has been repaired and has warranties. Usually, the only people at truck auctions are dealers who are trying to buy lots of trucks to sell to trucking companies.
That changed in 2021. Folks who own a trucking company decided to go to auctions themselves. Numbers from auctioneer Taylor & Martin lined up with that. [Taylor & Martin president Stacy] Tracy said Taylor & Martin’s weekly auctions attracted around 600 to 700 people before the pandemic, with a couple hundred of those folks attending virtually. But after that, the number attending shot up to 1,200 to 1,600. Most were virtual.
Skipping the dealership and going straight to auctions wasn’t all about saving money, [J.D. Power analyst Chris] Visser said. There was just so much demand for big rigs and so little supply. As a result of all of that interest, the price to buy a used truck at an auction now matches the price to buy one at a dealership.
All told, used trucks were selling for double, sometimes triple, the price they were selling for the year before.
That booming market is over. “Used trucks sold at auctions in the second quarter of 2022 are already 20% cheaper than those sold during auctions in this year’s first quarter,” Premack writes. A lot of those new market entrants who made big profits last year will go out of business this year. As shipper demand declines, freight rates decline, and operating costs — especially diesel — are much higher now than they were last year. The assumptions that made entering the trucking market last year a smart business move no longer hold.
Trucking could follow the same pattern that led to the last freight recession in 2019: softening demand for trucking rendering an oversupply of trucks and a crashing freight price that sends trucking companies into bankruptcy. One of the largest trucking companies in the country, Celadon, went out of business in 2019, along with about 800 others.
Trucking recessions can be leading indicators for the rest of the economy, but trucking is much more prone to booms and busts than the economy at large. While trucking recessions don’t always cause economy-wide recessions, four of the six most recent economy-wide recessions (before the pandemic recession) were preceded by trucking recessions.