All we’ve heard about supply chains over the past year was about an ongoing boom. Record volumes and skyrocketing profits dominated the headlines.
Now, FreightWaves CEO Craig Fuller is arguing that all signs are pointing to a freight recession.
Fuller is the founder of FreightWaves, a top source of supply-chain news and data. His professional background before starting the website was in the trucking industry, and he knows supply chains inside and out.
On March 24, he began to sound the alarm about a coming freight recession. He wrote, “We think another sharp, painful downturn in the U.S. truckload market is imminent, and it could be as bad as 2019.”
What happened in 2019? Trucking capacity was oversupplied after strong growth in 2017 and the first half of 2018, which resulted in the price of trucking declining steeply. Nearly 800 trucking companies went out of business in the first three quarters of 2019, including Celadon, one of the biggest firms in the industry.
Fuller sees the market gearing up for a similar downturn soon. Trucking demand in March has been unusually weak, he wrote, and retail sales have been below expectations as well. Companies also responded to supply-chain concerns by holding more inventory than normal, so they won’t need to buy as much when demand cools off, he wrote.
Oversupply concerns are back as well. Fuller wrote:
Trucking has enjoyed the largest number of new entrants in its history over the past two years. New fleet registrations were up to 20,166 last month alone. This is unprecedented. The last peak was in August 2019; there were 9,511 new trucking fleets and that was in the middle of one of the weakest freight markets in history. New trucking registrations tend to lag market conditions, so we can expect new fleets to continue to enter the market, even after things soften. This will make the downturn that much worse.
Just because the sky is falling for trucking doesn’t necessarily mean the sky is falling for the economy overall. During the 2019 trucking recession, Barron’s pointed out that there had been twelve trucking recessions since 1972, and only six economy-wide recessions in that span. But the conventional wisdom among investors is that a trucking recession could be a leading indicator for an economy-wide recession. We don’t know whether the 2019 trucking recession would have led to an economy-wide recession because the pandemic caused a recession in early 2020 anyway.
Fuller expanded on his prediction in a March 31 article. He walked through the data on tender rejection, which is when a carrier turns down a shipment. If lots of carriers are rejecting shipments, it would indicate that demand is high relative to capacity. If they’re accepting every shipment that comes their way, that would indicate they could be struggling to find customers. The tender rejection rate has fallen significantly in the past few weeks, and prices have fallen as well. Fuller included notes he received from trucking executives of companies of all sizes confirming his suspicions about a weak market.
It’s tempting to say that demand is just returning to its normal pre-pandemic level, so everything will be fine. But writing on April 6, Fuller explained why that view is incorrect. Trucking is a very contestable market, which means it is relatively easy to enter and compete in. Given soaring demand for trucking, lots of new trucks entered the market in the past two years.
“The trucking market has experienced the highest number of new fleet startups in its history. The chart of new startup fleets could easily be confused with a meme stock,” Fuller wrote. They mostly had to buy used trucks because new trucks were in short supply. The price of a three-year-old truck increased from $69,000 in 2019 to $136,000 last month.
Plenty of these new entrants may be finding out soon that they bought at the top of the market. Not only that, they are also operating in an overall higher-cost environment than before. Diesel is much more expensive than pre-pandemic, and insurance and maintenance costs are up as well. Fuller did the math:
With an employee driver, plus a truck purchased in 2022, a new fleet entering the market would have operating cash requirements that are $0.72 per mile more than the same fleet in 2019. Therefore, if a fleet is paying out an additional $0.72 per mile in operating cash compared to pre-pandemic, it will have an incredibly difficult time surviving in a dropping spot rate environment.
Seventy-two cents might not sound like a lot, but trucking is a very low-profit industry. Fuller writes that during the best trucking market ever in 2021, “The operating ratio for dry van truckload carriers . . . ranged from 92 to 97. That means for every $100 of revenue the fleet generated, it generated an operating profit of just $3 to $8.” In an environment like that, an extra 72 cents per mile in costs amid falling revenue spells doom.
Trucking is an extremely volatile industry normally. The boom-bust cycle in the freight market usually takes about three years to play out, so since the last one was in 2019, we’re due. Markets have already priced in a freight recession, according to an analysis from Deutsche Bank. The Dow Jones Transportation Average, an industry index of transportation stocks, is down about 11 percent since it peaked on March 29, and the stock of J.B. Hunt, one of the largest trucking and intermodal companies in the U.S., is down 18 percent over the same span.
In a competitive market economy, events in an industry can turn from good to bad at the drop of a hat. We might be seeing that right now with trucking.