On a recent DAT Freight & Analytics show, we interviewed Tim Denoyers, Senior Analyst at ACT Research, to talk about the long-term outlook for the truckload sector. Here’s an excerpt from the interview.
Dean Croke (DC): Now that more definitive employment trends are emerging, how many jobs will the US trucking industry contract this year, and is there a chance we could see a shortfall of drivers this year?
Tim Denoyer (TD): This is a really key question right now because of how intertwined supply and demand really are and how the spot market isn’t as loose at the moment. The declines in employment that we are seeing could start pulling freight into the spot market gradually over the course of this year. So we’re certainly in what we would call a surplus now. We added a lot of capacity over the last couple of years, but in the first quarter of this year, the long-distance proportional part of the market declined by 8,700 jobs, and that decline in employment was about a 4% annualized rate, which is a pretty sharp contraction.
That’s probably going to get a little bit larger, given what’s happening with freight rates. You probably take about 50,000 jobs out of the market from this perspective alone. And this doesn’t capture owner-operators or private fleets, just for-hire fleets. And so there’s even greater capacity contraction happening. So we think the process of beginning to swing toward the driver shortage is happening even though it could happen later this year or early next year.
TD: New truck orders don’t relate directly to jobs but they are always a key topic that we report on a monthly basis. We think that new orders for Class 8 trucks will soft for several months, extending into the third quarter of this year, we think we’ll be at 10 to 20,000 units per month unit sort of level, the most recent number was around 12,000 new truck orders.
DC: Because you still got a lot of noise in the data from the hangover from the big surge in truck orders late last year, at what point do the year-over-year comps start to regain some of their meaning once that washes out?
TD: I think it’s going be a few months until they start regaining their meeting. The backlog is about six months long at this point. And so that’s shorter than it’s been in a few years. The backlog is about six months and so there are still a lot of orders in the backlog, and replacement demand for equipment is still really strong at the big fleets that are really well capitalized. Even at this point in the cycle, where they’re struggling, they’re still performing relatively well.
KA: I would suggest we’ve got another 3% or more to go regarding capacity reduction- is that how you view where we need to be to get back to the next cycle?
TD: I would say that 4% analyzing just the Q1 numbers. We’re halfway through Q2 at this point, and so we’ve probably taken out another quarter where contract rates will decline, so I think the capacity decline is probably more like 5% for this year.
KA: I aggregated the number of interstate carriers exiting the market and going back to last October, and it’s about 15,000 motor carriers net negative. This is still a rather small piece of the total capacity pool in the spot market so I think it’s something to remember we’re looking for very small changes on the margin to have rather large impacts on the market as a whole.
TD: I was at an investment conference in New York last week. The key question I kept getting was, so how can rates possibly bottom if we’re building a pretty peak production rate of new trucks.? And the answer comes back to our discussion a minute ago have a lot of that replaced with a new demand for replacement, and then we’ve had sort of a really unusual cycle from our supply chain perspective.
We do think, by the way, new truck production is going to start gradually ramping down give later this year in the fourth quarter as a result of those lower as older equipment is retired.