Tractor demand no longer necessarily a gauge for market health

Chart of the Week: ACT Research Equipment Orders – Class 8  SONAR: ORDERS.CL8

Class 8 truck orders remained unseasonably strong through the first few months of 2024, outperforming last February by over 20%, according to ACT Research. Freight-hauling semi trucks typically dominate this category and have been a good indicator of industry health, but like many indicators, this value’s implications have changed.

Ask transportation service providers the state of the national freight market, and they will all say the same thing: It is awful. National truckload carriers are already tempering expectations for investors in Q1.

Long-term contract rates for dry van truckload freight continue to deflate, showing over 7% lower year over year in early March. In other words, there is very little reason to expect this category of truck orders to show signs of strengthening.

ACT offers up a few explanations, stating that private fleet growth and some level of increased vocational spending thanks to government spending on infrastructure and nearshoring efforts are propping up the order levels.

This makes sense, seeing as how the domestic freight market has been fractured since the pandemic began in 2020.

Looking at rejection rates by trailer type, the flatbed market (FOTRI) had an entirely different trajectory from refrigerated (ROTRI) and dry van (VOTRI). Tender rejection rates for flatbed took a while to increase, peaking after refrigerated and van started to plummet. 

This was largely due to the type of freight being consumer goods. Flatbed freight skews toward industrial and construction activity, which was throttled by supply chain and production limitations in 2020-21.

The flatbed market has been healthier after the pandemic because it got less attention and fewer new entrants during that period. Flatbed’s increasing national rejection rate supports the concept that heavy equipment is in higher demand around vocational efforts as well as in this truckload segment.

The less-than-truckload market has also had a different experience from the broader trucking market, thanks in part to the failure last year of the nation’s third-largest carrier, Yellow.

LTL contract rates (LCWT1) tend to follow dry van truckload with a lag of six to nine months. Just as LTL contracts were showing signs of weakening last spring, the news broke around Yellow’s troubles with the Teamsters. This appeared to help keep rates elevated as shippers scrambled to diversify their provider base away from the struggling carrier.

While the LTL space has not been completely inoculated against the overall conditions of the trucking market, it definitely got a strong buffer and was able to maintain more pricing discipline than truckload providers. Todd Maiden recently reported on ArcBest as a shining example of this effect.

Taking a sampling of publicly traded truckload carriers, most posted annual drops in average truck counts. 

The two exceptions from this sample are related to acquisitions. Knight-Swift acquired U.S. Xpress, and Schneider acquired M&M Transport Services. Neither grew its fleet outside of consolidation.

Point being, the narrative that Class 8 order growth is a combination of continued fleet replenishment and investment outside the for-hire truckload environment has strong support. 

A better indicator of industry health is the average used truck price, seen above for 3-year-old models (UT3) reported by ACT Research. Prices have plummeted behind the spot market collapse in 2022 and have been dropping since. This data point has its biases as well but seems better suited than new orders to explain the current market.

As has been the story with numerous high-level traditional macroeconomic indicators, Class 8 order volume’s relationship with and ability to explain its environment has changed. Understanding value beyond traditional thought has become increasingly important.

About the Chart of the Week

The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real time. Each week a Market Expert will post a chart, along with commentary, live on the front page. After that, the Chart of the Week will be archived on FreightWaves.com for future reference.

SONAR aggregates data from hundreds of sources, presenting the data in charts and maps and providing commentary on what freight market experts want to know about the industry in real time.

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Source: freightwaves - Tractor demand no longer necessarily a gauge for market health
Editor: Zach Strickland, FW Market Expert & Market Analyst