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Capacity is still being added to the market long after it has cooled


Chart of the Week: New Truck Orders – Class 8, Used Truck Prices – 3 Year Old Models (SONAR: ORDERS.CL8, UT3.USA)

Used truck prices for 3-year old models remain elevated as new orders plummet. (IMAGE: SONAR ORDERS.CL8, UT3.USA )

The question about how much capacity is being added or taken away from the market keeps being asked as volumes have not fallen in proportion to the perceived increase in capacity. According to FreightWaves Outbound Tender Volume Index, volumes are not far off 2018 levels on the contracted market, averaging only 2.27% off last year’s March. DAT is also reporting similar findings on the spot market, and spot rates are over $0.30 per mile lower on average this March versus 2018, not including fuel. Comparing new Class 8 truck orders to used truck pricing provides some insight into why there is an increasing discrepancy between volume level movement and capacity.

Rates drop for one reason, supply (capacity) exceeds demand (freight). It isn’t as simple as adding a bunch of trucks to the U.S. and watching the rates fall. Trucks must be in the right location willing to move to the desired destination at an expected service standard. If carriers know where to position their equipment and have consistent shipment volumes, they will be able to operate efficiently, lowering their costs in the process and subsequently spot market rates will drop. That is currently one of the reasons we are seeing market rates fall.

The other reason spot rates are falling is due to the additional capacity flooding the space. New truck orders for Class 8 vehicles were up 76% in 2018 versus 2017. The incentive for carriers to purchase new equipment was elevated last year due to temporary changes in tax codes for certain capital expenditures and a hot freight market generating higher margins.

The increasing revenues and margins subsequently lead to increasing employment levels. The trucking sector’s employment levels grew 3.07% last year as opposed to 1.39% in 2017 according to the Bureau of Labor Statistics. This number is not limited to drivers, but one can safely assume driver counts increased as the trucking companies grew, drivers being their main product.

There is also data from the Truckload Carriers Association that backs this claim as their members are reporting driver to non-driver ratios increasing slightly from December of 2017 to December of 2018 from 5.41 to 5.44.

Smaller fleets and owner operator growth is more reflected in used truck prices as they typically lack the funds or credit to make new vehicle purchases. It also makes financial sense to let the larger carriers take the initial depreciation off the top while they are building their business.

The fact that prices for three-year old used trucks have stayed elevated after the market topped is an indication that there are still many smaller carriers and owner operators expanding their fleets and entering the market. With new orders taking six to nine months on average to be completed, the smaller carriers and owner operators are just now getting a chance to purchase some of the used models.

Used truck prices for three-year old models are averaging $69,337 in February, the highest value since August of 2015, up 17.2% year-over-year. The bottom line is growth and contraction cycles take much longer to move than general market conditions. There is still capacity being added to the market as the momentum from late 2017 and early 2018 has carried into early 2019, long after the market has shifted.

About Indices presented in this article

(SONAR: ORDERS.CL8, UT3.USA) New Truck Orders – Class 8, – Count of new truck orders in the U.S. by month organized by class of truck.

Used Truck Prices – 3 year old models – The average sell price for sold 3 year old class 8 truck models.

About 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 the Sultan of SONAR will post a chart, along with commentary live on the front-page. After that, the Chart of the Week will be archived on 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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Zach Strickland, FW Market Expert & Market Analyst

Zach Strickland, the “Sultan of SONAR,” curates the weekly market update. Zach is also one of FreightWaves’ Market Experts. With a degree in Finance, Strickland spent the early part of his career in banking before transitioning to transportation in various roles and segments, such as truckload and LTL. He has over 13 years of transportation experience, specializing in data, pricing, and analytics.