Podcast Summary
Freight Industry Faces Another Downturn: A 'Trucking Bloodbath 2.0': Experts refer to the current freight industry downturn as 'Trucking Bloodbath 2.0.' Despite some similarities to the 2019 downturn, this one is more consumer-driven and could present opportunities for investors.
The freight industry is currently experiencing a significant downturn, which some experts are referring to as a "trucking bloodbath 2.0." This is a cyclical industry that saw a previous downturn in 2019 due to manufacturing slowdowns caused by tariffs. However, the current situation is different, as it's more consumer-driven. The data shows that freight costs are decreasing, and indices like the outbound tender rejection index and contract load accepted volume index reflect a surplus of capacity. Principal Asset Management, a real estate manager, leverages local insights and global expertise to identify compelling investing opportunities. The current situation in the freight industry could present opportunities for investors. The bullwhip effect, where small changes in customer demand ripple through the supply chain, has led to a reversal of some of the initial pandemic-related supply chain disruptions. Companies are seeing easing in freight costs, but it remains to be seen how much of this is specific to the trucking industry or indicative of a broader economic trend.
Trucking industry's capacity-constrained market leads to boom-and-bust cycles: From 2018 to present, the trucking industry experienced a 28% increase in dispatchable capacities and an 8% surge in the dispatch market, causing a historic low tender rejection index of 2.7% in 2022, indicating a market flooded with capacity.
The trucking industry experiences boom-and-bust cycles due to the imbalance between supply and demand. This is because trucking is a capacity-constrained market, and providers often overcommit to capacity, leading to a surge in new entrants during hot markets. However, as demand declines, the market becomes flooded with excess capacity, resulting in low rejection rates and increased competition. For instance, from 2018 to present, the industry saw a 28% increase in dispatchable capacities and an 8% surge in the dispatch market. The tender rejection index, which measures the percent of freight that is rejected, dropped from 30% in 2020 to a historic low of 2.7% in 2022, indicating a market flooded with capacity. The industry's cyclical nature is important to understand, as it can lead to significant opportunities and challenges for those involved.
New Entrepreneurs in Trucking Industry: Many new entrants faced revocations due to market downturn, while large fleets expand and hire. Driver population remains the main capacity constraint.
The trucking industry has seen a surge in new entrepreneurs entering the market during the peak cycle, driven by high earnings potential and ease of access to freight. However, many of these new entrants bought trucks at the market top and were unprepared for the downturn, leading to a large number of small fleet revocations. At the same time, large fleets are rapidly expanding and hiring, creating a shifting market dynamic. Despite this, the driver population remains the main capacity constraint, and truck manufacturers can only produce trucks based on demand.
Trucking industry struggles: driver shortage and economic factors: The driver shortage led many drivers to leave large fleets and become owner-operators, while economic conditions impacted trucking demand. Smaller companies faced challenges growing, while larger ones increased market share. Freight rates decreased significantly and operating costs increased, resulting in industry-wide struggles.
The trucking industry's current state is a result of both general economic factors and industry-specific issues. The driver shortage, which began in late 2020 and continued through 2022, led many drivers to leave large fleets and become owner-operators. This created a situation where smaller companies struggled to grow, while larger ones were able to increase market share. Additionally, freight rates have decreased significantly since their peak, with operating costs for trucking companies increasing as well. Today, demand for trucking services is approximately at 2019 levels, meaning the industry's struggles are not solely due to a downturn in the economy. However, as a trucking industry closely tied to goods consumption, economic conditions do impact trucking demand.
Trucking industry's slowdown signals broader economic challenges: The trucking industry's freight recession in early 2022 suggests a continuing slowdown in the US goods economy, potentially impacting broader economic indicators.
The trucking industry, which represents approximately 40% of the goods economy, is experiencing a slowdown that could indicate broader economic challenges. Despite the return of volumes to pre-pandemic levels, the surge in capacity and costs has resulted in insufficient freight. This trend was evident in the freight recession reported in March 2021, which preceded the retail sector's admission of excess inventory by several weeks. The weakness is particularly noticeable in industries exposed to consumer demand, with the exception of automotive. The packaging industry, for instance, has shown a close correlation with trucking cycles. While there were signs of recovery in January 2022, the situation worsened in February, March, and April. This high-frequency data, which leads traditional economic indicators by about six months, suggests that the US goods economy is continuing to slow down, with potential negative implications for broader economic indicators.
Unexpectedly high volumes in January 2023 for trucking and packaging industries: Retailers' excess inventory and weather disruptions impacting barge shipping cause unexpectedly high volumes in January 2023 for trucking and packaging industries. Tender rejection data remains stable, indicating no clear shift in the market.
The trucking and packaging industries have experienced unexpectedly high volumes in January 2023, which is typically a slow month. This development is attributed to retailers having excess inventory and disruptions caused by floods and extreme weather conditions, such as high Mississippi river levels, which impact barge shipping. The uncertainty surrounding these factors and their impact on the broader economy has left some questioning the severity and duration of the current market conditions. The tender rejection data, which reflects orders from large retailers and manufacturers, is considered a high-frequency indicator that could provide insights into potential changes in capacity and market conditions. However, at present, there are no clear signs of a shift in the market, as volume continues to increase and tender rejection data remains stable.
Excess trucking capacity causing drivers, smaller fleets to leave market: The trucking industry's excess capacity, low rates, increasing regulations, and high costs for parts, insurance, and maintenance are causing many drivers and smaller fleets to exit the market, potentially leading to another downturn in volume.
The trucking industry is currently facing a significant surplus of capacity, which was added during the COVID-19 pandemic and is taking a long time to evaporate. This excess capacity, combined with decreasing rates and increasing costs, is causing many drivers and smaller fleets to leave the market. The situation is reminiscent of the 2008-2009 financial crisis, and some experts believe it could even be worse due to the high cost of parts and accessibility issues. The economy's stability, particularly in terms of college loan and student financial aid payments, could also impact the freight market and lead to another downturn in volume. Ultimately, the industry needs to reduce capacity for the market to come back into balance, and the main reasons for leaving include low rates, increasing regulations, and high costs for parts, insurance, and maintenance.
Trucking industry facing financial challenges with increasing costs and precarious financial position: The trucking industry is experiencing increased costs, a mechanic shortage, and lower profitability, leading to a precarious financial position for many companies. Freight brokers, with higher returns on capital and no asset ownership, are less vulnerable.
The trucking industry is facing unprecedented challenges, with operating costs, particularly for diesel trucks, increasing by 30% since 2019. This is due to several factors, including a mechanic shortage, higher capital costs, and lower profitability. These issues have put many trucking companies in a precarious financial position, making it difficult for them to pay their debts and service their equipment. While there have been some bankruptcies, we have not yet seen a large-scale industry collapse. Additionally, the freight brokerage industry, which was a small cottage industry in 2009, has seen significant growth and now commands a larger market share. Freight brokers, who have one of the highest returns on capital in any industry, are not as vulnerable to financial instability as trucking companies due to their lack of asset ownership.
Freight brokers act as intermediaries between shippers and carriers: Freight brokers earn profits by matching shippers with available truck drivers and charging the difference between the bid and the price paid to the driver, despite low transaction volume and decreasing market conditions.
Freight brokers operate in an environment that resembles a trading floor, with high spreads between spot and contract rates, but low transaction volume due to shippers preferring to work directly with asset-based carriers. Freight brokers make their profits by acting as intermediaries, matching shippers with available truck drivers and earning the difference between the bid and the price they pay the driver. Historically, the freight broker industry has attracted talent from traditional trading floors, following the successful Chicago model of separating shippers and carriers and acting as intermediaries. However, the current market conditions have led to a decrease in volume for freight brokers, despite the high spreads.
Fraud in Freight Brokerage: A Growing Concern: The freight brokerage industry offers high margins but faces challenges like load board fraud and double brokering. Stay informed and take measures to mitigate risks.
The freight brokerage industry, which has seen significant growth and transformation since its inception, presents lucrative opportunities with high margins. However, it's important to note that the industry is dominated by a "bro culture" and has its challenges, such as load board fraud. This issue arises due to the lack of regulation in who can register on load boards, leading to the proliferation of illegitimate trucking companies. These companies can defraud brokers by accepting fuel advances and then disappearing, leaving the real broker out of pocket. Another emerging form of fraud is double brokering, where the fake broker brokers the load to another broker, creating a chain of custody issue. As the industry continues to evolve with the increasing use of technology, it's crucial to stay informed and take measures to mitigate these risks.
Fighting Freight Brokerage Fraud in Logistics: Despite the challenges, stricter regulations and increased oversight from load board managers could help mitigate freight brokerage fraud in logistics, but may face opposition due to industry deregulation.
Freight brokerage fraud, facilitated by AI technology, is a growing problem in the logistics industry, particularly in the form of load board fraud. This issue is difficult to regulate due to its transnational nature and the small dollar values involved. The lack of oversight and understanding of the complexities of the industry by authorities further enables this fraudulent activity. The cyclical nature of the trucking industry, driven by the ease of entering the market, exacerbates the problem. To reduce the impact of this issue, stricter regulations on opening new trucking companies and increased oversight from load board managers could help mitigate the boom-and-bust cycle. However, these solutions may face opposition due to the deregulated nature of the industry.
Trucking industry facing economic downturn, reminiscent of 2008 crisis: The trucking industry's cyclical inflation and low barriers for entry amplify economic downturns, with potential for increased bankruptcies due to supply chain disruptions and real economy roots.
The trucking industry is experiencing cyclical inflation and low barriers for entry, leading to magnified economic downturns. Despite some departures from the industry, the impact of the slowdown in volume and demand is real and reminiscent of the 2008-2009 economic crisis. The bullwhip effect, where supply chain disruptions lead to larger demand fluctuations, further exacerbates the situation. While the industry may not be entirely indicative of the broader economy, the real economy roots of the current slowdown cannot be ignored. The potential for more carriers to go bankrupt remains a concern.
