HERE’S WHERE ANY discussion of the current truck market should start: all mature markets exhibit a similar growth pattern. There is an underlying trend of slow trend growth in the flatbed market. Actual results cycle above and below the trend on shortrun conditions. As such, we saw a big dip in flatbed volumes in 2020.2 when governments shut down the economy in response to COVID-19 fears. In the same way, the surge in pent-up demand that followed those lockdowns caused the market to jump well above the trend line.
Pennsylvania’s February weather teaches us something important about such movements: Last Sunday, the temperature here in Cornwall, Pennsylvania, never got above 25 degrees F, 10 or more degrees below normal. It didn’t take googling Weather.com to predict that things would warm up the following week. Sure enough, I was hitting golf balls in 60-degree weather on Thursday. I was out there taking advantage of the warm spell because I knew such weather would not last in February. It’s Friday now, and my temperature gauge is reading 37 degrees, heading for 33 degrees by dinner time.
Brilliant forecasting, right? Of course not. Statisticians call this regressing to the mean; truckers call it getting back to normal.
Flatbed markets are due for some regressing—getting back to normal. That’s because the surge has taken flatbed volumes way above normal, just like that 60-degree weather in a Pennsylvania February. Roughly twice that achieved by a strong market. A 50-degree February day here in Cornwall provides comfortable conditions much like the trucking boom of early 2018. A 60-degree day is VERY comfortable, just like the recent earnings reports for trucking. Even a New York Ranger fan understands that the flatbed outlook for 2022 and 2023 depends on when the inevitable regression back to trend will start—and how steep it will be.
Has it started yet? Declines are normal after such peaks. In the same way, I didn’t expect the 20-degree increase I practice my golf in to be matched by a further 20-degree increase later in the week. 80 degrees in a Pennsylvania February? No way! Markets are the same. They are limited to how much they can perform above (or below) trend. Those trend measurements tell us profound things about the propensity of people to consume the things that move on flatbeds. It’s one thing to consume 10% more than normal. It’s entirely another thing to envision the nation doubling up on that historic increase. Conclusion? Flatbed metrics are NOT going to improve in 2022 except for seasonal influences.
That was last year. Where are we now? In early January, for four weeks it seemed the market might be headed back up toward its 2021 peak. However, the mid-February numbers suggest that the market is headed on a more moderate path. It remains quite high by historical standards but looks poised to take a path well below 2021. The fall from 2021 will be less however, even if the spring of 2022 remains near the level flatbeds now earn, and it will still be above the strong spring of 2018.
How to make sense of this in actual volumes? It depends on your perspective. If you take history as a guide, as I do, the first half of 2022 will be a very strong market. It’s starting strong and will have the normal spring surge to keep it strong. Although moderating, capacity tightness will only slowly decline as fleets grudgingly add capacity. The trucks will get loads at good prices compared to historical norms. If, alternately, you take 2021 as your guide, as many people will, 2022 will be surprising and disappointing. Just maintaining its current level will feel like failure. Volumes will be flat or perhaps down somewhat. After two years of steady increases, that will be disappointing—especially to people who have bet on higher volumes.
Same thing for prices? Here’s where the story gets complicated. There are three issues. The first is easy to handle. Prices trail capacity changes by two to four weeks (spot markets). Looking at the current data on flatbed spot prices, we see 2022 pricing still tracking above 2021. It is likely then that pricing will soon begin tracking with Market Demand Index (MDI), moving closer to the 2021 levels.
Understand the derivatives: I have talked before about derivatives, a concept that we learned about in calculus so long ago. Derivatives are all about rates of change. Prices track against capacity tightness, primarily a function of the rate of change in volume. If volumes surge as they have twice since June 2020, the industry gets behind in adding capacity. Capacity utilization gets tight; prices go up. That’s why you should look at capacity measures like MDI or other estimates of capacity utilization if you are studying pricing. A market growing in a gradual, orderly manner tends to have stable prices.
Here’s the point. It is likely that flatbed volumes will be relatively stable in 2022, and probably in 2023. That’s good because it means that volumes will stay well above normal. BUT, without further growth, the fleets will catch up to normal capacity levels. That process is clearly underway. The result will be lower levels of capacity utilization and MDI. A flat volume market will produce falling prices. Remember, the high prices we have are caused by extraordinary capacity tightness. If the tightness goes away, so do the high prices. It happened in 2018. These economics are why I am bearish on spot pricing in 2022 and 2023. So this is the second issue, althrough prices are related to volumes they move to a different dynamic.
Watch out for multipliers! This the third issue. The MDI is a good example of the multipliers that inhabit the truck market. Truckstop.com’s MDI methodology translates a small movement in tightness into a big movement in its MDI. A four-percentage-point move in capacity utilization (96%-100%) created an eight-fold increase in MDI. Get’s your attention, doesn’t it? Prices react the same way. They merely reflect cost changes when capacity utilization is in the 94-96% range, but go crazy if capacity utilization reaches 100% like it did last year. Volumes moved 10% above normal, prices moved 56% above normal. There’s the multiplier. Such volatility is important over the next few years. If capacity utilization falls as it should, prices will fall disproportionately. How far? Eventually, back to the historical trend. That translates to about $2.23 when the increase in inflation is factored in.
Back to Pennsylvania weather. Another way to say the same thing about pricing exposure is to remember the implications of the actual-verses-trend dynamics. History tells us that weather and prices always come back to the norm. 2017 and early 2018 had a big jump in pricing that regressed back to normal in just over a year. Truckers called that a recession. I suppose it felt like that to them. Statistically, it was just giving back the bonanza they had enjoyed for a year.
But what about the infrastructure bill? Some economists believe that we are entering an era of enhanced investment in infrastructure and structures, all strong drivers of flatbed volumes. There are two arguments for this, the first being that slow growth in investment since the 2008-2009 recession has created pent-up demand. Those economics are reflected in current investment, at a modest level above trend but not at the extraordinary levels for other economic indices. To this one adds a second argument, the $1 trillion federal infrastructure bill. That spending will have little effect in 2022 as most major infrastructure projects for this year have already been designed and committed to before the new funding becomes available. That trillion won’t hit the streets until 2023, and then will be spread across five years. Moreover, only about 15% of the money will go to flatbed markets. That will help, but mainly to hold flatbed volumes close to their current levels, not fundamentally increase them. We are still looking at a market considerably more modest than that of the last two years.
Can you be more specific about the next two years? Sure. I expect the spot market to remain strong through the spring, before beginning a regression toward normal in the summer. If the overall economy stays healthy, that regression will be gradual, causing slow erosion on volumes and a YOY pricing decline of about 5% by year’s end. That may sound disappointing, but it pails before the 61% pricing gains flatbed markets have enjoyed since 2020.2. 2023 will see a further 10% decline, delivering the market back to trend by the end of the year.
How about contract markets? By its nature, the contract market is less volatile in both volumes and price. That’s because supply chain managers protect their contract relationships from the worst of market fluctuations. It is also because the year-long span of most contracts insulates them from short-term price movements and adds a half-year lag behind spot price movements. One sees these differences from spot markets, on the one hand in the 68% higher peak in spot prices, and on the other hand, the fact that contract prices will be up significantly in 2022 on a full-year basis, by 14% (when spot prices will be flat to negative). The latter number is evidence of the lag in contract price changes. One concludes, then, that contract holders will be happy through the end of this year before dealing with significant decreases in pricing in 2023.
Anything else to consider? History tells us that trucking prices adjust downward most rapidly when the economy goes into recession. The runup we had from 2004 to 2008 collapsed when the economy tanked in the second half of 2008. Flatbed prices fell 27% in spot markets. Such market corrections make sense because shippers are quickly disabused of their worries about tight capacity and bid down prices, preying on the carrier fears. I bring this up because there are several current major risks of recession. I’ll cite five here.
- The overbuys from the boom in goods: Although a continuing boom in service consumption could keep the overall economy from recession, Americans have been buying goods at record rates since June 2020. You can see this in the overbuy index I calculate that has 2022 transport-heavy goods near record levels.When this index peaked in 2000 and 2007, recession followed.
- Fuel prices: Rapid changes in fuel prices are classically associated with recession. Every recession since 1970 has been associated with a spiking in oil prices, save for the special case in 1982 when Paul Volker killed the economy to control inflation. Oil prices are now almost three times what they were in early 2020, shifting 2% of consumer spending from other items to gasoline. That didn’t matter much in 2020 when consumers had federal checks coming in and had plenty of savings. It should count much more now, perhaps up to a 4% reduction in goods consumption.
- Political risk: Russia’s posturing and its designs on the Ukraine have oil markets worried. Russia, at 11%, is the fourth-largest oil producer in the globe as of 2020.1 Either military spill over onto oil production or sanctions would quickly spook oil traders just like the Iran/Iraq war fears spooked traders in 1980. Yes, 1981 markets figured out that their fears were unfounded. But the damage had been done.
- Stock Market: While stock pickers argue endlessly over how overpriced the current stock market is, the market is easily high enough to suffer a major correction. That’s important for consumer confidence and also for consumer liquidity. Between the retirement of the baby boomers and the greater reliance on 401(k) and other personal savings programs, incomes are increasingly tied to stock prices. If those prices fall, consumer spending will likely follow.
- Inflation: And finally, the big kahuna—our economy has become dependent on low interest rates. When lenders set interest rates, they adjust them according to inflation assumptions. If inflation is around 2%, as it has been for at least 10 years, then the lenders need some rate of return plus the 2% to offset the inflation. Consider the result of inflation on home mortgages, currently around 3.5%. The lenders get a net after-inflation rate of return of 1.5% plus the many government subsidies that help the housing market. Now, if the January 2022 inflation of 7.5% sticks, those same lenders have to charge 9% interest to earn the same after-inflation return. On a $300,000 home, that translates to an increase in interest expense from $875 per month to $2,250 per month. The same kind of economics would apply to any consumer or government loans. I’ll state it flatly. If the current run of inflation keeps going, we get recession, probably a biggie.
Sum this up please: Remember where I started this discussion. It is a constant in cyclical economics that a market at or near a peak is destined to decline. That puts the following limitations on the outlook for 2022 and 2023:
- Only a surprisingly strong economic performance will keep the market near its current peak for the next two years. Even if that occurs, it only means FLAT freight performance and declining prices. (A flat market allows recovery of capacity management.)
- The most likely case is a modestly growing economy in which consumers move back to their preference for service spending. Economists may be satisfied with that scenario, but truckers won’t be because goods spending will start its regression toward the longrun trend. Such an outcome means slowly declining volumes and falling prices. The infrastructure bill may be enough to forestall a dramatic fall for flatbed markets.
- The realization of several of the risks mentioned above could easily create the first real recession since 2009, after a record 13-year span of placid economics. Given the current peak conditions, a fall into recession would create trucking conditions much like those of 2008-2009.
“Always with the negative waves Moriarty!“2 Remember, I am just reminding you of the facts of cyclical economics. The truck market is up—so my forecasts are down. When the market inevitably softens (I think sooner than later), I will be the cockeyed optimist, just like I was when I forecasted the current capacity crunch in March of 2020 as governments were shutting down freight. I see my job as warning you that things could be changing soon.The conditions of this market urge you strongly to prepare for change.
What about the other trucking sectors? You have probably already figured out that my advice here generally applies to the whole market. I’ll be commenting on the other sectors later this year. In the meantime, assume that my advice then will be quite similar to what I have said in this piece.