Cyclical Heavy-Truck Industry Soars to Cloud 9

“It’s a bizarre occurrence and it will not be resolved soon.”

Orders for Class 8 trucks in July jumped 187% from a year ago to 52,250 units, the highest number of monthly orders ever. These are the heavy trucks that haul a significant part of the goods-based economy across the US. For the first seven months this year, order volume of Class 8 trucks doubled from the same period a year ago:

FTR Transportation Intelligence, which provided the data, explained: “Fleets are desperate to get new trucks, but supply is limited. Because fleets are frustrated by the current situation and are uncertain when they can receive trucks, they are placing a large volume of orders in hopes of getting some deliveries at some point in the future.”

The chart below shows the percentage change of Class 8 orders compared to the same month a year earlier. What a change from the transportation recession in 2015 and 2016 when orders plunged, and truck and engine makers reacted with layoff!. Orders began to rise again in early 2017 on a year-over-year basis and haven’t looked back since:

“In essence, there is a truck shortage,” FTR said. “Freight growth is robust and industry capacity is extremely tight. OEMs [original equipment makers such as Paccar] have been hindered because numerous parts and component suppliers have not been able to produce and deliver on time.”

But it’s not the new normal. It’s transitory, to use Fed speak. FTR VP of commercial vehicles, Don Ake, explained why:

“This is a unique situation where strong demand is meeting limited supply.  Prices can’t rise enough to alleviate the situation.  Therefore, the market is responding by placing an immense number of orders into the backlog.  Fleets are reserving places in line, so they can get the maximum number of trucks in the future.

It is a bizarre occurrence and it will not be resolved soon.  Conditions may be abnormal, but they are abnormally good.”

The transportation industry, and particularly trucking, is highly cyclical. The above charts along with Ake’s comments show why: When demand for shipments surges – as it has been doing for over a year since the transportation recession that had occurred even while the overall economy was being kept afloat by the service sector – trucking companies get very confident, and they want to make hay while the sun shines. So they want to expand capacity precisely when everyone in the same business wants to expand their capacity.

So, orders for Class 8 trucks skyrocket, out of the dumpster. Manufacturers, after having laid off workers and shut down shifts, are scrambling to get them back. But because the backlog is growing, and orders are not being filled quickly, trucking companies order even more, hoping to get some units, and this inflates orders further and strains manufacturing capacity all the way up the supply chain.

Then, as manufacturers and their supply chains catch up, these orders get delivered. And trucking capacity soars. And by that time, demand for transportation in the goods-based portion of the economy, which is also cyclical, tends to level off, and the cycle starts all over again. But for now, let the good times roll.

Demand for shipping has been very strong across all modes of transportation. Freight shipment volume by truck, rail, air, and barge jumped 7.2% compared to a year ago, and the total amount spent on freight by all modes of transportation jumped 16%. Read…  What’s Going on in Trucking and Rail?

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  23 comments for “Cyclical Heavy-Truck Industry Soars to Cloud 9

  1. Jack P Lifton says:

    This completely explains why there was interest in Tesla’s/Musk’s fantasy long haul trucks in the recent past. Any truck is better than no truck, and if the delivery units are not to spec the order cancels automatically, so the risk is only in the “deposit” if and only if it is non refundable.

  2. HB Guy says:

    Apart from a “strong economy”, many of the increased orders are likely due to the immediate expensing provision of the 2017 tax cuts, which lasts for 5 years. The Treasury and IRS released the final guidelines yesterday.

  3. FDR Liberal says:

    How much of the increased in volume in shipments is due to vendors ordering input components, intermediate and finished goods to get ahead of Trump’s tariffs?

  4. Winston says:

    In the percent change bar graph, “Transportation Recession” should be changed to “‘What anti-business crap is this community organizer going to come up with next?’ recession” Note the spikes in November 2017 and January 2018. What happened then? It’s called “business optimism” due to a business friendly POTUS.

  5. buzz says:

    Wolf. My Nephew works for a towing Company just outside Phila in PA. . He does medium haul for all kinds of companies flat bed wise. you call we haul. . from MI to VA to New England. One thing we both where talking about was the drop to almost zero in construction equipment and material they have been hauling this summer. . Been busy with everything else

    • Wolf Richter says:

      Thanks. Interesting.

    • Cagney says:

      Construction booming here in so cal. Especially commercial industrial. The excitement level is on par with an ant colony swarming a piece of discarded orange. The foresight is similarly matched.

  6. Rob W says:

    I am in the process of placing a order on a new Peterbilt, delivery time will be late March 2019, usually it is around 90 days for me to receive my trucks. I am being extremely cautious in purchasing new equipment, my gut feeling is we will be slowing down soon.

  7. Kasadour says:

    Great. More trucks on the highway. You can’t even drive from Portland to Eugene anymore- bumper to bumper traffic any given time of day, even late hours, and too many trucks.

  8. Wisdom Seeker says:

    Question: what is all the new freight, that is maxing out current rail and trucking capacity, and where is it going?

    In rail the growth seems to be in intermodal, which is having a record year, but what is getting shipped?

    In construction, main growth/bubble area seems to be residential construction, which is in Bubble 2.0. Where are the new bubble areas? (sounds like “not Philly” for starters)

    The shale industry seems to be growing again, so that’s part of it too.

    Is there other industrial or commercial traffic that is pushing freight loads up?

  9. van_down_by_river says:

    The quotation in the article indicates that this demand is a temporary blip but it is not clear to me why shipping companies placing large orders in the hope of getting more orders filled immediately indicates the situation is temporary. Americans must be spending money like made, I must be the last individual in the country pushed to austerity be circumstance.

    It would appear Bernanke really did make almost everyone wealthy and they can afford to purchase endless quantities of imported products and the latest $1000 i-phone, doesn’t this point to a robust consumer economy that will keep demand for big rigs strong for years to come. If this is the case Paccar stock might be a good value.

    • Maximus Minimus says:

      The answer came in yesterday’s article: limitless growth of credit. You don’s own anything, the bank does. It works marvelously on the way up, it’s a disaster on the way down.

  10. Tom says:

    My gut feeling tells me there will be a glut of foreclosed trucks going begging in three yr. or less.

  11. LouisDeLaSmart says:

    Everyone is a general after the battle, but here are my two cents.
    Manufacturing today operates on the principle of being “lean”. This means you hire “just enough”, have a utilization rate of >90%, and operate on the logic of capacity needs averaged over the next 5-6 years.
    First they will increase their utilization to maximum outup (work 24/7 with limited and only absolutely necessary repairs). And they will hire some temporary workers, manufacturing technicians.
    Second, they identify investment cost ($) vs. output (number of items) vs. lead time (time per unit needed to get it into production) and try to get those bottlenecks unclogged that give immediate results. All long term plans are shot down by management to avoid any “unnecessary spending”.
    Third, they will just keep working like crazy until the surge stops (something like a meat grinder faze).
    You should be aware, it’s a linear supply chain. It doesn’t matter if half the suppliers increase their capacity, one is enough to stop the system.
    So, if this is temporary, we will see longer que times, eventually settling back to the initial baseline.
    How did nobody see this? I still don’t get it…

  12. roddy6667 says:

    The higher it peaks, the lower it will crash.

  13. Peter in Vancouver says:

    Since about 2011 new Class 8 diesel rigs have been required to use “Blue Tech,” including special exhaust fluid additives (urea and water), to reduce emissions. Allegedly it also reduces mileage. Thus many truck purchasers have been taking advantage of a loophole that is now closing: buy a rolling chassis instead with an empty engine compartment, rebuild an older non-blue engine, toss that into the new engineless chassis, and save fuel. For several years, new Class 8 truck sales seemed low, but with the rolling chassis loophole closing, the current sales figures are skyrocketing. Much ado about fudging.

    • B Wilds says:

      Interesting possibility!
      This jump in orders is indeed a “bizarre occurrence” considering what we hear about a shortage of drivers and the industry going to driver-less trucks on our roadways within just a few years.
      Logic would dictate holding off purchases until further clarification of where this market is going takes place.

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