ECONOMIC UPDATE
Growing Pains Continue – Q1 ‘2022 In this column months ago, we predicted, “While the recovery from this self-induced economic shut down will have plenty of challenges, just as all economic recoveries do; and the rate of recovery will be very different in some segments of the economy, as well as very different for individual companies in each industry; the strength of the overall recovery will be far faster and far more robust than anticipated. Certainly, there will be segments of the economy and individual companies, that were previously healthy, which will be left behind and become the buggy whip’ manufacturers of the 2020’s. There are also many industries and individual companies, that were already in a state of decline, whose demise will happen more quickly than it otherwise would. In turn, the survivors will thrive as few competitors remain in many industries, and entire new industries will emerge and create prosperity in areas that did not exist in 2019.”
LOOK AT THE CAUSE, NOT THE SYMPTOM We remain convinced that our very bullish thesis is correct (an outline is at the end of this article). However, continues to be a cacophony of reports, coming out of almost every media source, filled with warnings about what we should be worried about – first it was the Delta variant and then the Omicron variant, government spending and debt, Federal Reserve policy, inflation, supply chain shortages… Each and every one of the concerns reflect an economy that is swelling with prosperity, as demand grows faster than supply, and productivity surges at record high rates. Every time we hear about a concern, or a new reason to worry, we look for the underlying cause. Every time we do, we see economic expansion, not contraction; we also see markets doing what they do with incredible efficiency.
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IOWA TRUCKING LIFELINER
by which demand exceeds capacity suggests that pricing will be extraordinarily strong for both spot and contract rates throughout 2022. That said, we expect pricing power to remain stronger and expand for a longer period because demand growth will be outsized, and many of the demand drivers are also offering jobs to potential drivers. These jobs pay well and, in many cases, offer better ‘quality of life.’ As a result, trucking will struggle to add capacity. This will be especially true in reefer and flatbed.
DONALD BROUGHTON
Managing Partner, Broughton Capital LLC
DEMAND EXCEEDS CAPACITY IN ALL MODES OF TRUCKING – Load posting in the spot market has steadily increased. The number of loads posted in all modes in 4Q ’20 was 1.6X 4Q ’17 and 1.8X 4Q ’18 (the two previous peaks). The number of loads posted in all modes in 4Q ’21 was 1.5X 4Q ’20 and the full year of ’21 was 1.9X the full year of ’18. In recent weeks, it has remained unseasonably strong and is now >8.5X the levels hit at the bottom in 2020. We are going to assume that if you are reading this article, you already know demand in trucking is strong - In all three modes of truckload trucking, the amount
WE EXPECT PRICING POWER TO REMAIN STRONGER AND EXPAND FOR A LONGER PERIOD BECAUSE DEMAND GROWTH WILL BE OUTSIZED, AND MANY OF THE DEMAND DRIVERS ARE ALSO OFFERING JOBS TO POTENTIAL DRIVERS.
DRY VAN - demand is being driven by strong consumer spending and the explosion in e-commerce. We expect the strength in consumer spending to continue as new household formation has reached a frenetic pace and the last 18 months of housing starts have hit at levels not seen since 2006 (before the 2008 housing crash). While it initially drives strength in demand for Flatbed section, for several years after a house is completed it drives demand for Dry Van. Purchasing a new house is only the first step for a young couple. Almost a decade of spending follows the house purchase, as they make the house their home, and most of those goods are delivered by Dry Van. E-commerce plays an equally powerful role - distribution centers are not the traditional balanced model which Walmart perfected (i.e., homogenous loads inbound are matched at a ratio of 1 to 1 with outbound loads of mixed goods that are exactly what each store needs). Outbound loads fully utilize each trailer’s capacity and depending on the retailer and the season, may weigh out before they cube out. In the land of e-commerce fulfillment, inbound loads are less optimized (goods mixed to meet immediate and volatile demand). After
