Never Repeats Itself, but it Does Often Rhyme”

There is not a single person working in our industry who doesn’t know, “Trucking is a cyclical business.” There are periods when it is very prosperous, and there are periods when it is tough to merely survive. As multiple cycles of experience pile up over the years of anyone’s career, it becomes increasingly easier to see the patterns which repeat themselves, cycle after cycle. It also often becomes ever more tempting to only see the similarities of the cycles as they come and go, and not take the time to figure out what is different in the current cycle than previous cycles. When industry veterans get blindsided late in their career, this is often the reason. And, “I should have seen that coming” is often their refrain.

WHAT STAYS THE SAME?

How marketplaces work, and how market participants behave, does not change. They are a reflection of us, the human animal. We are full of greed and full of fear, and markets soar and then crash, as a result. Yes, more than 80% of the cycle is the same. But, not all of it is the same. Understanding what is different separates people into two groups: those who beat the cycle, and those who get beaten by the cycle.

WHAT HAS CHANGED?

The Speed and Efficiency of Markets

Never before have markets reacted and adjusted as quickly as they do today. As more sophisticated technology is used by buyers and sellers of all sizes, significant increases in information about supply and demand have become available to everyone. Adjustments such as increases/decreases in price that used to take weeks or months, now happen daily or even hourly. Just as this is true for those of us in the trucking industry, it is also true for the producers of the products that need to be shipped. The net result is that at times markets seem more volatile because the speed at which the market can swing has never been faster.

As the use of technology and the capabilities of that technology continue to grow, so will the speed at which markets react. Those who continue to adopt new technologies and position themselves to quickly adapt to changing marketplace conditions will thrive; those who do not, will not survive.

The Demand for Each Mode. Over the coming decade, onshoring will drive incremental demand for all modes. Beyond that, the underlying reasons are different for each mode, but the rate at which demand will grow for each will significantly surpass previous periods. Those waiting for large cataclysmic contractions will get left behind. The thesis for each mode is as follows:

Dry Van - demand will continue to be driven by consumer spending and new household formation. While the rate of growth in consumer spending has slowed, it had to slow from the frenetic pace it reached, it will continue to grow in 2023 as consumer income continues to grow. As demand for labor continues to exceed the supply of workers, wages and consumer income will continue to grow. New household formation has also slowed. Similar to consumer spending, it had reached a frenetic pace (housing starts hit levels not seen since 2006, before the 2008 housing crash) that was impossible to maintain. Higher mortgage rates are putting pressure on new household formation right now, but inflation will trend lower throughout 2023 and as it does mortgage rates will decline and new household formation will reaccelerate.

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. Young couples don’t buy houses because mortgage rates are low; they buy them because they need a place for their growing family to live.

In the first year after buying a new home, consumers are >2 times more likely to buy a new car.

Reefer - An entirely new driver of incremental demand has been created.

• The pandemic and quarantines forced an ever larger number of people to learn / start to cook, or expand the types of things they cooked and increase the frequency (number of meals per day, as well as the number of days per week) they cooked. The well-established trend toward healthier menus with less processed food or ingredients was accelerated as people found the time, made the changes, and discovered the food tasted better. Volumes of foodstuffs in what are known as ‘the perimeter of the grocery,’ have seen steady increases in demand since March ’20, while the center aisles of the grocery have seen demand fall or remain flat. Reefer tends to move the perimeter, while dry van tends to move the center of the grocery. We see no reason for this trend to reflex or reverse itself.

• As ‘on-demand’ restaurant delivery services proved themselves to be a viable alternative, several things happened. The delivery companies opportunistically and dramatically expanded their workforces; consumers expanded their view of food delivery beyond pizza and Chinese; and restaurants focused on delivery services provided by anyone (including customer pick-up) as a lifeline that would allow them to survive. While delivery services expanded to even include fast-food restaurants, which tend to use much more processed food, the vast preponderance of growth in this channel came from restaurants using fresh or frozen ingredients. For each meal shifted, from processed food or one using processed ingredients, to one using fresh or frozen ingredients, represents a market share of 5% (3 meals per day, 7 days a week = 21; 1 / 21 = 4.8%). We believe this shift will not only prove to be permanent, but expect it will continue to expand and gain share for reefers.

The 35% increase since Jan ’20 suggests our thesis outlined above might be valid. The historically high correlation with load volume and spot pricing in the reefer market suggests better times are coming for the sector.

Flatbed – demand will continue to be driven by the construction and automotive industries, with significant waves of additional demand being added by the oil & gas exploration, steel, manufacturing and agricultural industries.

The rally in WTI crude oil prices, to levels that materially

Donald Broughton

exceed the cost of production via fracking in all the major fields, has already driven rig count dramatically higher. Just as e-commerce and food delivery govern the addition of capacity in Dry Van and Reefer, Oil & Gas Exploration will offer alternative high paying employment to potential drivers for the Flatbed industry. Russia’s attempt to extort the Europeans into accepting its invasion of Ukraine by restricting their access to Russian oil and naturalgashasalreadybackfired. Within the next three years, the US will replace Russia as theproviderofoilandnatural gas to Europe.

The oil rig count, already 3.5X the Aug ‘20 Covid-low, could more than double again from current levels. Current European concerns will drive the natural gas rig count (which was already 2.2X the Aug ’20 Covidlow) ever higher.

It was already being driven higher by demand from the auto industry, the oil & gas exploration industry, and a boom in commercial construction. Then the Russians bombed Ukrainian mills (steel was their second-largest export, exceeded only by grain), sharply tightening global capacity.

Summary - the economy continues to rebound more vigorously than most people appreciate, and it will continue to grow faster for a longer period than anyone predicts. The drivers of demand in each segment are also offering employment alternatives to drivers, thwarting the ability of each mode to add capacity. The combination of sustainable demand and constrained capacity should extend the length of this period of prosperity for the entire trucking industry. Fasten your seat belts because it is going to be an incredible ride!

It is our long-held belief, backed up by years of experience and tons of data, that the most reliable and earliest indicator of economic conditions is the trucking industry. Long before the wizards of Wall Street, or those big brains with PHDs in economics, become aware of a trend, the men and women of the trucking industry know. Not only do you know whether the consumer economy or the industrial economy is getting better or getting worse, based on the volume of loads and the rates being paid, but you know about specific companies (i.e., Wal-Mart may be sticklers about appointment times but they get me unloaded quickly; K-Mart is very disorganized, take forever to unload me, I can’t understand how they stay in business). Our ongoing mission with this column will be to: highlight trends in other parts of the freight market that you might not be aware of, but could end up affecting you; as well as trying to explain what we believe are the reasons behind the trends you are experiencing in trucking.

After spending over two decades as one of Wall Street’s top Analysts and one of its leading Market Strategists, Donald Broughton founded Broughton Capital in 2017. Broughton is notorious as a hard-hitting forensic accountant, using Sell ratings more often than any other analyst. He is highly regarded for translating goods flow data into economic forecasts that have proven to be highly prophetic. Additionally, Broughton is convinced that most individuals know much more about the economy than they realize and believes that economists are only boring because they are lazy or choose to be.