Why Class 8 orders are a lagging indicator of freight demand

Mike BaudendistelFreight Market Blog

Class 8 truck orders

Class 8 trucks, otherwise known as heavy-duty trucks, are the trucks that can haul more than 33,000 pounds and include all trucks that have a tractor-trailer.

Demand for Class 8 trucks, reflected in monthly orders, is a function of buyers’ (carriers or leasing companies) ability and willingness to purchase new equipment. Both the carriers’ ability and willingness to purchase new equipment occurs most often when the freight market trends have already been strong for a period of time, making equipment orders a backwards-looking indicator. The cyclicality of freight market trends and Class 8 production, as well as the fragmentation of the truckload industry, also contribute to Class 8 orders’ status as a lagging freight demand indicator. 

Carriers are most able to purchase new equipment once the freight market has already been strong.

Carriers’ ability to purchase new Class 8 vehicles is a function of the net purchase price of the vehicles, carriers’ cash flow and credit availability, all of which are more conducive to orders after freight market trends have already been in carriers’ favor for a period of time. 

Used commercial truck prices: The net purchase price of Class 8 vehicles is heavily influenced by used commercial truck prices because most new truck purchases come with an associated trade-in and because new equipment prices are not typically volatile year-to-year unless a new environmental standard is introduced. Used commercial truck prices, however, are volatile since the price of a used truck reflects that day’s market clearing price; sellers of used trucks have little incentive to continue owning a depreciating asset. Used commercial truck prices are high when freight market trends are already strong, lowering a carriers’ net purchase price for new Class 8 vehicles.  

Cash flows: Carriers are most able to purchase new equipment when their cash flows are strong, which gives them an ability to put money down on new equipment or buy new equipment outright. The relative strength in carriers’ margins and cash flows are closely tied to freight market trends and trucking spot rates. A period of relatively high trucking spot rates is typically also a period when carriers earn relatively high margins and cash flow; following such a period, carriers are more able to purchase equipment. 

Credit availability: Lenders are more willing to lend to carriers when freight market trends have already demonstrated that carriers are good credit risks. Those trends are visible to lenders in the latest results reported by the publicly traded carriers. 

Carriers are most willing to purchase equipment once the market is already strong. 

We view willingness to purchase equipment as a function of whether the carriers believe they will have sufficient numbers of drivers to seat equipment and carriers’ outlook for the freight market. While there are differing viewpoints on whether driver availability issues are demographic or simply economic (i.e., a function of pay and competition for labor from other industries), carriers’ outlook for the freight market are typically highly inaccurate. In general, carriers’ are too optimistic during periods of strength and too pessimistic during periods of weakness, which leads to over-ordering and under-ordering, respectively.

The highly competitive nature of the truckload industry and the deeply cyclical Class 8 production volumes contribute to Class 8 being a lagging indicator of freight demand. 

Setting aside carriers that operate in niche markets or with specialized trailing equipment, most carriers operate Class 8 tractors with dry van trailers. Dry van truckload is a highly competitive market with relatively little differentiation as compared to most other industries. Therefore, the same market forces impact most carriers at the same time. With most carriers’ fortunes aligned, so is their equipment-purchasing behavior.

Class 8 vehicle production is one of the most cyclical industries in North America with annual production volume ranging from just over 100,000 units during recessionary years to well over 300,000 units during boom years. Original equipment manufacturers (OEMs) take measures to avoid production lumpiness and build up backlogs that typically average four to six months, though they can be much longer or shorter depending on market conditions. The result is that trucking companies will place equipment orders because of today’s robust rates and profit margins, as described above, for equipment to be delivered several months from now – often just in time for the market to soften. Many carriers pursuing the same tractor-purchasing strategy exacerbates the resulting oversupply.

In that typical equipment oversupply scenario, freight market trends need to improve significantly, and for an extended period of time, before carriers have difficulty securing equipment and need more. In the early stages of a recovery, excess levels of equipment decline, but no new equipment is needed. Thus, demand in the form of new equipment orders arises once the freight market trends have already significantly improved and for a meaningful period of time – thus a lagging indicator of freight demand.

SONAR offers indexes that track class 8 truck orders. To learn more about class 8 truck order indexes or to sign up for a SONAR demo, click here.