Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Used Heavy Equipment Market
Transcript
- Lucas: So I was scrolling through the latest Ritchie Bros. auction results last night — yes, this is what passes for fun in my world — and I noticed something that really jumped out. A 2021 Cat D6 dozer with about 3,000 hours on it sold for $345,000. That same machine, two years ago, was going for maybe $290,000. In a period where new equipment prices have gone up maybe 12 percent, that's a 19 percent increase in the used price. Luna: Wait — used equipment going up faster than new? That seems backwards. Usually depreciation hits hard. Lucas: Exactly, and that's the tell. Normally you buy a new bulldozer, drive it off the lot, and it loses 15 to 20 percent of its value in the first two years. But in today's market, late-model used machines are actually appreciating. It's a textbook stagflation signal — high inflation in capital goods combined with a supply-side bottleneck that keeps production constrained. Luna: So the bottleneck is partly the semiconductor shortage still rippling through heavy equipment? I know Caterpillar and Deere have been complaining about chip availability for years now. Lucas: That's a big piece of it. A modern excavator has dozens of electronic control modules — it's basically a computer with a bucket. But it's not just chips. Look at the import price data that came out last week: costs of goods from China hit their highest since 2008. Steel, hydraulics, undercarriage components — a lot of that comes from China. And when you layer on higher financing costs — equipment loans are now running 8 to 9 percent — contractors are saying, you know what, I'll just keep my current machine running another year. Luna: Which pushes up demand for used machines, and also for parts and service. I've seen reports that Caterpillar's parts division has been running at record revenue for the past four quarters. Lucas: Yeah, their parts and service segment — they call it 'aftermarket' — grew 14 percent year-over-year in the most recent quarter. And the backlog there is stretching out. Some critical components like final drives and hydraulic pumps now have 12-week lead times. That's double what it was pre-pandemic. So you've got a feedback loop: new machines are expensive and hard to get, so people repair old ones, which stresses the parts supply chain, which makes repairs more expensive, which further incentivizes people to hold onto equipment. Luna: And that's exactly what a fleet manager I spoke with at a mid-sized excavation company in Ohio told me. He said his average fleet age has gone from about 4 years to almost 7 years since 2020. He's spending 40 percent more on maintenance per machine per year. Lucas: Forty percent — that's a huge number. And it cascades into the rental market too. When contractors can't buy, they rent. United Rentals, the biggest player, reported that their rental fleet utilization hit 74 percent in the first quarter, which is near the highest they've ever seen. But here's the twist — they're also keeping their rental machines longer before selling them off. Their average fleet age has crept up too. Luna: So the whole secondary market is tightening from both sides. Less supply coming from new purchases, less supply coming from rental companies rotating out old machines. And meanwhile, demand from end users — construction, mining, infrastructure — hasn't collapsed. Not yet. Lucas: Right. Real GDP growth came in at 2.1 percent annualized for the first quarter, which is actually up from 0.5 percent in the previous quarter. So we're not in a recession. But you've got persistent inflation — core PCE is still running above 2 percent, and the 10-year breakeven inflation rate ticked up to 2.24 percent. That's the stagflationary vibe: growth is okay but not great, and prices keep creeping higher. Luna: And the unemployment rate is 4.2 percent, which is historically low. So the labor market is tight, construction wages are up, and that feeds into the cost of operating equipment too. If your mechanic costs more per hour, you're even more motivated to keep the machine running longer. Lucas: Exactly. And this is where the data on wholesale prices from last week is interesting. Wholesale prices actually declined 0.3 percent in June, driven by a big drop in gasoline. That's a disinflationary signal in energy. But if you strip out food and energy, core wholesale prices were still up. So the inflation is becoming more concentrated in industrial goods and less in consumer energy. That's actually worse for capital-intensive industries like construction. Luna: Because they're not getting relief on the inputs that matter most to them. Diesel is cheaper, sure, but steel, tires, hydraulics — those aren't coming down. Lucas: Right. And the other headline that caught my eye was China posting its slowest quarterly growth since 2022. That's important because China is both a major producer of equipment components and a huge market for mining and infrastructure equipment. If Chinese demand softens, it could free up some global supply — but it also means Chinese manufacturers might dump excess inventory into export markets at lower prices, which could depress new equipment prices. That would be a strange twist. Luna: So you could see a scenario where new equipment prices actually ease later this year, but used prices stay elevated because the installed base is so old and people are still reluctant to trade up. That would be a weird inversion. Lucas: Weird but possible. And I think that's what makes this market such a good lens for stagflation. You're not just looking at one price curve — you're looking at the interaction between new and used, between OEM and aftermarket, between rental and ownership. Each of those markets has its own supply-demand dynamics, and right now they're all pulling in slightly different directions. Luna: It reminds me of the 1970s, when the used car market also went haywire. I've read that during the worst of the 1970s stagflation, used car prices actually rose faster than new car prices for a stretch, for exactly the same reasons — people couldn't afford new, so they bid up used. Lucas: That's a great parallel. And just like with cars, the heavy equipment market has a kind of 'flight to quality' dynamic. The high-demand used machines are the late-model, well-maintained ones. The older stuff, the 15-year-old machines with 20,000 hours, those are actually declining in value because nobody wants to take on the maintenance risk. So you get a barbell market: prime used equipment appreciating, junk used equipment depreciating. Luna: Which is exactly what we're seeing in the auction data. Ritchie Bros.' same-store sales are up, but the mix is shifting toward higher-quality assets. They're selling fewer total units but at higher average prices. Lucas: Yeah, and that's a margin tailwind for them. Their take rate — the commission they earn — is relatively stable, but on higher-priced items, that's more absolute revenue per transaction. So they're doing well. But for the end customer, the contractor or miner, it's a squeeze. Their cost of capital equipment is going up, their maintenance costs are going up, and they can't pass all of that through to their clients because construction contracts are often fixed-price. Luna: So margins get compressed. That's the stagflation story at the firm level. You can't raise prices enough to cover your input cost increases because demand is only so-so. And if you're a small contractor, you don't have pricing power. Lucas: Right. And that's why I think the used heavy equipment market is actually a leading indicator for broader economic stress. When contractors stop buying new and start hoarding cash, when they extend the life of their fleet, it's a sign that they're bracing for a prolonged period of slow growth and high costs. It's a micro-level response to macro conditions. Luna: And speaking of that kind of bracing — one thing I really appreciate about this show is that we're able to dig into these dynamics without interruption. We don't run ads, and that's a deliberate choice. It means we can spend the whole episode on something like used bulldozer auctions without having to cut away for a mattress commercial. Lucas: Yeah, it's something we hear from listeners a lot — that they value the depth and the focus. And if you do too, and you want to support keeping it that way, there's a simple way to do it. It's buy me a coffee dot com slash fexingo. No pressure, seriously. Just a way for people who get value from the show to help keep it ad-free. Luna: Exactly. And it's not about perks or rewards. It's just about sustaining the kind of conversation we're having right now. Back to the equipment market though — what do you think is the single most important data point to watch over the next six months? Lucas: I'd watch the Caterpillar parts backlog. If that starts to shrink, it means either they've ramped up production capacity — which is hard to do quickly — or demand for repairs is softening. A softening in parts demand would actually be a negative signal because it would mean contractors are deferring maintenance, which is a classic recessionary behavior. You stop maintaining your equipment when you're not sure you'll have work for it next quarter. Luna: So a shrinking parts backlog could be a canary in the coal mine for a broader downturn, even if the aggregate GDP numbers still look okay. Lucas: Exactly. And that's the kind of nuance you don't get from headline inflation or unemployment. You have to look at the operational decisions people are making on the ground. Right now, they're repairing more and buying less. That's a defensive posture. And until that changes, I think the stagflation narrative has legs. Luna: Well, we'll keep watching the auction results. Thanks for digging into this one. Lucas: Always fun to talk about heavy iron. Catch you next time.