Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Stagflation Is Reshaping the Trucking Industry
Transcript
- Lucas: You know, Luna, I was reading the latest JOLTS report this morning, and job openings are down to 7.359 million, the lowest we've seen in years. But here's the thing: in the trucking industry, the story is even more extreme. Small carriers are going bankrupt at a pace we haven't seen since the 1970s. Luna: Really? I thought trucking was always short on drivers. How can you have both a driver shortage and a wave of bankruptcies at the same time? Lucas: That's the paradox of stagflation, right? High input costs and weak demand just crush the margins of smaller players. Diesel prices are up about 40 percent since early 2024, and freight volumes have been flat to down. So while the big fleets are managing, the small guys are getting squeezed from both sides. Luna: Before we go deeper, Lucas, I know we've talked about this before, but if today's conversation helps you make sense of the economy, even a little bit, and you want to keep these episodes free for everyone, you can support us at buy me a coffee dot com slash fexingo. It's the smallest thing, and it really helps. Lucas: Yeah, that's exactly right. We love doing this, and every little bit keeps us going. So, back to the bankruptcies. I saw a stat that one in five small carriers went bankrupt last year. That's a huge shakeout. Luna: One in five? That's brutal. What's driving that? Is it just fuel costs, or is it deeper? Lucas: It's a combination. Fuel is the obvious one, but also insurance premiums have spiked, and rates are down because there's just not enough freight to haul. When you're an owner-operator with one truck, a few bad months can wipe you out. The big carriers can lock in contracts and hedge fuel, but the small guys are taking whatever spot rates they can get. Luna: So it's like a perfect storm. And I guess that explains why we're seeing more freight move by rail. I saw that rail volumes are up like 8 percent this year. Lucas: Exactly. Rail is more fuel-efficient, and with diesel prices where they are, shippers are shifting longer hauls to rail. That's a structural change that could stick even after the economy recovers. Luna: But wait, if we're seeing all these bankruptcies, shouldn't that reduce capacity? And then wouldn't rates go back up for the ones that survive? Lucas: That's the theory, and it's happening, but slowly. Capacity is coming out of the market, but demand is so weak that rates haven't bounced yet. The latest data shows spot rates are still below break-even for many carriers. Luna: So how does this connect to the broader stagflation narrative? I mean, we've got real GDP growth at just 1.5 percent annualized, and inflation, while easing, is still above the Fed's target. Lucas: Right. The trucking industry is like the canary in the coal mine. It's one of the first sectors to feel a slowdown because it moves the goods that drive the economy. When trucking sneezes, the rest of us feel it a few months later. Luna: And when it comes to the consumer, we're seeing higher prices at the store because the cost of moving goods is still high, even if fuel prices have come down a bit from their peak. It's a sticky inflation problem. Lucas: That's the sticky part. I was reading a report that said even though diesel is down from its June peak, it's still 25 percent higher than a year ago. And carriers are passing those costs on to shippers, who pass them on to us. That's why your grocery bill isn't falling as fast as headline inflation would suggest. Luna: We saw that in our last episode on grocery prices. It's like the same dynamic. So, is there any good news for the industry? I mean, the unemployment rate is still low at 4.2 percent, and wages are up. Lucas: There is some. For the drivers who are still working, wages have gone up, actually. Average hourly earnings in the sector are up about 4.5 percent year-over-year. And the driver shortage isn't going away, especially for long-haul routes. But the problem is, there aren't enough loads to keep everyone busy, so it's a lot of waiting, which eats into earnings. Luna: So it's not that there's no demand for drivers, it's that the economics of each trip have gotten worse. That must be frustrating for the drivers themselves. Lucas: Absolutely. And it's pushing some drivers to leave the industry entirely. I saw that the number of owner-operators is down about 15 percent from its peak. Some are retiring early, others are moving to other industries. That's a long-term problem because when the economy does pick up, we might not have enough drivers. Luna: That's a classic dilemma. But let's talk about the government angle. Is there any policy response? I know the Fed is focused on inflation, but is there anything on the regulatory side that's helping or hurting? Lucas: There are a couple of things. The EPA's new emissions rules for trucks are adding to costs, which is tough in this environment. But at the same time, there's been some relief on the fuel side, like the suspension of the federal gas tax that was floated last year, though that never went through. So it's a mixed bag. Luna: And I've heard that some states are offering incentives for electric trucks. But with tight margins, can small fleets afford to switch? Probably not. Lucas: Exactly. The upfront cost of an electric truck is still double that of a diesel one, and the charging infrastructure isn't there yet. So for the small guys, it's just not feasible. That's widening the gap between the big fleets that can invest and the small ones that can't. Luna: So what does this mean for the overall economy? Are we headed for a freight recession that drags everything down? Lucas: It's possible. The freight data is a leading indicator, and it's been negative for a while now. But the consumer is still spending, albeit on services more than goods. So it's not all doom and gloom. But if the labor market starts to soften more, and we see jobless claims continue to creep up from the 199,000 we saw last week, then that could change. Luna: Right, initial claims ticked up to 199,000, which is still low, but it's a direction to watch. And today's ADP report showed only 44,000 private jobs added in July, which was below expectations. That's a sign the labor market is cooling. Lucas: And that's exactly what the trucking industry is feeling. It's like the canary that's already a bit woozy. We need to keep an eye on Friday's jobs report to see if the trend continues. Luna: So, looking ahead, what should our listeners watch for to know if the trucking industry is turning a corner? Lucas: First, watch diesel prices. If they stay below $3.50 a gallon, that helps. Second, watch the Cass Freight Index, which measures shipments and expenditures. If that starts to turn up, that's a good sign. And third, keep an eye on the number of trucking bankruptcies. If the pace slows, that means capacity is being rebalanced. Luna: And for the everyday person, I guess the takeaway is that the price you pay for goods is still being affected by these trucking troubles. So don't expect prices to drop dramatically anytime soon. Lucas: Exactly. Stagflation is a slow grind, and trucking is on the front lines. It's a tough business right now, but those who survive will be positioned well when the cycle turns. The question is when that will be. Luna: And that's the million-dollar question. Thanks for breaking it down, Lucas. I feel like I have a much clearer picture of what's happening with all those trucks on the highway. Lucas: Glad to help. And to our listeners, if you see a trucker on the road, maybe give them a little extra space. They're having a rough year. Luna: Ha, that's good advice. We'll be back next time with more insights on how stagflation is shaping your world. Until then, stay curious.