Written by Will Gagne-Maynard, a Convoy senior data scientist and Aaron Terrazas, director of economic research at Convoy. This is one in a series of periodic guest columns by industry thought leaders.
We need more trucks.
This is true not only in the immediate term, as manufacturing backlogs associated with the global semiconductor shortage have slowed production, but also in the longer term.
Class 8 truck orders are one of the most closely watched metrics in the freight industry. Conventional wisdom suggests that they are a bellwether for the spot market: Strong orders precede a collapse in spot rates, and when orders dip during a soft market, a freight market upswing is imminent.
Reality is a little bit more complicated.
Some portion of Class 8 truck orders is what economists call replacement demand. Those are trucks intended to replace older, worn-out vehicles. If demand holds constant, replacement demand should have a neutral effect on the spot market. It just keeps the supply stable. Only truck production above and beyond replacement demand leads to net capacity growth, depressing eventually weighing down the spot market freight rates. And only truck production below replacement demand leads to a net capacity contraction, eventually pushing the spot market higher.
Unfortunately for economists, new trucks don’t come off the line with a sticker indicating if they are net capacity growth or replacing a vehicle that is about to be scrapped. We have to estimate it.
As with most things in life, there is a quick, hacky way to do this and a more complicated, but more thorough, way to do this. Often, the quick solution is good enough.
The simple solution is to rely on high-level summary statistics or rule-of-thumb heuristics. Estimates can be based on the assumption of a uniform eight-year truck replacement cycle, or on a long-term moving average of truck orders which relies on the reasonable implicit assumption that all trucks are replaced eventually. These approaches typically put annual Class 8 replacement demand in the mid-to-high-200,000s.
But occasionally, the fast-and-hacky route leads to poor decisions.
A more data- (and time-) intensive approach would be to estimate the typical truck’s lifespan and the full statistical distribution for how long trucks are operational — similar to what actuaries do when they calculate human life expectancy for things like health and life insurance policies.
From a data science perspective, this is not a trivial task. It requires detailed truck level data on the current age of all the active trucks on the road — or in the absence of full population data, confidence that a sampling approach is reasonably unbiased.
We undertook this detailed analysis using a unique trucking data set compiled through Convoy’s day-to-day operational work, bringing together data on federal- and state-licensed truckload carriers’ fleets. It produced some interesting results.
First, while the average Class 8 truck in our analysis was eight years old — validating the longstanding industry heuristic of an eight-year replacement cycle — the average was skewed toward older trucks by a long tail of super-survivor vehicles and a production surge during the mid-2010s freight boom. The median truck was closer to six years old.
Second, the current level of replacement needs is substantially higher than conventional estimates suggest. Our estimate of annual Class 8 truck replacement demand is in the range of 331,000 to 372,000 trucks, depending on the assumptions we make. That is as high as 100,000, or 35 percent above the 275,000 truck annual replacement needs suggested by the simpler methodology, which assumes a uniform eight-year replacement cycle.
Third, replacement needs are not constant over time. Just like demographic Baby Booms echo through time — resulting in subsequent booms for things like childcare, education, wedding venues, and homes (and, further down the line, things like eldercare and end-of-life services) — so do periodic waves of trucking industry capital investment. Surges in capital investment that typically accompany a strong freight market reverberate six to ten years later with a surge in replacement needs. The trucking industry’s replacement needs will rise over the coming years as the generation of trucks manufactured during the past two freight booms that peaked in 2014 and 2018 approach the end of their lifespans.
This is all to say: We need more trucks.
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