2026 brings a ‘marginless recovery’ as capacity shakeout accelerates

Speaker 1:

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2025 is in the rear view, so what's ahead for 2026? Hey everybody, welcome back. I'm Jason Cannon and my co-host is Matt Cole. Most of us spent 2025 waiting for a recovery that never really happened, but we're not holding that against 2026. A recent survey conducted by truck stop.com and Bloomberg Intelligence shows that 37% of queried owner operators and small fleets expect rates to improve. Just as we turn the corner into 2026,

Speaker 2:

That 37% is down from 55% at the start of the year. So yes, there is optimism. It's waning optimism Forecasting 2026 is a little complicated because much of the data that paints economic pictures like these was held up during the government shutdown. But from what we do know and from what we can tell from current trends is there is reason to be optimistic, just maybe not wildly so

Speaker 3:

We do expect freight volumes to recover, especially by the time we get into Q2 and certainly by Q3. We really don't expect between now and spring to yield a whole lot. If you look at a lot of the things that are going on in the economy, the consumer has been pretty stressed. There are indications that consumer is spending well for the holidays, which is certainly good news, but if we look at the factors that drive spending and drive manufacturing, a lot of them are still under stress because largely because of tariffs. We're seeing some rollback on the consumer side due to affordability concerns, but there's very little out there that would suggest that we're looking at any kind of big

Speaker 1:

Boom. A lack of strength in industrial production has muted expectations for a strong 2026, much more so than a sluggish consumer, but even slow growth is growth.

Speaker 3:

Trucking is really much more of an industrially focused business. Now, certainly there are some very large carriers that we all know that are very heavily invested or heavily tied to the consumer in retail environment, but if you think of trucking as an entire unit, it needs the industrial sector to recover and there's a lot of questions as to just how quickly that's going to happen. So we expect basically a steady recovery and freight again, beginning sometime in the springtime and growing pretty steadily, but not overly robustly. We're not talking about something like what we saw in late 2017, for example, or certainly 2021. Just a very sort of steady recovery and frankly, there are some downside risks there if tariffs continue to be a problem, but there are also some definitely upside possibilities. One being the housing market. If the Federal Reserve continues to lower interest rates, we would certainly expect that at some point we'll get mortgage rates under 6%. That's probably going to have a stimulative impact on home sales and probably residential construction, and that's good news, not just for flatbed, which obviously is very tied to residential construction, but drive Van is very tied to home sales because when you sell a home, you typically replace a lot of the stuff in that home that generates some sales. So our biggest upside probably in the near term is a housing market recovery followed by a more industrial recovery and obviously some kind of consumer stimulus.

Speaker 2:

Trucking has been on the wrong end of supply and demand for more than three years. The good news is that starting to turn around, which should help spur better rates in 2026, the bad news is it's happening very slowly and in pockets where it's less impactful. Overall,

Speaker 3:

We're in a really weird environment because if you look at the indicators of what we would call truckload capacity, in other words, truckload carriers, they're very low even based on the published BLS data and extrapolating that to the driver population, which historically that's been pretty accurate. It's pretty much in line with where we were before the pandemic and we've clearly had freight growth since then. So that puts us behind. And then if you look at the preliminary benchmark revision that BLS put out before the shutdown a few weeks before the shutdown, that would imply even tighter truckload employment. However, clearly we don't have a huge disruption in capacity or else it would be showing up already in the market, and that's because of this resilience of the small carrier that a lot of people still have trouble buying and you really can't pick one silver bullet as to why it's happening.

It's a whole bunch of little things. It's all the government support we just talked about that happened back in 2020 and 2021, and a lot of that going to them paying off debt or buying a truck outright instead of financing it. The extraordinary spot rates they had in 21 and early 22, the fact that they are benefiting from greater connectivity with brokers because of the so-called development of digital freight platforms and all of that. That actually kind of started with the ELD mandate because a lot of those were not part of the grid, if you will, the information grid and then just the hard date on this is lacking, but we know from conversations that a lot of equipment lenders have just been very loose with their enforcement of getting equipment back. A lot of that was because they were expecting a big rebuy in 2027 and that was going to bring in a lot of equipment and they certainly didn't want a whole bunch of used equipment on the market before that even happened.

Of course, we don't expect a big pre-buy at this point, even though we do appear to have more clarity in where we're going with EPA, but we've just had all these distortions and then even on top of that, these small operations, they don't have the overhead that these large carriers do. And so you put all of this stuff together, some of which is kind of normal and some of it's extraordinary. And the thing is, is that total capacity is probably not all that high, but it's where that capacity resides that's distorting the market. It does appear that the larger carriers have cut to the bone that they've really cut as tight as they can probably get away with cutting certainly tighter than they would in a normal market, but there's this overhang that is primarily capacity that brokers are using. And so the phenomenon is that as you have more freight come into the system and we haven't had a lot more freight come into the system, even if it gets pushed off to the stock market, and it certainly does seem to be happening in flatbed in particular, that it's just kind of getting soaked up by excess capacity in that side.

It's just a dynamic we've never really seen. Every other cycle we see, we kind of see that small carrier leased owner operator environment go up and down in concert with what's going on with carriers, company drivers, and that got completely disrupted by the pandemic it's going to get there has to, it's going to get there one way or another. And the question is, does that small carrier capacity just keep sort of drifting away or do we end up with some larger carriers just going out of business and that taking it out? We've seen a little bit of that this year, not a whole lot. We do have indications that insurance premiums are going to be much higher for 2026 than they were for 2025. That might be the trigger. So if we had this conversation in a couple of months, we might have an indication that we've lost a lot more capacity, but at this point it's only an assumption, not an actual event.

Speaker 1:

As far as catalyst for capacity exits, Avery said he doesn't expect English language and non domicile CDL reforms to be tipping points. He tells us why after a word from 10 44 sponsor Chevron lubricants,

Speaker 4:

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Speaker 3:

It's certainly not going to be a non-issue because people are reacting to their expectation of it already and that's moving the market. I think to some degree we've been pretty conservative about how we've been approaching this. We're data driven and we aren't seeing data from the spot market that's indicating any kind of sustained tightness and we're watching it very closely. We did increase our estimate of what we call active truck utilization, which is kind of our fundamental barometer of market tightness based on some pretty conservative assumptions of what the non domiciled rule could do and what we were seeing with ELP. But let's take those two separately for a second. Even though they're obviously very closely related, the ELP enforcement at this point looks like it's going to take out about 25,000 drivers in the first year. Now that might sound like a lot of drivers, but if you look at it in the scheme of things in the overall trucking environment, and remember this is going to be not just for hire drivers, but this is going to be private.

In fact, we hear quite a few private fleet drivers that it's just not going to be a market mover independently 25,000 drivers. We see changes like that in payroll employment over the course of several months sometimes. So that alone is not going to move the market. Now if you add that to the most aggressive assumption of what might happen with non domicile CDLs, yeah, you could get there. In fact, we have an estimate that even without any improvement in freight, if you take the most aggressive view of FMCs a's estimate of the drivers that could leave the market in two years and you add that on top of ELP, in other words, no, no overlap between the two. You could get to a 2021 market without any change in freight, but we don't think that's going to happen or at least we're very skeptical about that.

So we've moved a little bit to that. Now, as we all know, the non dumb south CDL issue is a bigger question mark because that's now been put on hold by the US Court of Appeals for the DC circuit on some procedural grounds, but also some questions as to whether the rule itself is going to survive. So even if the rule does survive, it's clearly been stretched out a bit. So we think that really severe cut in capacity due to this whole foreign driver enforcement, it is not likely. There's going to be some self deportation, if you will, or drivers leaving the market before they get caught. But in the scheme of the overall trucking industry, that's going to be pretty small. So yeah, it's going to chip away potentially significantly so and definitely put the trucking industry in a position to see greater freight growth when we do see more rate growth, when we do see more freight volume, but we really don't think that what I call pressure on the foreign drivers is by itself going to be a game changer. It might set up that change in the game, if you will, but I don't think that alone is going to drive a recovery in the freight market for carriers.

Speaker 2:

If and when that capacity leaves the market next year, there will be new carriers drawn to the industry by the improved conditions created by that capacity exit. It's a cycle we've seen play out numerous times. What's unique right now is there seems to be a population of new carriers being drawn in by the promise of capacity leaving the market before it actually leaves.

Speaker 3:

That's the normal dynamic. If you look at the period between 2014 and 2019, that was very much like that. We had strength in 2014, hired a bunch of drivers, hit what was at the time of peak in 2015, and then things were really soft and we lost a lot of that capacity. And so by the time we got to mid 2016, things were kind of like they are now in that we hadn't been buying trucks, we hadn't been hiring a lot of drivers and things got to the point where we weren't prepared to handle any additional capacity, and then that's when 20 17, 20 18 hit. Now we could get into why that happened. I think a lot of it was a lot of people expected President Trump to reverse the ELD mandate. So I think carriers were being conservative in early 2017. They didn't think they were going to have a crunch, and of course they ended up having a crunch.

But I think the bottom line is that the scenario you laid out is what we will expect to happen. The question is when is that going to happen in 2026 or is it going to be perhaps 2027 when that happens? But we'll always have the same dynamic. We'll recruit more drivers. We've obviously lost a significant number of drivers who've gone on to do other things, but I think it's even happening now. If you look at new carrier formation, it isn't dropping right despite the fact that we're not seeing any significant improvement in rates. Diesel prices are not going down. They aren't surging, but they're not going down. We still see roughly 5,000 new carriers every month, which is more than what we were seeing before the pandemic. I think part of that is they're reading all the coverage about the non domicile CDL, the ELP, and they're thinking they're getting ahead of this, right?

They're like, okay, I'm going to get into the market now in part because of this whole freight fraud, cargo theft, all those issues, brokers have gotten more particular about using carriers that have been in the market for less than a year. So I think some of the savvy operations who are maybe lease owner operators or company drivers, I think they figured out that they kind of need to get into the market soon so that when things recover, they're going to be usable, if you will. In other words, so psychology plays a lot into this and people sort of roll their eyes when you start bringing psychology into economics, but it's almost unavoidable. I think a lot of carriers that probably should have left the market, probably mostly small carriers, but even some medium-sized ones that strictly financial reasons they probably should have just closed up shop.

They're looking at things and thinking, well, there's got to be an upturn. There's got to be an upturn coming soon. We've been in this freight rate recession for too long, and why would I suffer through three years of this only to go out of business a quarter or two before it turns up? Well, guess what? That becomes a little bit self-fulfilling. I'm not suggesting that is the reason that we're having this issue. It isn't the primary reason, but I think it is a contribution to it is that mentality, and it's an admirable trait I think in truckers that they have sticktoitiveness, if you will, that we want to gut it out. Our concern is that if our rate forecasts are correct, that's just not going to happen until at best, 2027. So that's a long time for a lot of these operations to stick it out and we don't wish anybody to go out of business, but it certainly would help a lot of others if we did lose a lot of capacity. But we'll see. The biggest thing that could change it would be a surge in diesel prices, but that doesn't really seem to be in the cards.

Speaker 1:

Rates are going to end this year up slightly and could end next year up slightly, but potentially it's just not slightly enough to really matter. Avery says,

Speaker 3:

Our current forecast has both this year, contract rates being below 2% growth next year being below 2%, so all the way through 2026, less than 2%. 2% is essentially worth because you've got inflation to deal with if nothing else, you've got a tariff price increase on trucks that while it is certainly not as severe as we thought it could be, it's going to add to the cost of a truck as will, keeping the current emissions thresholds in place for 2027, which apparently is where EPA is going. So even in 2027, our forecast is barely above 2% I think. So I've taken, we call this sort of a margin less recovery. It's like the good news is rates are going to go up and have gone up. The bad news is they just aren't going up enough to make much of a difference. But the other point I make is that in a sense, our forecast is impossible, and I say that because if we have that tet of a rate growth all the way through 2026 and into 2027, there is no way we're going to keep the capacity levels in the range that we have them now.

We will lose a lot of carriers and that will lead to an increase in rates in 2027. So it's one of those things where, here's our forecast, but there's no way this forecast can be right. It's sort of the Heisenberg principle of you can only, the act of observing something changes it. It's kind of like that or Schroer's cat or whatever metaphor you want to use, this level of rate recovery. It's not to go up and it will go up. We just aren't in a position yet forecast how that happens or when,

Speaker 2:

So what comes first in this chicken and egg scenario to fix truck omics demand or a supply right sizing?

Speaker 3:

I think basically it would be very difficult with diesel prices where they are without a further collapse in spot rates and so on, to lose enough capacity to really generate everything. Now, my one caveat there is the insurance environment. I think that remains to be seen. There is that possibility, but we've seen no indication yet of that happening. So our view is we have to have more freight. So that's what needs to happen. We are just kind of at a loss as to what's going to bring more than just incremental freight over the next 12 months. Maybe a stimulus check will help, but it's sort of a difficult thing in our forecast model to come up with a scenario that yields that sort of strength in freight volume that's going to bring the market back to the kind of levels that carriers want it to be.

Speaker 1:

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