The Weekly Wrap: Concerns Over Diesel Prices and AI Investment Dynamics
Happy Friday, everyone!
This week, the 10-year Treasury yield reached levels not seen since 2002. Some might view this as a positive sign of economic strength, yet the financial media largely portrays it as a negative omen, particularly while Donald Trump is in office. This seems to follow the trend that during his presidency, everything is viewed through a lens of negativity. The recent minutes from the Fed’s last meeting indicate that many officials anticipate another interest rate hike before the year ends, but not in October. Market predictions suggest about 17 percent likelihood for a hike this month, while December has a much higher, 80 percent probability. In another note, jobless claims have fallen to 197,000, a number reminiscent of levels last seen in 1969. Surprisingly, the S&P 500 hit an all-time high of 7,818.93 on Tuesday. Still, many people claim they dislike the economy, which dragged the University of Michigan’s measure of current conditions down to a new low.
For this week’s discussion, we’ll largely set that aside to focus instead on trucks and AI. Let’s dive in!
Concerns About Diesel Prices
In recent weeks, numerous reports have discussed dire commercial implications due to what many label as record-high diesel prices. We found this particularly interesting because, as mentioned earlier, once you adjust for inflation, those diesel prices might not actually be as high as they seem. This brings into question whether these prices are truly wreaking havoc across the economy.
Let’s take a closer look at the “record-high” narrative. The Energy Information Administration reported an on-highway average of $6.53 per gallon the week of September 21, marking the highest weekly figure since data collection started in 1994. However, given the recent depreciation of the dollar’s purchasing power, this figure doesn’t really indicate we’re at a historic high with diesel costs. For perspective, the peak of $4.764 per gallon in June 2008 translates to about $7.20 today. Additionally, the nominal price hitting $5.81 in June 2022 adjusts to about $6.57 in today’s dollars. Currently, the nominal price is around $6.28 per gallon, which equates to approximately $4.12 in 2008 and $5.55 in 2022 dollars.
Despite this context, the business news has latched onto the narrative that trucking companies are collapsing due to these diesel prices. An article from The Drive stated, “High Diesel Prices Bankrupted 16 Trucking Companies in Just 30 Days.” The message was reinforced further by a subheading emphasizing that expensive diesel is not only raising costs but also pushing trucking companies out of business.
As noted by several sources, the increasing cost of diesel was the tipping point for 16 freight companies that turned to either Chapter 7 or Chapter 11 bankruptcy protection in late August and early September. Some of these were small operations, while others managed fleets of various sizes.
What are these sources? The Drive cites an article from Inc. that discusses how a wave of bankruptcies occurred “in the wake” of high prices, subtly shifting the narrative. It didn’t directly assert that diesel prices caused the bankruptcies. The story from Inc. was based on an earlier report from FreightWaves, which is actually where most of the information originated. Hence, there’s really just one source: FreightWaves.
FreightWaves’ write-up reported that at least 16 trucking, delivery, and transportation firms filed for bankruptcy between late August and September 21, with a mix of reorganizations and liquidations. However, it’s worth noting that together they didn’t collectively say diesel was the definitive breaking point. Sure, the current diesel prices are challenging for truckers, particularly smaller businesses, but typically, longer-term shipping contracts help companies mitigate fuel cost pressures. They’re also juggling tight labor markets and increased insurance costs, further complicating their financial situations.
Meanwhile, the Daily Mirror amplified The Drive’s assertions, inaccurately linking the diesel price increases to the Iran conflict as the cause for bankruptcies. It’s just another example of how this entire situation seems to be blamed on Trump and is depicted as catastrophic.
Moreover, the frequency of bankruptcies raises further questions. Just how many trucking companies file for bankruptcy in a typical month? Mahoney’s previous reports showed that there were filings earlier this year, notably about a dozen in April, more than 20 through May, and at least 21 more in later months. So, it seems there wasn’t a significant spike in September related to the supposed record diesel prices.
In the broader context, even though these filings occurred, they represent only a tiny fraction of the total population, with roughly 345,000 authorized for-hire carriers in the U.S. today—an increase since pre-pandemic times. It’s also crucial to note that several of the 16 listed companies operated with just one truck each.
In essence, there’s no widespread issue of trucking bankruptcies linked to record-high prices because those prices aren’t truly at a historic high and the number of bankruptcies isn’t remarkably alarming.
Fears About AI Consuming Investment Funds
Investment surges often coincide with narratives suggesting that non-booming sectors are being deprived of funding. The common theme is that the expanding, trendy areas are “crowding out” investment in other domains.
Currently, this narrative is focusing on growth in construction, particularly for data centers and certain energy projects, while other areas have seen declines.
At first glance, it appears alarming. The surge in data center construction might make it look like we’re unable to invest in any other segments. Data centers not only consume vast amounts of electricity and water—they appear to be sucking up construction funding as well.
We acknowledge that economies can behave erratically, often directing excessive funding to one sector while ignoring others. That being said, there’s little concrete evidence to support this happening right now.
It’s essential to realize that these are growth levels. If you just glance at construction spending graphs, it might seem as if only power and data centers are commanding investment—when that’s not the case; it’s simply where the growth is concentrated.
To put it in perspective, single-family construction remains the dominant category, followed by manufacturing and power projects, while commercial and multi-family sectors follow closely behind. In August, the combined annualized rate for construction in these categories stood around $1.2 trillion, while data center construction accounted for merely about seven percent of that total.
Furthermore, various factors may prompt construction slowdowns in those categories even amidst a building boom for data centers. High interest rates are stalling the housing market, which you’d expect would suppress residential construction spending. The student population in the U.S. has reached its peak—at least momentarily—leading to anticipated declines in educational facility construction. Moreover, Biden-era subsidies accelerated manufacturing projects, making eventual contractions inevitable. With online shopping’s continued proliferation, retail centers aren’t likely to be a significant growth area anytime soon. And regarding regular office construction, is there really an expectation for growth given the ongoing trends of remote work and a stagnant labor market?
This begs the question: why are financial outlets and economists so eager to champion this flawed crowding-out narrative? Because, well, that’s what the First Rule of Trump Era Financial Media dictates.
Business History Highlight: The Dot Com Bear Market’s Low Point
It’s been twenty-four years since the dot-com crash reached its nadir.
On October 9, 2002, the S&P 500 closed down to 776.76, marking the bottom of the bear market that emerged after the dot-com bubble burst. This represented a nearly 49 percent decline from its peak in March 2000.
While the internet was poised to transform commerce and daily life significantly, many companies, whose plans hinged on losing money faster than others, didn’t bring the expected returns to investors. It’s a stark reminder that disruption doesn’t guarantee profitable outcomes for shareholders. If you happen to have any insights on this, feel free to share!
Of course, there was no clear signal that day indicating the market had hit bottom. Investors had to deal with a market environment that had spent years teaching them that today’s great deal could become tomorrow’s disaster. It required a mindset divergent from the prevailing bearish sentiments.
Exactly five years later, on October 9, 2007, the S&P 500 reached its peak of 1,565.15 before the financial crisis took hold.
