Is the U.S. truckload market more volatile than ever before? (Part 1)
By Noam Frankel, Founder and CEO of FreightFriend, with Phoebe Noce, Director of Marketing at FreightFriend
Noam is a pioneer and innovator in the logistics industry. He draws from his experiences building teams and brokerages from nearly four decades of leadership at top brokerages such as American Backhaulers and Echo Global Logistics. Noam is an expert in building brokerages and carrier relationship strategy.
This is the first article in a 3-part series.
Like many other industries, the U.S. truckload capacity market moves in cycles of supply and demand. What’s unique, however, is the incredibly fragmented industry and continuous cycle of overshoot and collapse.
For shippers and brokers, the cyclical rise and fall feels perhaps even more exaggerated in recent memory, given the current COVID-19 pandemic and a particularly tumultuous 2017-2018.
In fact, as we exited Q4 in 2019, capacity started tightening and stayed that way, bringing us now to a market that feels tighter than anything we’ve seen before.
Is it just perception or are these cycles starting to occur more frequently and with more volatility? Have market dynamics changed, and if so, why is it happening?
To help answer these questions, we turned to three experts in the industry:
Noël Perry, a long-time transportation economist and founder of Transport Futures, a North American heavy freight consulting firm. Perry frequently works with the Transportation Intermediary Association, Women in Transportation, and other logistics organizations and companies.
Chris Pickett, Market Analyst at Pickett Research and former Chief Strategy Officer and advisor at Coyote Logistics, a top three 3PL. Pickett is the author of the Coyote Curve theory and a key influencer in shaping Coyote’s market forecasting model.
Kris Glotzbach, a 25-year industry veteran with experience in tech-enabled logistics at companies such as American Backhaulers, CH Robinson, Uber, FourKites, and Shipwell.
Though our experts agreed on some of the factors that affected the market, they differed on the impact and influence and just how “normal” the current cycle might be.
We’ll hear from Perry on economic and technical cycles, which can affect the market outside of the typical capacity cycle, from Pickett on a historical perspective on the market over the past 15 years, and from Glotzbach on the effect changes in requirements from the supply chain have had on capacity.
Are we in the normal cycle and simply due for a shift? Before I dive into the U.S. truckload capacity market, let’s first define what we consider a single market cycle.
What do we consider a single market cycle?
The U.S. truckload market, like many markets, is a continuous rebalancing of supply in demand. Here, supply refers to the number of trucks (and, consequently, drivers) that haul freight. Demand is simply the demand for those trucks to meet the needs of the current market.
This rebalancing act “creates a cycle that swings from relative capacity shortage, where there is more demand relative to supply which drives market rates higher, to relative capacity surplus, where there is more supply available relative to demand which drives rates lower,” Pickett said in his 2018 paper on Navigating the U.S. Truckload Capacity Cycle. In the rest of this article, we will refer to relative capacity as available capacity or, simply, capacity.
Because available capacity and spot prices move in correlation, the truckload market can be tracked by looking at the movement of spot pricing, plotted on a graph.
Here, the line measures the percent change of spot prices above or below average contract pricing. We consider a single market cycle to be when the market is at contract prices, increases, decreases, and returns to contract prices — in other words, the line goes above, below, then returns to the x axis.
Much of today’s modern cyclical market theory has been significantly shaped by Pickett, who spent his tenure at Coyote closely studying the market.
What about truckload capacity market volatility?
Volatility is measured by the amplitude of the curve, or the distance from the highest or lowest point to zero. So the greater the amplitude, either positive or negative, the more volatile the market. Can we expect higher peaks and lower troughs in the future?
What causes the market to expand and contract?
The market is influenced by many decisions, but one of the key catalysts for supply is the influx of capacity from truck orders. When capacity is low and spot prices favor carriers, many carriers are investing in their fleets, purchasing trucks and equipment to increase assets and attract the best drivers. Because orders can take 18 months or more to deliver, the market is often inundated with capacity when demand is low.
Over time, as capacity expands and there is not enough freight to support it, some carriers who failed to prepare or forecast correctly are forced to exit the market, which then decreases the amount of available capacity.
“You get this long cycle of capacity flushing into and out of the industry, based on how [buying] decisions are made,” Pickett says.
With so many different stakeholders in the industry, as long as the market continues with its current structure, so will continue the cycles of overshoot and collapse.
“It’s a function of how this industry is inherently structured that guarantees this short term thinking,” he says, that capitalizes on today’s positive economic conditions.
What has the market shown us in the past?
In order to determine market frequency and volatility, let’s first look at the historical market.
In the past 15 years, the U.S. truckload capacity market has gone through four major shifts (not including the current cycle due to the COVID-19 pandemic). These periods include:
Q2 2008 to Q1 2010
Q1 2010 to Q3 2013
Q3 2013 to Q1 2017
Q1 2017 to Q4 2019
All of these cycles were affected, at least in part, by at least one exogenous event, which, according to Perry, can “throw things out of cycle.” Let’s take a closer look to better understand their impact.
The first cycle was concurrent with the housing bubble and financial recession, and Perry reminds us that it was not caused by short term cyclical activity but the combination of 30 years of upward momentum encouraged by low interest rates, relaxed mortgage requirements, government policy, and more.
Nearly all other cycles were impacted by severe weather, from Hurricanes Irene and Sandy in the second cycle to the polar vortex in the third cycle to Hurricanes Harvey and Irma in the fourth. Weather, in particular, creates capacity shortages and shifts in demand.
I distinctly recall one of the most impactful weather events this century back in 2005, when I had just returned to the industry after a hiatus. FEMA’s response to Hurricane Katrina for both disaster relief and reconstruction created a massive freight demand spike with almost no limits on pricing.
During that time, both brokers and carriers prospered. Carriers immediately began ordering more trucks, but because of long lead times (which occur with truck orders, no matter the market), most of the equipment was delivered just in time for the Great Recession, resulting in a sustained period of overcapacity and depressed pricing.
From the data and my past experiences, it’s clear that weather and other exogenous factors can have a dramatic impact on capacity.
But does the data tell us that the cycles are getting longer or more frequent? Are they becoming more volatile? Why should we care?