What causes freight markets booms and busts?

Like the broader economy and other markets such as real estate, the freight market experiences periodic ups and downs – booms and busts. Obviously the strong market of the past few months is the result of unique forces related to the Covid-19 pandemic, but if you look at the long-history of truck rates which go back to the early 1990s, you see a cyclical pattern with stretches of inflationary markets punctuated by periodic episodes of deflation. The chart below shows the Producer Price Index for General Freight Trucking published by the U.S. Bureau of Labor Statistics. A similar pattern appears in private industry data, such as indexes published by DAT and FreightWaves.
It’s debatable where exactly we are in the cycle today, and there are widely diverging opinions on when exactly the current elevated rates will decline, and whether the trend will be a clean stylized curve or something a little messier.

Reasons for Freight Market Cyclical Patterns

There are three big explanations for why we see this pattern.
1. The Most Common Explanation
Underpinning this cyclical pattern in truck rates are fluctuations in supply and demand, and specifically focusing on the lagging relationship between the two. Basically, the idea that supply is constantly trying to catch up to demand. Demand moves, supply catches up — sometimes slowly, sometimes quickly, sometimes too little, sometimes too much.
2. Less Common Explanation
Some of the core industries that drive truckload demand are cyclical in nature in-and-of themselves, and that demand-driven cyclicality drives booms and busts in the freight market. Several big sectors of the economy have their own cycles — including manufacturing (basically a capital investment cycle), housing (driven primarily by interest rates), and commodity agriculture (associated with weather patterns).
3. The Least Common Explanation
A third explanation is in how the freight industry approaches pricing. We know that the combination of long-horizon fixed contracts and auction dynamics can lead to irrational pricing. Attempting to build in market rigidity is common industry practice, but when contract rates deviate too far from market rates, this contributes to these booms and busts.

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In 2020, we know that truckload demand increased during the pandemic with the surge in goods spending and e-commerce, and we’re gradually seeing new supply come onto the market to meet that demand — particularly in the last few months with truck orders touching near-record highs. If and when supply exceeds demand, we’ll start to see truck rates declining.
The reality is that all three of these forces are at play. While we may observe periodic booms and busts in truckload rates, what we’re observing is just the tip of the iceberg. There’s a lot more beneath the surface.

How to Tame Freight Market Volatility

We’ll dive into how to tame freight market volatility in our next post. Before reading the next article in the series we do have available our video on this topic. Watch as Phil Melton (MercuryGate VP of Global Industry) and I discuss the topic freight market booms and busts live.

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Aaron Terrazas
Director, Economic Research
Convoy, Inc
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