Like the broader economy and other markets such as real estate, the freight markets experience 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. 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. 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.
3 Reasons for Freight Markets Cyclical Patterns
There are 3 big explanations for why we see this pattern.
1. The Most Common Explanation
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 markets. 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
In 2020, we know that truckload demand increased during the pandemic with the surge in goods spending and e-commerce. We’re gradually seeing new supply come onto the market to meet that demand. If and when supply exceeds demand, we’ll start to see freight rates declining.
How to Tame Freight Markets Volatility
We 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 below as Phil Melton (MercuryGate VP of Global Industry) and I discuss the topic freight market booms and busts live.