Is the U.S. truckload market more volatile than ever before? (Part 2)
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 second article in a 3-part series.
In Part 1, we talked to Noël Perry, a long-time transportation economist and founder of Transport Futures, Chris Pickett, Market Analyst at Pickett Research and former Chief Strategy Officer at Coyote Logistics, and Kris Glotzbach, a 25-year veteran in tech-enabled logistics, on whether or not U.S. truckload market dynamics have changed and if market cycles were becoming more volatile. We looked at historical data and some of the factors affecting the market. For more background, read Part 1 here.
At the end of Part 1, we established that unplanned events — such as weather — could impact the the market. Keeping these factors in mind, we now ask: Have the cycles historically been accelerating in frequency? Let’s revisit the data from Pickett’s graph below.
The length or duration of each cycle (or how long it took the spot market to return back to contract pricing) can be a potential indicator of the severity of each shift.
Cycle 1: 8 quarters
Cycle 2: 12 quarters
Cycle 3: 12 quarters
Cycle 4: 12 quarters
We are currently in the fifth cycle, and it’s unclear how long the cycle will last.
What does the data tell us about volatility? And how do we use it to plan for the future?
Given this data, the cycles historically show no signs of lengthening, which could suggest that freight market cycles are not occurring more frequently, though they still might be growing more volatile.
We define volatility as a statistical measure of the dispersion of returns. In the truckload market, this can be measured by how far the market deviates from the equilibrium between capacity and freight (where x=0 on the Pickett’s graph).
Additionally, forecasting has proven difficult in large part due to unplanned, exogenous events, which seem to affect both duration and volatility. As I mentioned in Part 1 of this series, the increase in truck orders we saw as an effect of Hurricane Katrina set the market up for a period of overcapacity at the start of the Great Recession.
Similarly, Hurricane Irene lengthened Cycle 2 by several quarters, keeping spot prices high. Later, we experienced a very shallow trough of -7% when capacity decreased as a result of Hurricane Sandy. Had Sandy not occurred, we could have endured a longer cycle if the market troughed much lower and spot prices slowly recovered to contract pricing.
Although events like these increase unpredictability and make forecasting difficult, do they genuinely have a big effect on the market or is it just perception?
Per Pickett, the effects are less dramatic in actuality. “They create ‘short term’ — generally speaking — imbalances between supply and demand,” he says. “They’re secondary dynamics at most. They might move or tweak the market for a quarter or so.”
Historical data seems to support Pickett’s position, but some of our other experts call for a wider scope.
How the supply chain affects the truckload capacity market
Industry veteran Glotzbach looks holistically at the total supply chain for his understanding of what impacts the capacity market. Most of the volatility we see, he says, occurs upstream and downstream in the supply chain.
Historically, Glotzbach remembers a more predictable market, approximately 18-month periods that cycled through tighter, then looser capacity. This has changed however, he says, partially due to consumer buying behaviors.
Originally, the supply chain followed a make-to-stock model, and manufacturers would create product and deliver directly to the customer as they demanded it. As time and buying needs changed, the model shifted to make-to-order, where inventory and forecasting were required, and manufacturers sent stock to distribution centers who then sent products to customers. Make-to-order then gave way to make-to-customization, or the model we see today.
“We’re in the age of the customer,” Glotzbach says. As supply chains trend toward just-in-time, manufacturers send parts of products to local and urban distribution centers. Assembly doesn’t occur until an order comes in, allowing for limited customization and speed to ship.
In this model, however, any shock to the supply chain can create devastating ripple effects that can then affect the truckload capacity market. When we see volatility upstream to suppliers and downstream to customers, it creates a bullwhip effect. It’s why we see the sharp peaks and deep troughs of increased volatility. The current cycle, impacted by the COVID-19 pandemic, is one of the best examples of these effects.
So is the COVID-19 pandemic an indicator that volatility is increasing?
The market was already beginning to tighten in the months leading up to the pandemic, mirroring past cycles of demand.
“2019 was a very loose market,” Glotzbach says. “A lot of [asset] procurement events happened in Q4 and Q1 and [people] were betting the market long, assuming there would be some tightening.”
Few people, however, could predict the effect COVID-19 had on accelerating the demand for capacity.
What contributed to the increased demand for capacity?
Upstream manufacturing The virus first hit China, which affected many supply chains. That, coupled with the fact that production was already delayed due to the Chinese New Year, meant that manufacturing shut down and containers were stuck on the wrong side of the ocean.
Carrier adaptation and exit
Per Glotzbach, many carriers are becoming more specialized, even down to driver recruitment. So when the U.S. economy (along with other global economies) stagnated due to stay-at-home orders and quarantining, some industries, such as hospitality and automotive, also slowed to a trickle, resulting in carriers that had difficulty pivoting to take on freight from industries that demanded it, such as consumer packaged goods.
With so many businesses impacted, many carriers exited the marketplace, further reducing available capacity.
What’s surprising, Pickett says, is that total consumption has not gone down dramatically due to the pandemic. The demand, instead, has shown up in different industries (like in paper and health products). Many of the issues with capacity, he says, have been due to unplanned lanes. Pickett goes into this further in his article on how the virus has impacted the market here.
As volume and demand increased in certain categories, capacity tightened and routing guides began to fail. As the pandemic gained momentum again, tender rejection rates hit an all-time high of 27.84% the week of November 15, according to FreightWaves SONAR. Rejection rates during this time were higher than the same period in 2019 and 2018.
“In 2020, we expect that rejection rates will stay strong through the rest of the year, though they shouldn’t climb at similar rates to the previous two years due to the already extraordinarily high levels,” SONAR said.
How will the COVID-19 pandemic affect the future?
The pandemic, undoubtedly, will have a number of effects. For one, it’s possible that we start to see a pattern of increased volatility in the market.
“If you’re comping a record high, the tables are already set to probably have a record low,” Pickett says. “You’re setting yourselves up for more [volatility] going forward.”
He says the historical data, however, proves inconclusive, unless the market continues to react in a similar way to the current shift.
Glotzbach, on the other hand, sees enough additional evidence to suggest the cycles are becoming more frequent and more volatile than in past years. COVID-19, he says, is simply a “final punch.”
What other factors might impact the market later?
One possible factor is the truck driver shortage. As drivers skew older (the average driver age in the for-hire over-the-road truckload industry is 46, according to a 2019 report by the American Trucking Associations) and the industry fails to recruit enough younger drivers, capacity will continue to fall out of the marketplace as drivers retire.
Consolidation and commoditization might also contribute to market volatility in the future. Glotzbach expects the trucking industry to become more commoditized within a decade and predicts that brokerages and asset-based carriers will consolidate. We will also likely see self driving trucks in the middle mile in the next 10-15 years, he predicts.
Economists such as Perry also point to the expected impact from technical disruption. Though disruptive technologies (such as autonomous vehicles) can have unplanned effects on the shifting truckload capacity market, they are part of an existing economic cycle known as the Kondratiev wave, which occur every 30 years, as old technology is replaced by new.
“There is usually a period of destruction followed by a period of rapid growth,” Perry says.
Some of the most recent examples include the evolution of automotives (beginning in 1930) and information technology (beginning in 1970). If the Kondratiev wave holds true, we might see significant volatility in the market but, as Perry alluded, it would be considered a “normal” or expected market shift.
Taking all of this into consideration, it’s clear that there are a lot of variables that could cause the market to swing more severely and more often. Our experts might not agree on their impact or effect on the market, but the data does show that the market has seen significant shifts in recent years with record high peaks and record low troughs. If we continue on the same pattern, we could expect a wild ride in the near future.
In Part 3 of the series, where we'll dive into strategies to prepare your business for big market shifts in the future.