Why Trucking is Not Your Average Market
I’m frequently asked by shippers for advice on which direction freight rates are going. I wish I could predict the future, but I can’t. However, it is possible to better understand the market mechanisms that drive rate fluctuations by analyzing available data. And one of the chief lessons is to not assume that rates always move according to a standard market average.
Historically, on average, pricing in the truckload market tends to increase by just over 2% a year. We know this because we reviewed the rate changes within a leading industry index.
However, rates have not always increased at the same pace in the past. As a result, most of the time, if you assume that rates are always heading upward by 2%, the chances are that you will be wrong.
Analyses show that 70% of the time, rates year-over-year have increase by between 0% and 5%. Only 15% of the time have we seen rates go up by more than 5% year-over-year, and we’ve never witnessed a double-digit hike.
But these figures do not tell the whole story. The trucking market is about as near to the definition of what economists call “perfect competition” as you can find in the real world. This is due mainly to low barriers to entering and exiting the marketplace, no economies of scale, and a fragmented market.
When you have perfect competition, rate increases are all about supply and demand. Past market performances indicate that when the supply for trucks and drivers doesn’t keep up with the demand to move freight, rates tend to increase. Likewise, historic data shows that when there is an oversupply of trucks and drivers, rates decrease until the excess capacity leaves the market.
This made me wonder whether it is possible for rate increases to exceed the yearly average over an extended period of time. I looked at the leading industry index to determine which quarters were above or below a 3% year-over-year increase and discovered that four such periods have occurred since 1998. These are described below.
- The 3rd and 4th quarters of 2000. A direct result of demand growing faster than trucks was followed by seven quarters of increases below 3% when GDP growth slowed in 2001 and 2002.
- Fourteen quarters starting in the 2nd quarter of 2003 and ending in the 3rd quarter of 2006. Here, we had the triple whammy of a growing economy, a change in hours of service that took away capacity, and a driver shortage that made it more difficult to add capacity in the short run. However, all good things have to come to an end and, in this case, we ended up eventually with a glut of trucks followed by a very bad recession resulting in way too many vehicles and not enough freight. This resulted in 16 consecutive quarters with rates increasing less than 3%.
- Six quarters starting in the 4th quarter of 2010. After four years, most of the excess capacity had left the trucking market permanently and the economy picked up (by the way, it wasn’t until the 4th quarter of this run that rates actually recovered to the level they were at in the 4th quarter of 2006—the previous high point). This run was followed by eight quarters of relatively average rate increase.
- The 2nd quarter of 2014. The index went up 3.6% year-over-year.
Will our current run be short-lived as was the case in 2000? Or will it be another mega-run like the one we saw in 2003? What do you think?