Spot Market Update & Seasonality by Noël Perry


The Rule Of Three

Three weeks ago, when the Truckstop.com Market Demand Index (MDI) spiked 20 points above the previous levels, we wrote about the rule of three: Take no action until you have at least three data points. 

Two weeks later, we have those three data points. They all show a big jump above the previous averages. The chart to the right shows the MDI for the average of all truck types. (We examined the differences between Van, Reefer, and Flatbed and found them to be moving in roughly the same direction.)  Since the direction is clearly sharply upwards, is it time to take action to adapt to further tightening of the truckload spot market?

Additional analysis of the Truckstop.com data suggests no. 

Here’s why: Our conclusion comes from the related data on spot rates and our understanding of the seasonal nature of the truckload market.

Rates Matter

Here is the rate data displayed in the same format as the MDI data. We see here a steady rise in the average price but without the recent spike evident in the MDI data. 

The steady rise may require adjustments to pricing and shipper budgets, but those adjustments would not be because of a one-time, sustained market change. In addition, we get an important hint about market dynamics from the parallel movement in prices in all three of the historical reference points included in this chart. They have all been moving steadily upwards since Week 6.

That parallel movement causes us to consider the seasonal pattern for truckload rates. The next chart does that – and shows a clear seasonal pattern – one that changes the story considerably. The “seasonalized” data presented on the red line takes out the normal seasonal rise in springtime truckload rates, allowing us to see any underlying changes in rate levels. This data shows a modest uptick in the last three weeks, but only in the neighborhood of five cents per mile. In the inherently volatile world of spot prices, such a modest change is seldom the reason for a participant to take a significant change in strategy.

Prices and MDI

Why then does MDI move so strongly but not prices? The answer probably lies in the difference between the two metrics. MDI is a measure of the effort that shippers put in looking for truckers. It makes sense, that when the market is approaching its normal peak in June, that they would put extra effort into that search. This is especially true in 2018, a year of shortages in all seasons. Apparently, that extra effort is paying off for shippers (and brokers) because pricing has not jumped along with MDI. Looking harder has found trucks without a big price premium. One can also see when looking at the MDI and rate data, that the MDI is inherently more volatile. We should not be surprised when MDI jumps around at peak times, but rate data does not.

This data tells us something else as well. Having now established the presence of a strong seasonal trend, one must consider at what point seasons will change and rates will begin to come down. Even the hottest summer eventually departs, creating cool afternoons for football games and eventually snow for skiing. This question is apropos in late June because the historical data in the previous chart shows that prices normally peak in week 26, this week, before slowly falling throughout the next three months. That fall is in the neighborhood of twenty cents per mile, more than enough to offset the five cents that underlying prices gained during the current uptick. One concludes, then, that prices are about to flatten, before beginning a slow slide through October. That’s what the normal seasonal pattern tells us.

Conclusion 

Take a final look at the seasonalized rate data in the last chart. The value for week 25 is almost the same as the value for week 1. This raises a startling point about the business of year-over-year (YOY) comparisons, the most common way to measure price change. In Week 26 we are 26% above the value for Week 26 of 2017. Impressive! Keep in mind, however, that Week 26 in 2017 was a time of modest spot prices, only just above the average for this recovery.

The big gains in pricing began near the end of the summer last year at the time of the hurricanes. Then prices jumped even more when the Electronic Logging Device (ELD) mandate appeared late in December. Notice that the seasonalized prices in 2018 have been roughly level this year. If that pattern continues – we expect it will be no stronger than that – then YOY comparison will be made against progressively tougher comparison points as the year matures. By the end of the year, they will be flat or maybe even negative.

Now, the level of pressure will be the same, high rates, but the YOY figures will be shockingly low for observers used to the 20-30% numbers of the last year.

The numbers say: stay the course. 

Emotion will say “Head for the bunkers! The good times are over!” The additional analysis does indicate a softening of the market condition in 2019, but let’s save that analysis for another time. Our point here is that investment in fully understanding industry metrics provides a much clearer picture of conditions that a simple glance at the statistics.

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About Noël Perry: Joining Truckstop.com in June of 2017 as Chief Economist, Noël Perry is the rare economistic to specialize in transportation. Starting on a loading dock in 1968, he has followed his life’s interest in senior research positions at Cummins Engine, CSX and Schneider National. He has been in private practice since 2008, working with clients in four modes and the shipper community. He is frequently quoted in the national logistics media and heard on the speaking circuit.

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