Freight cycles 101: Supply, demand, and everything in between with FWF Director of Analytics, Matthew McGavin

What causes freight market cycles, and why are rate shifts so "surprising" even when everyone sees them coming? In this episode, FWF Director of Analytics Matthew "Shooter" McGavin answers both. 

We cover how supply and demand interact with fuel costs, federal policy, and interest rates to move the market, why the freight cycle can't really be reliably predicted until it's already happening, and what newer brokers should focus on to avoid misreading macro trends at the lane level.

Inside Freight is produced by Fifth Wheel Freight, a third-party logistics provider based in Grand Rapids, Michigan, offering truckload, LTL, drayage, rail, over-dimensional, and expedited freight services across the US and Canada. Learn more at fwf.com.  

Transcript

SPEAKER_00 0:00

What are other things that are impacting the up and down nature of the freight cycle outside of just supply and demand, the obvious up and down, but like, you know, I'm sure you can name a million, but some of the most common ones that we see impacting these cycles? Right now, the key factor making that change is all right. Well, Matt, or as we call you here, shooter, welcome to Inside Freight. We're very happy to have you here today. If you could tell us a little bit about who you are, what you do at Fifth Wheel, and kind of what brought you to Fifth Wheel.

SPEAKER_01 0:35

I am the director of analytics here at Fifth Wheel Freight. I started in an analytics role here a little over five years ago now. And it was my first introduction to the freight market. And now, five years later, I'm doing a little bit of market analytics, a lot of internal analytics and reporting that to the sales floor, to the executive team, and other leaders within the company.

SPEAKER_00 0:53

Nice. Very nice. Today we're gonna talk a little bit about freight cycles. I think that's something that everybody in the industry obviously is very, very familiar with. We talk about it every single day. But someone new to the industry might not understand what that means, might not understand why the market is always cycling. So if you can kind of just start by like very baseline explaining sort of what a freight market cycle is and and what that like means within the industry, generally speaking.

SPEAKER_01 1:17

Yes, it is the cyclical change in the market rate, the cost of moving freight. And that's what everybody considers a cycle. It goes up and it goes down, it has high peaks, low troughs, and it depends on the change in demand, the amount of people willing to have something to ship and paying to ship it, and then the people willing to do so for them. Both sides of that change greatly throughout the course of a cycle. And that is how we define the market freight cycle, the change in the cost to do that.

SPEAKER_00 1:44

That makes sense. And very similar to like stock market cycles and things like that, I would imagine, to some extent.

SPEAKER_01 1:49

Yeah, you know, the willingness for somebody to pay for it at the top and then the willingness to pay for it at the bottom.

SPEAKER_00 1:54

Why doesn't the freight market ever really like plateau? That's something I always wondered when I came into this industry. You see quite literally on these charts the cycle, the up and down. You don't really ever see like a just pause.

SPEAKER_01 2:06

The freight market itself is not a final good. It's a service delivered to many other different industries, construction, manufacturing, and it depends on the demand from those two. And one thing on the other side of the equation is supply. Supply is very slow to change and adjust. So we will constantly see, you know, the highs turn into lows, but it's a slow process, and that's where we get that cyclical nature where supply can't immediately meet demand. Right. And vice versa, when demand can't immediately meet supply. Yeah.

SPEAKER_00 2:36

No, that makes sense. What are other things that are impacting the up and down nature of the freight cycle outside of just supply and demand, the obvious up and down, but like, you know, I'm sure you can name a million. But some of the most common ones that we see impacting these cycles?

SPEAKER_01 2:51

Right now, the key factor making that change is oil prices, diesel prices, fuel prices can be upward to you know 40-50% of the operating cost of moving freight. So when we see significant increase in diesel prices like we have in the past month, that is a significant strain for carriers and will drive up that cost of freight, regardless of what supply is doing, regardless of what demand is doing.

SPEAKER_00 3:10

How do things like interest rates, politics, the broader economy sort of play a role in in these cycles sort of inadvertently?

SPEAKER_01 3:17

Interest rates are the key one, which have been changing, you know, for the favor of borrowers for the past couple years. It's gonna allow for construction customers, for manufacturing suppliers to be able to borrow at a lower cost, to be able to invest in their new infrastructure projects or to restock at a lower rate, and that will add to truckload demand.

SPEAKER_00 3:37

Yeah, no, that makes sense.

SPEAKER_01 3:38

Politics don't necessarily affect interest rates. That's largely controlled by the Fed, but you can see politics determine supply-side factors such as CDL requirements, which is what we're seeing right now, restricting certain types of non-domicile drivers, or demand infrastructure coming from the federal government. We can see that come through in a few different ways. EPA regulations, the cost of what needs to be in a new truck produced after 2026, things like that that can just control what the supply side of the market looks like.

SPEAKER_00 4:09

Right, right. No, that makes sense. Why do you think, you know, I'll be on LinkedIn sometimes and we see we see a market shift happening for whatever reason it might be, and people sometimes seem surprised. And it's a it's a very cyclical market, so you you'd think that sometimes these shouldn't be so surprising in hindsight, but why do you think that people still are surprised seemingly sometimes by these shifts?

SPEAKER_01 4:32

The shift is predicted numerous times, but it's only correctly predicted once. So it is surprising when we see that you know, the tenth prediction come come true.

SPEAKER_00 4:41

Yeah.

SPEAKER_01 4:42

And everybody at the same time is really excited.

SPEAKER_00 4:44

Right.

SPEAKER_01 4:44

Which kind of builds some optimism around it and builds some celebration. So it's something that is kind of celebrated in that moment a little bit and talked about as it progresses through the next couple years.

SPEAKER_00 4:55

Right.

SPEAKER_01 4:55

Through that portion of the cycle. But like I said, it's is so hard to predict, and it's kind of surprising when we do see that inflection point because you only really see it, you know, once at the bottom of a cycle.

SPEAKER_00 5:07

Right. You're kind of you're kind of waiting for it and anticipating and obviously predicting when it's going to happen.

SPEAKER_01 5:13

And you will see a couple different signs of it happening.

SPEAKER_00 5:16

What are those typically?

SPEAKER_01 5:17

Prices, spot market prices. They can be controlled by, you know, momentary increases in demand, which don't necessarily indicate the flip of the market or seasonal demand, holidays will cause spot rates to increase, obviously. And do we look at that too much and overestimate it? Or just the general shift of perception will typically change based on monthly factors. And whether or not that comes true will take a couple months to kind of fully realize.

SPEAKER_00 5:46

Right. If I'm a broker, a newer rep, or just like new to this industry in general, what would you recommend? I really try to understand early so I don't, you know, accidentally misread market signals or what's happening in the market.

SPEAKER_01 5:57

Everybody is gonna have their own opinion on the market, their own uh forecasted expectations, along with what's driving those, can be very opinionated. Yeah. But even on the macro level, that doesn't necessarily determine what you're seeing on an individual lane, what is beneficial to your shippers, your carriers, what your network looks like. So you can't lean too much into the general shift of macro developments.

SPEAKER_00 6:21

That makes sense.

SPEAKER_01 6:22

I mean, you really have to take it based on what you're seeing sometimes, and that's where an experienced broker can really gain an edge.

SPEAKER_00 6:27

Yeah, absolutely. Cool. Well, thanks for explaining the market for the logistics snoobbies out there. Appreciate it.

SPEAKER_01 6:33

Thank you.

SPEAKER_00 6:34

Have a good one. Thanks for listening to Inside Freight by Fifth Wheel Freight, where we break down the logistics topics that matter to brokers, shippers, and carriers. FWF is a third party logistics provider headquartered in Grand Rapids, Michigan, specializing in truckload, LTL, drainage, rail, over dimensional, and expedited freight across the US and Canada. To learn more, visit FWF.com or follow us on LinkedIn, Instagram, TikTok, or YouTube.