Carriers Cruising Into Red-hot Holiday Season
This week's DHL Supply Chain Pricing Power Index: 75 (Carriers)
Last week's DHL Supply Chain Pricing Power Index: 80 (Carriers)
Three-month DHL Supply Chain Pricing Power Index Outlook: 75 (Carriers)
The DHL Supply Chain Pricing Power Index uses the analytics and data in FreightWaves SONAR to analyze the market and estimate the negotiating power for rates between shippers and carriers.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels positive for carriers, momentum neutral
The freight market continued to cool this week ahead of what we expect to be a red hot holiday season. The Outbound Tender Volume Index (OTVI) has been oscillating at a very high level since Labor Day; this week happened to be a rebound to the tune of 2% higher over last week. This repetitious pattern over the past seven weeks would lull you to sleep if you hadn't known how tight capacity has been and how difficult it has been to source trucks.
While freight market variables have eased since Oct. 1 (volumes, rejections and spot rates all down), each has come down from near-historic highs. As the Passport team noted in their most recent trucking markets report, "... we believe this period is the ‘calm' before the storm. We put ‘calm' in scare quotes because of course the current market is anything but calm: In a normal year, a national tender rejection rate of 24.7% would imply utter chaos in routing guides and load boards. But in 2020, those conditions have persisted for nearly two months, since the beginning of September."
The industry has become accustomed to chaos this year. The past few weeks have been a reprieve from the market endured in July and August, but it won't last. Despite the lukewarm recovery of the labor market, consumer spending and confidence have improved and stabilized. Retail spending (excluding auto) is up 8% year-over-year, according to the latest consumer data from Bank of America. The lack of service spending opportunities has allowed consumers to purchase more goods. Also, elevated import volumes and low inventory levels give us further confidence this season will be robust.
SONAR:OTVI.USA (2020 – Blue; 2019 – Green; 2018 – Orange)
Tender rejections: Absolute levels and momentum positive for carriers
The Outbound Tender Reject Index (OTRI) has fallen for the second straight week. We believe this marginal decline is more likely from contract freight being renegotiated, than from capacity materially loosening. Tender rejections have declined since Labor Day, but off of the highest value in the three-year series history (~27%). Carriers are still rejecting one in four loads on a national level, and capacity remains extremely difficult to find.
Tender rejections fell in most regions of the country this week, including all of the major freight hubs on both the East and West coasts. Harrisburg and Allentown, Pennsylvania, and Elizabeth, New Jersey, on the East and both Los Angeles and Ontario, California in the West all saw lower rejections. The only regions where capacity tightened this week were the Mountain Prairie and Midwest, but these are tiny markets compared to the five listed above.
This week, Stephens released a note on the capacity constraints limiting truck driver training schools. After surveying 28 driving schools, they estimated 22% of all truck driving schools are currently closed — either temporarily or permanently; current throughput is running at only 57% of pre-pandemic capacity. Thus, carriers can order all the trailers they want, but it will be some time before the bottleneck at training schools is resolved.
SONAR: OTRI.USA (2020 – Blue; 2019 – Orange; 2018 – Green)
Spot rates: Absolute levels positive for carriers, momentum neutral
Spot rates have reacted to falling rejection rates for the second week in a row. After peaking a hair under $3 per mile, spot rates have tumbled all the way down to a measly $2.86 per mile, inclusive of fuel. We kid of course, but this is the lowest weekly spot rate average from Truckstop.com since before Labor Day.
Of the 100 lanes available from Truckstop.com in SONAR, only 37 were positive this week, up from only 28 positive last week. We don't see this as a concern for carriers. This is a function of contract rates inflecting upward and carriers rejecting fewer loads rather than faltering demand. As JP Hampstead, director of Passport Research, worded it, "Carriers still hold pricing power in this market, and shippers have by and large switched from a strategy of controlling cost to ensuring service."
SONAR: TSTOPVR
On a national level, rates are still up 26.2% year-over-year, down from 28% each of the previous three weeks. Rates have been positive on a yearly basis since mid-June but have recently accelerated as carriers have been rejecting tenders at 20%-plus rates. The yearly comps do not get tougher until the typical holiday peak season beginning in November. Until then, we expect to see spot rates running 20%-25% up year-over-year.
SONAR: TSTOPVR.USA (2020 – Blue; 2019 – Orange)
Economic stats: Momentum and absolute level neutral
Several economic releases this week are worth noting.
Weekly jobless claims were released Thursday and give us one of the best close-to-real-time indicators of the overall economy.
Jobless claims fell sharply this week and came in well below consensus expectations. Jobless claims were 787,000 this week, which easily beat the consensus of 875,000, and dropped 55,000 from 842,000 last week. The great news is that this week (other than the week of Oct. 3) marked the lowest weekly jobless claim total going all the way back to March 14, when COVID-19 began to spread in the U.S. and jobless claims exploded. More good news came in the form of continuing claims (a rough proxy for unemployment, which fell sharply again this week, down by more than 1 million to 8.37 million. The unemployment rate has come down to 7.9% but is still more than double its pre-pandemic level.
Initial jobless claims (weekly in 2020)
Source: CNBC, U.S. Department of Labor
Turning to consumer spending as measured by Bank of America weekly card (both debit and credit) spending data, total card spending in the latest week was up 3.3% year-over-year. The picture is even brighter when focusing on retail spending. Retail spending (excluding auto) was up 10% year-over-year for the week that ended Saturday.
As we usually note, keep in mind there is a beneficial mix shift from cash to debit ongoing that is somewhat inflating these numbers. One can tell this is the case from the fact that debit card spending is currently running up 8% year-over-year and far outpacing credit card spending, which is down 3% year-over-year.
The main takeaways this week are that Amazon Prime Day occurred on Oct. 13 and 14 this year, which one can easily see in the jump in online retail spending from the 55% range to 80% and above at the end of the week. We would expect there to be mean reversion in the online retail category in the coming weeks back down to the more normalized level in the mid-50s.
By category, online electronics (up 71% year-over-year this week) and online retail (up 72%) continue to be the standout performers. Other strong categories include home improvement, furniture and general merchandise. The strong categories, as well as the weaker ones, have been remarkably persistent since the pandemic began, with the former weakening slightly and the latter improving gradually.
Grocery is still strong but well off the highs, running up 9% year-over-year. Restaurant and bar spending has staged a huge comeback and is now down just 8% year-over-year. Brick-and-mortar retail spending has improved dramatically as most states reopen and was down 5% year-over-year this week. Finally, airlines, lodging and entertainment continue to be the worst-performing categories by far, but lodging is way up off the bottom and appears to have gained momentum in recent weeks. Airlines and entertainment are now declining about 60%-70% year-over-year compared to the trough of down 90%-100% in early April.
Card spending by American consumers has a strong correlation with truckload volumes, so we will continue to monitor this data closely going forward.
Source: Bank of America Merrill Lynch
Transportation stock indices: Absolute levels and momentum positive for carriers
Our transportation indices cooled off again this week after several strong months. Transportation stocks, and particularly truckload, are in the midst of a pullback as the market wavers over whether spot rates have peaked and rising new truck orders will spoil the party. Logistics was the best performer this week at -0.2%, while LTL was the worst performer and down 1.5%.
For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at khill@freightwaves.com, Seth Holm at sholm@freightwaves.com or Andrew Cox at acox@freightwaves.com.
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