This week’s DHL Supply Chain Pricing Power Index: 70 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 75 (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 level positive for carriers, momentum positive for shippers
The Outbound Tender Volume Index (OTVI) has normalized after the Independence Day fluctuation and sits at 15,754. Nominally, OTVI has only ever been higher than it is now a handful of times. OTVI notched its all-time high the week leading up to Black Friday/Cyber Monday last year when the index topped 17,000. However, we must remember there are some rejected tenders counted in OTVI, so it’s helpful to adjust using the inverse of the Outbound Tender Reject Index (OTRI) to add context.
At the previous high in November, OTRI was above 28%, which means many of the tenders that pushed the index higher leading up to Thanksgiving were rejected tenders. That is not the case right now. Over the past several months, OTRI has declined meaningfully as contract rates have been marked up toward spot and routing guides have become slightly more sound. Over the same period, tender volumes have risen considerably, indicating the upward pressure on volumes is from more accepted tenders than in the previous high. In fact, the “Accepted” Outbound Tender Volume Index has never been higher than it is right now.
The disparity is miniscule — less than 1% over the previous high — but the previous high was the peakiest of peaks in the midst of a goods-heavy holiday shopping season. We’re two weeks into the third quarter, a time when seasonal freight movement moderates ahead of the back-to-school season and the eventual peak holiday season. Thus far, the moderation simply hasn’t materialized.
Drivers of demand. Unlike much of the early months of the pandemic, there are catalysts outside of consumer demand driving freight volumes. Consumer goods demand remains strong from a historical perspective, up ~20% versus pre-COVID, but has flatlined in recent weeks. Overall consumer spending has remained stable despite moderating goods demand due to an unleashing of pent-up services demand.
There will be a significant lag between a drawdown in consumer goods demand and consumer freight due to historically low inventory levels currently. Retailers across all segments have months, if not years, of restocking ahead that will keep retail freight volumes elevated long after consumers revert back to service spending norms.
The manufacturing sector continues along its stable but hiccup-filled recovery path. The Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index has notched 13 consecutive months of growth. Industrial production still lags pre-COVID, but given the supply chain difficulties and labor struggles, the sector is performing well. Just look at the Flatbed Outbound Tender Volume Index year-to-date. Because flatbed capacity is more stable and has more barriers to entry, the flatbed rejection rate can glean valuable insights on demand directionally. The index has doubled since the beginning of the year.
The housing market, despite soaring input costs and difficulty sourcing labor, continues to push ahead. Housing starts and permits growth has slowed in recent months from the torrid pace of Q2, but both are growing in a healthy way.
There are two primary potential headwinds: inflation and the Delta variant. In June, the consumer price index rose 5.4% year-over-year, which is the highest pace in nearly 13 years. But much of the move higher in consumer prices was in sectors most whipsawed by the pandemic, including used car prices and lodging. Also, there are base effects from lapping a difficult economic time last year in which prices plummeted in the onslaught of the first wave. One good sign: Data shows that Stage 4 producer inflationary pressures, while still increasing in June, increased at a slower rate than they did from April to May. Stage 4 goods producers make final demand products for consumers and therefore are a good measure for inflationary pressures that could eventually reach consumers.
Tender rejections: Absolute level positive for carriers, momentum positive for shippers
The Outbound Tender Reject Index (OTRI) is at its lowest point since before the winter storm hampered freight flows in late February. After peaking above 28% on March 27, OTRI has been sliding ever since. There has been volatility, particularly in the dry van segment, but for the aggregate index the trend is intact. Carriers are still rejecting a lot of tenders, 22% to be exact. But generally there has been marked improvement in carrier compliance over the past several months.
One of our newest indices in SONAR gives us the ability to compare markets on as close to an apples-to-apples basis as possible. FreightWaves’ Carrier Trend Market Score indices are divided into two perspectives — shipper/broker and carrier. The scores are positioned on a scale from 1 to 100 and have values measuring van and refrigerated (reefer) capacity. The higher values represent more favorable trends for whichever perspective. For instance, a value near the high end of the range would suggest very favorable conditions for carriers in our carrier capacity trend score index.
For the past several weeks, capacity disparities have been driven by import volumes. The markets with the tightest carrier capacity coincide with the nation’s busiest ports, but relative capacity is looser now than leading up to Independence Day. In the week prior to the Fourth, several major markets, including Ontario, California, Savannah, Georgia, and Atlanta, had Carrier Trend Market Scores of 100, indicating the best carrier conditions. As of Friday, not a single major market has a score above 95. In fact, the three major markets mentioned have trend scores of 81, 86 and 81, respectively.
By mode. Relative capacity in each of the three major trailer types are moving in different directions. As stated above, overall tender rejections have been steadily moving down, but there are major disparities by mode. Reefer rejections have been tumbling since notching an all-time high post-winter storms in February. ROTRI has fallen from ~45% on April 1 to ~32% currently. Flatbed rejections have moved inversely of reefer so far this year. As the manufacturing sector ramped up in earnest early in the year, flatbed tender rejections have slowly risen. Since April 1, FOTRI has risen from ~21% to ~23%.
Dry van, which makes up a supermajority of the overall rejection index, has been volatile, but the trajectory has been fairly stable over the past several months. The trend is certainly down but coming from a lower high so the pace of correction is slower than reefer. If van rejections were to follow any sort of historical seasonality, or even continue the current pattern, we should expect to see rejections at their lowest point for the month next week before rising into month’s end. VOTRI has fluctuated between 22% and 26% each of the past three months, with the bottom coming mid-month. I would expect to see rejections reverse course toward the end of July.
The FMCSA data indicates that trucks are being added to the for-hire trucking market, but not by new fleets and not nearly at a rate fast enough to match demand growth. Since the beginning of the year, more than 42,000 tractors have been added to the for-hire market; 39,000 of these tractors came from existing fleets (at least 18 months old). Year-to-date, the for-hire market has grown 2.6%, while OTVI has expanded more than 12%. Calling the issue a driver shortage is simplistic and misguided; carriers are trying to respond, but there is simply too much demand to match capacity.
Freight rates: Absolute level and momentum positive for carriers
In the two weeks prior to Independence Day, the Truckstop.com national dry van spot rate average surged from $3.10/mile, inclusive of fuel, to $3.31 currently. Rates fell slightly this week from the fresh all-time high of $3.33/mile posted on the Fourth.
FreightWaves contract rate data is at a 10-day lag to Truckstop.com’s spot rate data, so we should see contract rates pick up when the data is updated. Currently, contract rates are sitting at $2.54/mile, excluding fuel surcharges. I suspect to see the recent all-time highs of my June around $2.60/mile retested in the coming weeks as contract rates continue to be renegotiated higher. With OTRI still well above 20% nationally, and still a large spread between contract and spot, there’s more room for carriers (and brokers) to bid up contract rates.
Spot rates are highly correlated with tender rejection rates and thus have been following the same monthly volatility pattern: Rates peak at the beginning of each month, then moderate mid-month before rising into month’s end. With that trend in mind, if OTRI continues its current pattern, we should see some relief for shippers on spot rates. That’s not to say rates will plummet — they most certainly will not. But I don’t suspect the national dry van average to test the most recent ATH in the next two weeks.
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. This week, the data was again very promising as the labor market continues on a bumpy but trajectorially stable recovery path.
First-time filings totaled 360,000 for the week ended July 10, a significant drop-off from the previous weeks’ upwardly revised total of 386,000. Last week’s claims notched another pandemic-era low.
Continuing claims, which run a week behind the headline number, also fell sharply, declining by 126,000 to 3.24 million. This was another newly established low for a jobs market that has made significant strides but still has a long road ahead before getting back to pre-COVID employment.
The aggregate total of those collecting benefits under all government programs also fell sharply, dropping by 449,642 to 14.2 million through June 19. That is well above anything seen before the pandemic, but pales in comparison to the peak of 33.2 million on the rolls a year ago.
Initial jobless claims (weekly in May 2020-May 2021)
Consumer. Although there are base effects due to the timing of Independence Day this year versus previous years to explain much of the decline, consumer spending softened in the most recent week of data from Bank of America. According to Bank of America, total card spending was up just 13% over 2019 for the week ending last Saturday, which is a marked slowdown from the ~20% growth from the previous several weeks. The coming weeks should see improved yearly comps as we move toward comparing normal spending days (non-holidays) to other normal spending days.
Starting the week of June 12, some states have been withdrawing early from federal unemployment insurance programs. This week, Bank of America highlighted spending in states that have withdrawn early versus those states still receiving. Spending is slightly lower for the states that allowed the expiration than for the states that did not, but only in the most recent week.
The first child tax credit disbursements began hitting family bank accounts Thursday. Families have benefited from child tax credits for years, but the American Rescue Plan made some big changes. The amount per child was raised across age brackets, low-income families with little to no taxable income were qualified, and most importantly to freight, the way the credits are paid out was changed. Rather than receiving the credits come tax time, families will receive half of the funds via monthly direct deposits now through December. Families will receive the rest after filing taxes.
All told, parents and caretakers with household income less than $150,000, and individual filers up to $75,000, will soon begin receiving $250 or $300 per child (depending on age) every month through the end of the year. In a note published this week, analysts at Cowen said the additional income may surprise both Americans and the broader economy, calling it “an underappreciated catalyst for discretionary consumer spend.” Over the next year, Cowen estimates the child tax credit will amount to $150 billion in stimulus to families.
These disbursements coincide with strong pent-up demand for the second-biggest shopping season of the year: back to school. Analysts and retail executives are gearing up for a superlative-filled B2S season, as children and parents crave a fresh start and a sense of normalcy that should translate to record shopping.
A recent survey from Piplsay, a consumer research firm, indicates that 39% of consumers expect to spend more this B2S season than in years past. Target’s chief growth officer, Christina Hennington, said on the first-quarter earnings call in mid-May that the retailer is “planning for one of our biggest back-to-school and college seasons ever.”
Cowen analysts expect child tax credit payments to lift sales across retail, restaurant and travel industries. Parents of nearly 90% of children in the U.S. will receive the payments, according to the IRS.
Manufacturing. Over the past two weeks, regional manufacturing surveys have reported generally positive readings amid logistical challenges. The New York Fed’s Empire State business conditions index rose 26 points to a record high of 43 in July. New orders and shipments surged, while the employment component increased 8.3 points to 20.6 as 29.5% of companies indicated they would be adding workers.
The Philadelphia Federal Reserve released its July manufacturing survey for the region this week. The bank said its business activity index declined to 21.9 in July after topping 30 in June. The print was well below economists’ expectations for a reading of 28, according to a Reuters poll.
Both of these indexes are diffusion indexes calculated from sentiment surveys, and any reading above zero indicates growth. So while the Philly region’s factory sentiment may have moderated in July, the direction of the segment is still positive. The Philly Fed’s factory gauge hit its highest level in 1973 in March 2021.
New orders and shipments are expanding quickly, but factories are still struggling to keep up with demand. Difficulty sourcing labor is one key area of concern across basically every economic category, but particularly heavy industries.
In both the Empire State and Philly Federal Reserve reports, the prices paid component fell sharply. While this is a good sign, it’s only one month and the price indexes remain at historically elevated levels.
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