This week’s DHL Supply Chain Pricing Power Index: 75 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 65 (Carriers)
Three-month DHL Supply Chain Pricing Power Index Outlook: 60 (Carriers)
The DHL Supply Chain Pricing Power Index uses the analytics and data contained in FreightWaves SONAR to analyze the market and estimate the negotiating power for rates between shippers and carriers.
Carriers are dealing with a lot of good problems this week, like not being able to handle the throughput of freight coming their way. Carriers are rejecting loads at a clip unseen for a few years and volumes continue to burst from the seams. The wider economy seems to be stalling ahead of another possible round of fiscal stimulus, but freight volumes are healthy.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels and momentum positive for carriers
My goodness, the volume throughput continues to impress even the most bullish in the industry. The outbound tender volume index (OTVI) ramped up another 3.85% this week and currently sits at 12,909. This freight level is remarkable for a few reasons. First, there are no signs of any sort of typical seasonality this year; secondly, other parts of the economy have stalled and unemployment remains extremely high; lastly, OTVI has crossed into unchartered territory by climbing higher than the March panic-buying spree.
The yearly comparisons are fantastical – up 27% over 2019, and 21% above the 2018 value. The pace of reefer volumes slowed this week while still increasing 2.5%.
The possibility of another round of fiscal stimulus should be on both shippers’ and carriers’ minds. Goldman Sachs estimates a $40 billion hit to personal income in less than two weeks when the federal unemployment benefits are set to expire. The government has (fairly) successfully kept the consumer afloat with unprecedented stimulus, but many analysts and politicians are calling for more. The chance of a decision not to extend these benefits is our main worry for freight volumes in the short-term.
Besides the expiration of federal benefits via the CARES Act, there is little evidence that leads us to believe freight volumes will fall off significantly in the coming weeks. The threat of lockdowns created a panic-buying situation in March, then freight volumes plummeted because the majority of businesses were closed. Now, regions are going back into lockdown but the restrictions are less severe. The sectors being locked down are predominantly service-based industries that do not move a large percentage of the nation’s freight. Consumer demand remains fairly strong given that economic backdrop. That being said, the consumer sentiment index from the University of Michigan did pull back in July. Despite this, we do not believe the typical seasonal decline will be as pronounced this year. Carriers remain in a wonderful pricing position.
Tender rejections: Absolute levels and momentum positive for carriers
The Outbound Tender Reject Index (OTRI) continued exhibiting stickiness at a high level for a third week in a row. Last week, OTRI climbed higher than the week leading up to July Fourth. Since then, tender rejections increased over 2% (or 37 basis points). We have heard from large asset-based carriers that they are rejecting more freight than they have in a very long time. OTRI currently sits at 17.09% and is trending upward.
The supply-demand dynamic of May, June and July has been much different than March and April. During March we saw volumes and rejections rise in stepwise fashion to all-time highs in a matter of weeks. This time around it has taken much longer for freight volumes to fill markets, and it has taken even longer for carriers to gain the confidence to reject contracted loads in favor of spot market options.
Another difference in this tightening environment is that volumes will remain elevated for some time, unlike in April when volumes plummeted to holiday levels due to nationwide lockdowns. We should expect to see tender rejections in the double-digit range as long as volumes remain elevated – all signs point to this happening (especially if another round of stimulus is announced). From a capacity standpoint, carriers are in the best position of 2020 right now. Carriers are rejecting loads at a higher clip than at any point since the summer of 2018.
Spot rates: Absolute level and momentum positive for carriers
Spot rates climbed even higher this week to new highs for 2020 on a national level, according to DAT long-haul freight rate data. The per-mile rate (excluding fuel) is now $1.83/mile.
We may be seeing the first signs of a cooling spot market this week. Spot volumes are receding in more than half of the Truckstop.com lane pairings available in SONAR.
Of the 100 lane pairings from Truckstop.com, rates declined this week in one-quarter of them. However, many of these lanes are coming off multi-year highs last week, so the decline may be warranted.
Rates are elevated right now and the supply-demand dynamic suggests they will remain so for some time. Carriers are rejecting loads at a high rate and volumes are flowing at historic levels. Carriers have options and they are exercising them in search of margins.
Economic stats: Momentum and absolute level neutral
Several economic releases this week are worth noting.
By far the most widely watched economic data point this week was initial jobless claims, which give us one of the best close-to-real-time indicators of the overall economy.
This week’s jobs news was slightly disappointing relative to the improved momentum and change in tone we had seen in recent weeks. Initial jobless claims came in at 1.4 million last week, which was worse than consensus expectations of 1.3 million and broke the streak of 15 straight weeks of jobless claim declines. The jobless claim trends developing in hot spot states like Arizona, California, Florida, Georgia, Nevada and Texas are not good and bear watching. Lastly, there was also positive news on continuing claims, which dropped 1.1 million from the previous week and are at 16.2 million.
U.S. initial jobless claims/gains (2007-present)
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 (ending July 18) was actually up 1% year-over-year. This is an improvement compared to recent weeks and well off the ~40% declines from late March and early April. 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 by noticing that debit card spending is currently running up double digits year-over-year and far outpacing credit card spending, which is down meaningfully.
There were several main takeaways from the card spending data this week. Card spending in states that reopened later and where the COVID-19 case count is flattening or falling are seeing higher spending than states where the opposite is true. Online retail spending (particularly on July 13 and 14) weakened substantially because there was no Amazon Prime Day during this week in 2020 as there was last year (it has been pushed back this year). Finally, lower income consumer spending is running higher than middle- or high-income spending – this is due to the generous unemployment insurance and stimulus more than replacing pre-COVID incomes for this cohort. The expiration date for the extra unemployment insurance and benefits is July 31; should these not be extended, it represents a major risk to consumer spending.
By category, online electronics and online retail continue to be the standout performers. Other strong categories include home improvement, grocery and furniture. Brick and mortar retail spending has improved dramatically as most states reopen. Finally, airlines, lodging and entertainment continue to be the worst performing categories by far.
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
Source: Bank of America Merrill Lynch
Transportation stock indices: Absolute levels and momentum positive for carriers
It was not a great week for our transportation indices following several strong weeks over the past month. Parcels was the best performer at 0.3% and truckload was the worst at -2.8%.
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