This week’s DHL Supply Chain Pricing Power Index: 75 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 75 (Carriers)
Three-month DHL Supply Chain Pricing Power Index Outlook: 70 (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
In last week’s edition, I noted that the setup for carriers couldn’t be much more favorable. Despite tender volumes having declined nearly 10% since the start of the month, I feel no differently. It seems freight markets are taking a breather after pushing to a YTD high to end the first quarter.
I wouldn’t get used to it. The Reefer Outbound Tender Volume Index (ROTVI) has steadily fallen since its all-time high in early March, when winter weather sent reefer demand surging. But produce season is ramping up, and the combination of warmer weather and vaccines could offset the drag from falling grocery spend overall by consumers as they revert to restaurant spending. Grocery spend peaked in January, and restaurant spending was up more than 10% over 2019 in the latest week of data ending April 3, according to Bank of America.
In addition to reefer, many other catalysts drive freight volumes throughout the second quarter. Consumers continue to drive freight volumes throughout the country, with total card spending up 20% from 2019 last week. Bank of America estimates retail sales excluding autos increased a remarkable 11.1% seasonally adjusted in March.
The ISM Purchasing Managers Index for the manufacturing sector rose to 64.7 in March, the highest reading since December 1983. The National Association of Home Builders/Wells Fargo Housing Market Index has declined since its all-time high in November but remains extremely high at 82.
The economic recovery paired with Americans still being unable to spend on big-ticket services has created a near-perfect backdrop for carriers in Q2. The Port Report, produced by the National Retail Federation and Hackett Associates, is calling for imports to “set records now into the summer” as consumers keep spending on goods.
The most recent stimulus round is providing a massive boost to consumers, who by and large are still stuck at home. Working from home has been a major success for millions of Americans, and people keep spending on at-home upgrades like furniture and online electronics.
Service-based spending categories like airlines, lodging and restaurants all were positively impacted by the stimulus, but the five biggest growth segments were in goods. With the roaring consumer economy, blossoming industrial recovery, white-hot housing market and historically depleted inventories, there’s very little outside of severe inflation that could derail this trucking market. There are too many catalysts for this lull to continue for long.
Tender rejections: Absolute levels positive for carriers, momentum neutral
In the last week of Q1, the Outbound Tender Reject Index (OTRI) jumped back toward its familiar natural ceiling of 30% as shippers rushed to get freight out the doors. After topping out at 28.3% on March 28, the U.S. aggregate OTRI has declined to 25.8%. This is an extremely high level by any measure; carriers are still rejecting more than 1-in-4 electronic tenders at contract rates.
As produce season begins, the reefer capacity environment has rarely been tighter. The Reefer Outbound Tender Reject Index (ROTRI) is also just off an all-time high and currently reads 46%, indicating nearly half of all electronically tendered contract reefer loads are being rejected.
I anticipate higher freight demand in the coming months, and there are no immediately visible signs of capacity relief. The port congestion has prompted retailers to seek alternative routes, which will benefit East Coast ports, but with carriers optimized for LA/Long Beach, it may create lasting volatility. And with vessels arriving from the Suez blockage, bunching on the East Coast will likely cause even more disruptions at ports.
Spot rates will feel some upward pressure, but I don’t foresee rates testing the recent highs again given contract rates continue to be marked up to spot, even if in the form of shorter-term contracts.
Spot rates: Absolute level and momentum positive for carriers
In a continuation of last week’s trend reversal, the national dry van spot rate average from Truckstop.com available in SONAR rose again this week, up 2 cents to $3.18/mile, inclusive of fuel.
Regionally, rates were a mixed bag this week with 47 of the 100 lanes in SONAR positive. However, surges in pricing on particular lanes more than made up for less green markets. Four lanes jumped by double-digit percentages this week, while none fell by the same mark.
Spot rates have a high correlation directionally with OTRI, so the upward pressure this week was expected as carriers were able to squeeze in a few extra dollars on end-of-quarter runs (data ends April 4).
Contract rates are quickly ticking up toward spot rates. Spot rates will remain elevated if the current environment of high demand and relatively scarce capacity remains. Catalysts including new truck orders and the ending of social distancing measures will add capacity, but the questions linger: when and how much. For now, carrier networks remain strained with this level of demand, and I anticipate demand will increase from here when the produce season begins in earnest and more regional economies reopen.
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. While those were disappointing, the jobs report for March blew away expectations and is more important.
Jobless claims came in above consensus estimates this week, a break from the recent momentum. Jobless claims were 744,000, which came in above the consensus of 694,000, and an increase from 728,000 last week. There was good news in the form of continuing claims (a rough proxy for unemployment), which were down 16,000 this week to 3.73 million, marking a new low in the COVID era.
The latest unemployment report from March was very encouraging and blew away expectations (the U.S. economy added 916,000 jobs in March) and suggests the economic recovery is gaining steam from an employment perspective. Meanwhile, the unemployment rate declined to 6%.
Initial jobless claims (weekly in 2020-21)
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 available increased by a whopping 67% year-over-year and 20% compared to 2019 (i.e., on a two-year basis). The picture is slightly less optimistic in retail spending excluding auto, which was up 61% year-over-year last week.
As we usually note, there has been an ongoing beneficial mix shift from cash to debit that is somewhat inflating these numbers. One can typically tell this is the case because debit card spending has been far outpacing credit card spending for the past year. Not so this week, however, as credit card spending increased 68% year-over-year, while debit card spending was up 66% year-over-year. Debit spending is still outpacing credit on a two-year basis materially. After consistently running deeply negative for months and being down precipitously since April 2020, credit card spending is clearly booming again.
The main takeaways this week are that, excluding auto, total card spending in retail was up 11.1% month-over-month seasonally adjusted in March, which is an enormous number. Also, total card spending by stimulus recipients is still outpacing that of nonrecipients, running up this week by 33% on a two-year basis compared to 14% for nonrecipients. The latter is still an incredibly robust figure. Finally, there has been a noticeable increase in restaurant spending (which rose by 13% on a two-year basis last week), and millennials are spending stimulus at a rate faster than all other generations.
We have been noting that we are expecting a near-complete reversal and decisive change in terms of the winning and losing categories from a year-over-year growth perspective once a large number of Americans are vaccinated. However, at this point, the COVID winners and stay-at-home beneficiaries still haven’t dropped off much because overall spending is so strong, but previously weak categories are surging.
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 Securities
Transportation stock indices: Absolute levels and momentum positive for carriers
It was another solid week overall for our transportation indexes. LTL was the best performer at 4.8%, while truckload was the worst performer at 0.4%.
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