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This week’s FreightWaves Supply Chain Pricing Power Index: 40 (Shippers)

Last week’s FreightWaves Supply Chain Pricing Power Index: 40 (Shippers)

Three-month FreightWaves Supply Chain Pricing Power Index Outlook: 35 (Shippers)

The FreightWaves 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.

This week’s Pricing Power Index is based on the following indicators:

Volumes somehow find room for further decline

Last week, I wrote about the trend in freight demand one would typically see in August: namely, upward movement. This trend, as I then noted, played itself out in bullish cycles, bearish downturns and even in extreme volatility. I was worried last week just because volumes were unseasonably flat. 

This week, the worry deepened. The Outbound Tender Volume Index (OTVI) fell just as back-to-school spending was meant to inject freight demand into a flagging market. Of course, when looking at macroeconomic data and reports from retailers, this fall is hardly surprising. But on a historical basis alone, OTVI’s downward spiral is hard to digest.

Tender volumes fail to impress:
SONAR: OTVI.USA: 2022 (white), 2021 (green) and 2020 (orange)
To learn more about FreightWaves SONAR, click here.

OTVI fell 1.21% on a week-over-week (w/w) basis as high inventory levels negate the need for shippers to move much freight. On a year-over-year (y/y) basis, OTVI is down 22.5%, although y/y comparisons can be colored by significant shifts in tender rejections. OTVI, which includes both accepted and rejected tenders, can be artificially inflated by an uptick in the Outbound Tender Reject Index (OTRI).

Accepted volumes are nearing 2020 levels:
SONAR: CLAV.USA: 2022 (white), 2021 (green) and 2020 (orange)
To learn more about FreightWaves SONAR, click here.

Contract Load Accepted Volume (CLAV) is an index that measures accepted load volumes moving under contracted agreements. In short, it is similar to OTVI but without the rejected tenders. Looking at accepted tender volumes, we see a dip of 1.15% w/w but also a fall of 5.18% y/y. This y/y difference confirms actual cracks in freight demand — and not merely OTRI’s y/y decline — are driving OTVI to lower levels.

While retailers had already announced their towering inventory at the close of the second quarter, this week brought a new round of inventory concerns from major retailers. On Tuesday, Walmart stated it has canceled billions of dollars of new orders in an effort to align its overstocked inventory with consumer demand. On Wednesday, Target revealed that its Q2 inventory levels were up 36% y/y and 2% over the previous quarter, but also that its net earnings were down 89.9% y/y.

Lowe’s reported an 11.59% y/y increase in inventory but a 0.86% y/y dip in net earnings. Kohl’s, which reported a 63% y/y fall in net earnings amid a 47.6% y/y rise in inventory, is planning to trim its stock in order “to account for a softer demand outlook.” I could go on, but hopefully the pattern is becoming clear: Retailers overcorrected on orders after being caught unawares early in the pandemic, while consumers are satiated on goods purchases and are being squeezed by inflationary pressures. Consequently, tender volumes are dampened as retailers see no urgency to receive more freight.

Volumes grow in smaller markets:
SONAR: Outbound Tender Volume Index – Weekly Change (OTVIW).
To learn more about FreightWaves SONAR,
click here.

Of the 135 total markets, 63 reported weekly increases in tender volume. Lexington, Kentucky, saw its local OTVI jump nearly 16% w/w. While I primarily know Lexington as a city that makes Big Ass Fans, it has a small but robust foothold in manufacturing automobiles as well as miscellaneous industrial materials. (It’s also a city for hipsters and/or rock climbers, not to mention the thoroughbred horses.)

Savannah, Georgia, also reported a 4.62% w/w gain in tender volumes. While some of that rise can be attributed to import volumes trickling in from the Port of Savannah, reefer volumes in the market also swelled 5.68% w/w. Larger outbound markets did not, however, see the same bounty. Atlanta suffered a 1.61% w/w contraction in freight demand, while Ontario, California, saw volumes fall 4.04% w/w.

By mode: After a disappointingly muted growth last week, reefer volumes are once again climbing with vigor. The Reefer Outbound Tender Volume Index (ROTVI) is up almost 3% w/w, with the week’s largest gains coming from Midwestern markets such as those in Indiana and Wisconsin. ROTVI is down over 26% on a y/y basis, but a large portion of that difference is due to rapidly declining reefer rejection rates.

Van volumes, on the other hand, are dragging the overall OTVI into the red. The Van Outbound Tender Volume Index (VOTVI) is down 0.85% w/w, reflecting the general torpor in the present truckload market. Similar to reefer volumes, VOTVI is down more than 24% y/y, but the gap is mainly from falling tender rejections.

Rejection rates creep downward

This time in 2019, when the trucking industry last suffered a recession, OTRI was at 4.27%. For context, OTRI had just come off its record low at 3.86% the week prior and was beginning to climb steadily to its local peak in mid-September. OTRI’s current downward trend, meanwhile, shows no immediate signs of reversal, even though the back-to-school shopping season is supposed to push more freight onto the roads.

OTRI settles below 6%:
SONAR: OTRI.USA: 2022 (white), 2021 (orange) and 2020 (green)
To learn more about FreightWaves SONAR, click here.

Over the past week, OTRI, which measures relative capacity in the market, fell to 5.76%, a change of six basis points (bps) from the week prior. OTRI is now 1,667 bps below year-ago levels.

The largest container port in America is bracing for a slowdown in imports. Gene Seroka, executive director of the Port of Los Angeles, cautioned that “China factory orders are slowing” and, as has been discussed, “some retailers continue to have elevated inventories.” Accordingly, Seroka expects August’s cargo numbers to soften as orders for durable goods decline rapidly.

Nevertheless, Seroka’s complaints appear to speak more to an increase in shippers’ preference for East Coast ports and less to declining import volumes overall. On Thursday, the U.S. saw 130 container vessels waiting offshore, ready to be docked and unloaded. The stage is thus set for the bullwhip effect to play itself out, wherein news of demand destruction reaches suppliers too late. Even so, this freight will need to move once brought onshore, as warehousing vacancies are virtually nonexistent.

Capacity tightens in Michigan:
SONAR: WRI (color)
To learn more about FreightWaves SONAR, click here.

The map above shows the Weighted Rejection Index (WRI), the product of the Outbound Tender Reject Index — Weekly Change and Outbound Tender Market Share, as a way to prioritize rejection rate changes. As capacity is generally finding freight, only a few regions this week posted blue markets, which are the ones to focus on.

Of the 135 markets, 69 reported higher rejection rates over the past week, though 37 of those reported increases of only 100 or fewer bps.

Detroit saw tender rejections rise by a significant 186 bps w/w, bringing its local OTRI to 6.66% — likely the work of KISS at play. Rejection rates in Detroit have been wildly inconsistent over the past few months, nearing 8.5% late in July but plummeting to 4.8% last week. This inconsistency mirrors industrial production in the region, where manufacturers have been subject to input prices spiraling faster than they can pass them along to customers.

SONAR: VOTRI.USA (white); ROTRI.USA (green); FOTRI.USA (orange)
To learn more about FreightWaves SONAR, click here.

By mode: Speaking of industrial production, flatbed rejection rates rose slightly on a weekly basis but are still suffering from a prolonged decline. The Flatbed Outbound Tender Reject Index (FOTRI) gained 19 bps w/w to reach 15.87%. Even so, the current FOTRI is a far cry from what it was two months ago, when flatbed rejections were steadily above 30%. Cratering demand from the construction sector is surely a major contributor to this decline, as housing starts have been falling rapidly since April.

Due to rising reefer volumes, reefer rejection rates were a bit more impressive. The Reefer Outbound Tender Reject Index (ROTRI) rose 44 bps w/w to 6.84%. Rejection rates for dry vans, however, did suffer from falling demand. The Van Outbound Tender Reject Index (VOTRI) fell 14 bps w/w to 5.92%.

Contract rates skydive without a parachute

A watched pot never boils. True to that logic, I could have spared you my hemming and hawing about the direction of contract rates had I waited for the other shoe to drop (the first shoe being spot rates, of course). Last week, I wished for contract rates to undergo a drastic movement of any sort — that wish has since been fulfilled.

Contract rates decline sharply:
SONAR: National Truckload Index, 7-day average (white; right axis) and dry van contract rate (green; left axis).
To learn more about FreightWaves SONAR, click here.

Contract rates, which are linehaul rates that exclude fuel surcharges and other accessorials, fell 9 cents per mile over the past week, settling at $2.78. Keep in mind that contract rate data is reported with a two-week delay, which puts the beginning of the current drop at the tail end of July. All other things being equal, contract rates historically peak at the end of quarters, though that peak is most pronounced at the end of June and December. With a bit of hindsight, we can now see how unusual it was that rates declined at the end of last June and during Independence Day week. 

At present, I have no forecast for the degree to which contract rates will fall until the end of September. I would not find it surprising if they ended that month near $2.70 per mile, though I did expect the majority of their decline to occur in Q4 2022 and Q1 2023. Should the current free fall endure, this prediction might be bullish.

What is now clear is that the spread between contract rates and linehaul spot rates (which similarly exclude fuel surcharges and other accessorials) is narrowing rapidly. With linehaul spot rates outpacing contract rates by only 80 cents this week, the spread has shrunk 11 cents w/w and has returned to levels last seen in early May.

To learn more about FreightWaves SONAR, click here.

That the spread has narrowed is doubly impressive, considering that the National Truckload Index (NTI) fell 6 cents per mile w/w to reach $2.67. Only a third of that decline is due to lowering diesel prices, as the linehaul variant of the NTI (NTIL) fell 4 cents per mile w/w to close at $1.89. In April 2020, the NTIL hit a record low of $1.18 per mile. While I do not believe that the NTIL will return to those levels in the near future, it does show spot rates still have quite a bit of room left to tumble.

SONAR: FreightWaves TRAC rate from Los Angeles to Dallas.
To learn more about FreightWaves TRAC, click here.

The FreightWaves TRAC spot rate from Los Angeles to Dallas — arguably one of the densest freight lanes in the country — also found room for further decline. Over the past week, the TRAC rate fell 1 cent per mile to $2.60. Despite falling through a seeming floor, this TRAC rate is actually outperforming the National Truckload Index — Daily (NTID).

While this TRAC rate was 18 cents per mile below the NTID last week, the spread has since narrowed to only 6 cents per mile. Uncertainties surrounding AB5, California’s newly enforced independent contractor law, yet remain and could push these rates higher in the not-so-distant future.

SONAR: FreightWaves TRAC rate from Atlanta to Philadelphia.
To learn more about FreightWaves TRAC, click here.

It is somehow even worse on the East Coast, where rates have suffered a more severe decline. The FreightWaves TRAC rate from Atlanta to Philadelphia fell 10 cents per mile w/w to reach $3.01. This latest drop compounds the previous two weeks’ losses of a cumulative 26 cents per mile, meaning that the current deterioration is not an easy-come-easy-go fluke but is instead entrenched. In terms of outbound freight volume, the Atlanta market still boasts the most but is suffering contraction like most other regions.

For more information on the FreightWaves Passport, please contact Kevin Hill at [email protected], Tony Mulvey at [email protected] or Michael Rudolph at [email protected].

Michael Rudolph

Michael Rudolph is a research analyst at FreightWaves and is a former freight broker. Prior to entering the logistics industry, Michael worked in academia. He holds an MA from the University of Chicago.