Conditions have improved, still remarkably difficult heading into peak season

The Pricing Power Index is based on the following indicators:

Tender volumes stable but accepted volumes turn up

The Outbound Tender Volume Index (OTVI), shippers’ requests for capacity, has stabilized over the past week, breaking the downward trend that started at the beginning of October. Over the past week, OTVI has fallen by less than two-tenths of a percent.

Volume levels are set to follow the same seasonal trend where volume levels end October lower than where they enter the month. Volume levels are down 2.5% since the beginning of the month but have stabilized around the 15,500 mark. Given elevated consumer demand, expect that volume levels will ramp throughout November, though there is plenty of risk for slower volume growth during the peak retail season surrounding Black Friday.

Consumer sentiment has declined significantly over the past several months, though retail sales continue to surprise the upside. Bank of America’s total card spending continues to run more than 20% higher than 2019 levels and more than 15% above 2020 levels. These increases show that deteriorating sentiment hasn’t materialized, at least not yet anyway.

The National Retail Federation just released its 2021 Holiday Sales Forecast, expecting holiday sales to grow by 8.5%-10.5% over 2020 levels. NRF’s chief economist, Jack Kleinhenz, said, “With the prospect of consumers seeking to shop early, inventories may be pulled down sooner and shortages may develop in the later weeks of the shopping season. However, if retailers can keep merchandise on the shelves and merchandise arrives before Christmas, it could be a stellar holiday sales season.”

Over the past two years, December has been a relatively soft month as volumes slid off the November peak. If inventory levels are drawn down earlier than normal and retailers try to offset shortages and stockouts during the holiday season, upward pressure would be applied throughout both November and December. These impacts could allow for freight volumes to not suffer the traditional December drawdown, but those impacts are still more than a month away. 

Adjusting OTVI, which includes both accepted and rejected tenders, by the tender rejection rates shows the true level of freight moving through networks. Accepted tender volumes are running up nearly 1% week-over-week (w/w), maintaining strength compared to last year, running up over 6.5% year-over-year (y/y). A lot of the strength in accepted tender volumes is being driven by the decline in rejection rates over the past three months.

Across the country, volume levels in 69 of the 135 markets tracked by FreightWaves SONAR were higher over the past week. Freight markets that had been outperforming over the past several weeks took a back seat to some of the interior markets. 

Elizabeth, New Jersey, which houses the Port of New York/New Jersey, had been an outperformer over the past month. It took a significant step backward during the past week. Tender volumes in the market fell by 9.7% w/w, the largest non-holiday-related pullback since the middle of May. 

Ontario, California, the country’s largest freight market, also witnessed tender volumes suffer over the past week. Volume levels in the market fell by 1.4% over the past week. Even with the drawdown, tender volumes are now outperforming 2020 levels, up 0.55% y/y.

Interior markets like Atlanta and Chicago had a strong week. Freight volumes in Atlanta finally broke a decline, jumping 5.2% over the past week, a significant move for the second-largest market in the country. Chicago has been able to piece strong weeks back to back, increasing 3.1% w/w. Over the past two weeks, tender volumes in Chicago have increased by 14.5% as the market is showing signs of life ahead of peak season.

By mode: It was a strong week in the temperature-controlled market as reefer volume growth has accelerated. Reefer volumes as measured by the Reefer Outbound Tender Volume Index (ROTVI) increased by 1.62% w/w. Even with this week’s increase, reefer volumes are running down by nearly 4.5% y/y, though winter weather and increased demand around the holiday season are going to drive reefer demand through the winter months. 

Dry volumes didn’t experience the same growth but were able to grow ever so slightly. Over the past week, the Van Outbound Tender Volume Index (VOTVI) increased by 0.16% w/w. Much like the reefer market, van volumes are underperforming year-ago levels, down 1.05% y/y. If the holiday retail season is as strong as expected, anticipate dry van volumes picking up rather quickly in the coming weeks.

Rejection rates fall to the lowest level in more than a year

The Outbound Tender Reject Index (OTRI), a measure of relative capacity in the market, picked up where it left off, trending downward heading into peak season. Over the past week, OTRI fell by 89 basis points (bps) to 19.8%.

This week’s decline in rejection rates brought the national average to the lowest level since the beginning of August 2020. The gap with year-ago levels continues to hover around the 450 bps mark. Typically the final week of the month, rejection rates pick up, but that has yet to occur in October. 

The upward pressure on freight volumes is going to have an impact on tender rejection rates in the coming months. As tight as capacity is in the market currently, any significant uptick in freight volumes is going to ratchet capacity even tighter, driving rejection rates higher. Throw in holidays, when drivers tend to stay closer to home, the outlook for relative capacity is to tighten in the final two months of the year as opposed to any significant loosening.

Once the calendar turns, the capacity situation will remain difficult. Numerous constraints including limited production capacity at OEMs, the severe ramp-up in used equipment prices and a tight labor market are going to hamper the capacity front into 2022. 

As earnings season has progressed, numerous executives from trucking companies and brokerages alike have noted that the tight capacity experienced in the market is going to persist for some time. Additionally, some executives have called for another round of double-digit rate increases in 2022 to aid in driving better compliance.

Ultimately, the capacity situation may not get as bad as it was earlier in the year (rejections over 25%) but it is likely not going to improve as fast as shippers are hoping for.

As the national rejection rate fell by nearly 100 bps over the past week, the number of markets where relative capacity loosened drastically outnumbered the number of markets where capacity tightened. Of the 135 markets within SONAR, just 45 markets experienced rejection rates increase over the past week. 

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. A blue market is any market that is tightening faster, highlighting markets that should take priority as well as increased prices. Conversely, red markets are loosening faster relative to the size of the market, where shippers are gaining some pricing power.

Over the past week, Ontario has loosened significantly as rejection rates have fallen by 231 bps w/w. The rejection rate in the market is currently 14.75%, the lowest it has been since the middle of January. This is a market where shippers have been able to gain some pricing power, especially compared to other large markets.

Markets like Chicago and Atlanta that experienced substantial volume increases over the past week saw mixed changes in rejection rates. In Atlanta, rejection rates increased by 49 bps w/w, bringing the overall rejection rate in the market to 17.74%. Even with the increase, rejection rates are still over 300 bps below year-ago levels. In Chicago, capacity loosened this week as rejection rates fell by 84 bps w/w. The overall rejection rate sits at 19.26%, just 56 bps below 2020 levels.

By mode: Reefer rejection rates suffered a major pullback to begin the week but have since recovered some of the dip. The Reefer Outbound Tender Reject Index (ROTRI) decreased by 175 bps over the past week to 36.03% but has increased by 45 bps since Tuesday. 

Dry van rejection rates pulled back by more than the overall rejection index. Over the past week, van rejection rates fell by 116 bps to 19.18%. The largest equipment type in SONAR has been the most stable for the past year but has dipped below 20% for the first time since February. Van rejection rates have fallen by nearly 500 bps since the beginning of September, but peak season should slow down the decline.

The flatbed market just keeps ratcheting tighter. Over the past week, flatbed tender rejections increased by 340 bps. The increases in rejection rates over the past several months bring flatbed rejection rates to nearly 2,000 bps higher than 2020 levels. The flatbed market was the last to tighten, but has accelerated to surpass van rejection rates. Flatbed rejection rates are rapidly approaching the all-time high of 31.33% set in late May.

Ultimately, capacity is going to be difficult to secure throughout the final quarter, even though rejections are below 2020 levels. Add in that the September jobs report had the first decline in truck transportation employment numbers since January. The risk of capacity flooding the market seems relatively small, especially in the short term. The barriers of entry have become increasingly difficult with the rapid rise in used equipment prices, so shippers expecting conditions to ease significantly over the next three months are in for a tough reality on the capacity front.

Rates hit the brakes in the middle of October 

The spot rate data available in SONAR from Truckstop.com is updated every Tuesday with the previous week’s data.

Spot rates have suffered the third consecutive down week as rejection rates continued the downward slide. Truckstop.com’s national spot rate, which includes fuel surcharge and other accessorials, fell by 2 cents per mile over the past week to $3.43/mi. The national spot rate is now nearly 5% off the all-time high set the week of Sept. 5. 

Of the 102 lanes from Truckstop.com’s load board, 45 reported increases last week, with outbound Los Angeles continuing to climb. Of the eight lanes out of Los Angeles, seven were higher in the past week, with the exception of the LA-to-Las Vegas lane, which fell by 6 cents per mile to $5.15/mi. 

The uptick in rates out of LAX comes as rejection rates and volume levels have pulled back, signaling shippers may just be avoiding the contract market to move freight as soon as possible as opposed to having to go through the entire routing guide. 

Even with the recent drawdown,  the national spot rates continue to run nearly 20% higher y/y. Pressure will intensify for spot rates over the next couple of weeks as peak season kicks off.

Contract rates also pulled back over the past week, decreasing by 2 cents per mile to $2.69. Dry van contract rates, which are reported on a two-week lag, are roughly 3% off the all-time high set in mid-September. 

Contract rates, which are just the base linehaul rate excluding fuel surcharges and other accessorials that are included in spot rates, have closed the gap with spot rates significantly over the past year. Contract rates continue to run up over 20% y/y and likely face more upward pressure heading into 2022.

Ultimately, upward pressure on freight rates is likely to remain in place for at least the next six months and beyond as supply chain constraints continue to be worked through.

For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at [email protected] or Andrew Cox at [email protected].

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