This week’s FreightWaves Supply Chain Pricing Power Index: 45 (Shippers)
Last week’s FreightWaves Supply Chain Pricing Power Index: 45 (Shippers)
Three-month FreightWaves Supply Chain Pricing Power Index Outlook: 40 (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 take an expected blow from Independence Day
Signals from the Outbound Tender Volume Index (OTVI) will be a bit erratic until next week, as the holiday noise from Monday will be skewing volume levels. Since OTVI is calculated as a seven-day moving average, and since freight demand on July Fourth was effectively absent, the current dip should not be alarming by itself.
Nevertheless, demand from retail shippers is historically quiet in the period from now until mid- to late August, after which retailers begin to restock their shelves for the back-to-school season. Given that many retailers have already noted record levels of inventory amid slowing consumer demand, even the traditional peak in August and September might be less “peaky” than usual.
OTVI fell an unsurprising 10.59% on a week-over-week (w/w) basis as holiday noise affects this week’s data. On a year-over-year (y/y) basis, OTVI is down 15.22%, although such 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).
Contract Load Accepted Volumes (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 an anticipated w/w decline (10.4%) but also growth by 5.14% y/y. While this y/y comp may seem like a reversal of recent consecutive declines, there is a far likelier explanation that is unfortunately less optimistic.
In 2021, carriers were comfortably enjoying record profits and, as such, elected to take longer vacations around holiday weeks. We saw capacity go offline for much longer periods in 2021 than usual near holidays like Thanksgiving and Christmas. This year, however, carriers are much more eager to get back on the road as opportunities in the spot market are becoming much more scarce. Carriers that are under contract, meanwhile, are similarly likely to accept their contracted loads, as the contract space is offering much-needed (and high-paying) insulation from spot market turbulence.
Speaking of market turbulence, investors issued another signal of their belief that the economy is headed for (or currently in) a recession. The average rate on a 30-year fixed-rate mortgage fell 40 basis points (bps) w/w to 5.3%, according to data from Freddie Mac. This week’s decline marks a sharp about-face for mortgage rates that have been spiraling since the beginning of the year, peaking just two weeks ago at 5.81%.
While this week’s fall is not nearly enough to push mortgage rates back to 2021’s year-end average of 3.11%, it does indicate that demand for home loans has shriveled up, with some lenders quoting rates above 6%. Of historical interest, this w/w decline of 40 bps is the largest since December 2008, which occurred after the climax of the subprime mortgage crisis.
Of the 135 total markets, only 19 reported weekly increases as freight demand took a breather on the federal holiday.
For the time being, California markets are the ones to watch. The Supreme Court’s denial of review for California’s contested AB5 law opens a path for the law to go into immediate effect, although certain avenues still remain for the law to be contested under, for example, the “Negative Commerce Clause” in Article I of the U.S. Constitution. If AB5 is ultimately enforced, capacity in California markets will almost certainly ratchet tighter.
To cite some figures supporting the centrality of California freight markets, 35% of total U.S. import volume is handled at the ports of Los Angeles and Long Beach. These imports are then moved via the rails or by truckload carriers, especially those operating in the nearby market of Ontario, California. Ontario saw a decline of 19.6% w/w in freight demand this week, over 900 bps above the overall OTVI’s w/w slide.
By mode: Continuing on the trend of the state’s predominance, 16% of reefer volume comes from California markets, according to current SONAR data. Mostly owing to the federal holiday, the Reefer Outbound Tender Volume Index (ROTVI) fell 11.31% w/w. Van volumes slightly outperformed the overall OTVI this week, as the Van Outbound Tender Volume Index (VOTVI) fell 10.19% w/w. On a y/y basis, VOTVI is down 15.8% while ROTVI is down 26.86%, although these comps are made difficult by the vast y/y difference in tender rejections.
Rejection rates fall below 7% on Thursday
After a stay of execution last week, when tender rejections rose and briefly stayed above 8%, OTRI has resumed its decline at an alarming rate. This year, carriers were quicker to hop back in their trucks and chase freight after the summer holiday. The question of OTRI’s eventual floor, which had been tabled during last week’s bump, is once again open.
Over the past week, OTRI, which measures relative capacity in the market, fell to 6.99%, a change of 119 bps from the previous week. OTRI is now 1,746 bps below year-ago levels.
For comparison, OTRI was at 4.79% during this time in 2019. While currently being 220 bps above that level might mitigate fears around a 2019-style downturn, it is worth noting that OTRI did not begin its steep decline until late February this year. In 2019’s freight recession, OTRI started its descent in December 2018. Also, 2019’s decline started when OTRI was hovering near 15% as opposed to 2022’s nosedive starting around 20%. Thus, direct comparisons between the two periods might be misleading, given that 2019’s slide had a head start with a lower ceiling.
Further indicators of a market downturn cropped up in the latest release of the Logistics Managers’ Index (LMI). The LMI, which tracks contraction and expansion in the logistics sector, fell 2.7 points in June to 65. Though any level above 50 indicates expansion, June’s reading both marks the lowest point seen since July 2020 and is slightly under the LMI’s all-time average of 65.3.
Just three short months ago, the LMI had posted a record high reading of 76.2. A more bullish view of this rapid decline is that the industry’s growth in 2021 and Q1 2022 was simply unsustainable, such that growth is now moderating to a more stable and “normal” level.
Of course, a more bearish view could take June’s LMI as another sign that we are heading toward (or currently in) a recession. Since the common, technical definition of a recession is two consecutive quarters of negative GDP growth, fears surrounding a present recession will not be validated or alleviated until July 28, when the U.S. Bureau of Economic Analysis releases its advance estimate of Q2 2022’s GDP.
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.
Of the 135 markets, only 49 reported higher rejection rates over the past week as most capacity quickly returned after Monday’s holiday.
Tender volumes and rejection rates both spiked this week in Gulf Coast markets, namely those of New Orleans and Houston. While Port Houston has been seeing increased activity with record levels of containerized volume, this sharp growth is unlikely to be a lasting trend and probably speaks more to a repositioning project, as most of the accepted loads are set to be picked up next week.
According to weekly data from the Energy Information Administration, U.S. oil refineries are operating at 95% utilization, the highest level since September 2019. Gulf Coast refineries in particular are running at 98% utilization. With amplified pressure from the Biden administration to increase gasoline production, and with little spare capacity to do so, there is an elevated risk for overstressed refineries to suffer mechanical failures. Should a sudden outage occur, whether from such mechanical failures or from threats of flooding by hurricane activity, it would not only disrupt freight flow in the region but would also throw an additional wrench in the current fuel crisis.
By mode: Despite ROTVI’s underperformance against the overall OTVI, reefer rejection rates did manage to bounce back quickly after the holiday. The Reefer Outbound Tender Reject Index (ROTRI) fell only 14 bps w/w to 8.59%, though ROTRI remains 2,520 bps below year-ago levels. Dry vans were not as fortunate, with the Van Outbound Tender Reject Index (VOTRI) falling 131 bps w/w to 6.9%. VOTRI is 1,912 bps below year-ago levels.
Flatbeds were the only mode to post a w/w increase in tender rejections, as the Flatbed Outbound Tender Reject Index (FOTRI) rose 253 bps w/w to 25.84%. This boost signals sustained industrial activity — particularly from the oil and gas sector — despite new residential construction taking blows from the cooling housing market. Flatbeds are also the only mode to be in the black on a y/y basis, as FOTRI is currently up 89 bps over 2021 levels.
Linehaul spot rates get a much-needed boost
For obvious reasons, rejection rates and spot rates tend to move closely together. When contracted loads are rejected, they fall to the spot market, creating elevated demand. As anyone who’s taken Econ 101 knows, increased demand leads to higher pricing power from the suppliers: in this case, carriers playing in the spot market.
This week, however, the National Truckload Index (NTI) rose 7 cents per mile to $2.94, despite falling rejection rates. Rates on lanes coming out of Los Angeles saw a big boost, likely signaling that carriers are seizing pricing power while future trends of regional capacity are made uncertain by legal developments around California’s AB5. On the flip side, however, future trends of regional freight demand are made equally uncertain by the failure of the ILWU and the PMA to conclude labor negotiations before their previous contract expired.
The NTIL, which is the linehaul rate that removes fuel from the all-in NTI, also rose 7 cents to $2.05 per mile, indicating nearly a third of spot rates are going straight to fuel payments. For now, the rising NTI is carried by higher linehaul rates and not diesel prices.
Contract rates, which are base linehaul rates like the NTIL, took a slight dip of 2 cents per mile this week to $2.91. Contract rates, which are reported on a two-week delay, have not yet caught up with Q3, with the latest data coming from the tail end of Q2. Given that pricing power shifted to shippers during Q2 and that contract bid cycles are increasingly occurring on a quarterly basis, it will be worth seeing whether newly negotiated contract rates reflect declining market conditions.
The chart above shows the spread between the NTIL and dry van contract rates, showing the index has continued to fall to all-time lows in the data set, which dates to early 2019. Throughout 2019, contract rates exceeded spot rates, leading to a record number of bankruptcies in the space. Once COVID-19 spread, spot rates reacted quickly, rising to record highs on a seemingly weekly basis, while contract rates slowly crept higher throughout 2021.
Once spot rates started the rapid descent from the stratosphere in late February, the spread between contract rates and spot rates narrowed as contract rates continued to increase throughout the first quarter. This caused the spread between contract and spot rates to turn negative for the first time since July 2020.
The spread quickly fell to minus 98 cents, where it stands today. This wide spread will place downward pressure on contract rates as the calendar turns to the back half.
The FreightWaves TRAC spot rate from Los Angeles to Dallas, arguably one of the densest freight lanes in the country, did not tip the scales whatsoever. Over the past week, the TRAC rate remained unchanged at $2.67 a mile. Compared to the NTID, or the National Truckload Index — Daily, rates from Los Angeles to Dallas are lower than the national average, but that was not the case at the start of the year. When carriers flooded Southern California back in January, they pushed down spot rates rapidly.
On the East Coast, especially out of Atlanta, rates are likewise stagnant but are still beating the daily NTI. The FreightWaves TRAC rate from Atlanta to Philadelphia remained static at $3.40 a mile. In the previous two weeks, however, rates along this lane fell by a total of 20 cents per mile.
Both the current pricing inactivity and the prior declines are somewhat surprising, given that Atlanta’s OTRI began to spiral in late June. On the Monday following Juneteenth, when local rejections were at 7.42%, Atlanta’s OTRI climbed 558 bps by the end of the month to 13%. While rejections have since fallen, the market’s OTRI is still hovering at 10.6% — a level not seen since late March.