This week’s DHL Supply Chain Pricing Power Index: 65 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 70 (Carriers)
Three-month DHL Supply Chain Pricing Power Index Outlook: 75 (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.
We may be seeing signs of a traditional January lull, but at a much higher level than years past. The Outbound Tender Volume Index fell nearly 5% this week, but the difference between last year and this year expanded this week. On a rejection-adjusted basis, tender volumes are running up 23% yoy versus 20% last week. Tender rejections continue to decline modestly, but carriers are still rejecting more than 1-in-5 contracted loads. Stimulus can only carry the freight markets so long. Fortunately, the industrial economy is revving up and retailers have significant restocking ahead.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels positive for carriers, momentum neutral
The Outbound Tender Volume Index (OTVI) fell nearly 5% over the past week. This is a meaningful decline, but shouldn’t be seen as a trend. Tender volumes are following the seasonal lull, but at a much higher level. Due to the high level of tender rejections, it is important to adjust OTVI to account for this. On a rejection-adjusted basis, tender volumes are up 23% yoy, up from 20% last week.
The pace of consumer spending slowed last week, but remained relatively strong. After posting a torrid 9.7% yoy growth rate last week, consumers reigned in spending and notched a 6% yearly growth rate in the latest week of data (ending Jan. 16).
The stimulus checks created massive disparities in spending between those who received and those who did not. Total card spending for stimulus recipients ran at 12.7% yoy for the seven days ending Jan. 16 compared to a 2.8% yoy pace for non-recipients. Expanded unemployment insurance (UI) is also making a difference as total card spending increased for UI recipients, with the yoy rate now running above non-UI recipients after running below prior to the expanded benefits.
Consumers’ willingness to continue spending throughout the pandemic is a big variable in retailers’ import demand. The ports of Los Angeles and Long Beach are congested at generational proportions. Every single anchorage space in both ports is full and six of the 10 contingency anchorages in Huntington, California, are being occupied by liners calling LA.
Data Sources: Global Port Tracker; Commerce Dept.
The Signal, a digital forecasting tool provided by the Port of LA, indicates no letup in freight anytime soon. It expects imports to rise sequentially every week through the end of the month. The truth is retailers are still months behind on inventory replenishment. Although retail imports were up 15% yoy each of the last five months of the year, it just barely made up for the early-year trough. When taking 2020 as a whole, retail imports were only up 1.5% yoy, while retail sales were up 4.1% yoy as of the latest month of data (November).
So whether or not consumers continue to spend at strong yoy rates, there should be enough replenishment demand to keep freight flowing at an elevated pace.
Additionally, the December industrial production data was very encouraging for freight markets. Production came in up 1.6%, smashing expectations of 0.5% gain. It is a great sign for both the freight markets and the wider economy to find other drivers beyond consumer demand. The vaccines are coming. It is not a matter of if, but when spending reverts back to services. Strong industrial demand is a necessary support the freight markets need to continue the party throughout the year.
Tender rejections: Absolute levels positive for carriers, momentum positive for shippers
The Outbound Tender Reject Index (OTRI) continued its stepwise descent from the all-time high on Christmas Day to 21.93% currently. While the decline is significant, it shouldn’t be taken as a sign that the market has gained a material amount of capacity and has loosened. Rather, the ongoing rebidding season is pushing contract rates higher toward spot rates, leaving carriers with less desire to reject contracted freight.
The freight market is still incredibly tight, and capacity is not easy to source versus historical standards. Now that tight market is being rewarded with higher contract rates, which will put downward pressure on both tender rejections and spot rates in the coming weeks.
This doesn’t mean we should expect tender rejection rates to fall back near historical averages. Freight volumes remain up 20% yoy and do not show signs of slowing anytime soon. Indeed, the striking new equipment orders that have captivated the industry will impact capacity at some point. However, it will take several months for this equipment to be implemented and even then, if the bottlenecks at driver training schools are not released, the impact will be muted.
From a geographic perspective, many of the markets that had seen falling tender rejection rates since Christmas reversed trend this week. West Coast markets, particularly Los Angeles and Ontario, California, saw tender rejections pick up for the first time in 2021 this week. Cross-border markets along the Mexican border also showed signs of relative tightening this week with Albuquerque, New Mexico, and Houston, McAllen and El Paso, Texas, all tightening this week.
Spot Rates: Absolute level positive for carriers, momentum positive for shippers
According to Truckstop.com data available in SONAR, the dry van rate per mile fell more than 6% this week to $2.85/mi., inclusive of fuel. This is an acceleration from last week’s 5% decline. Spot rates have peaked for this cycle and will remain elevated from a historical standpoint, but will not return to the high of $3.22/mi. on Jan. 3.
The reason is the ongoing rebidding season that is seeing contract rates pushed up in the range of high single digits to low double digits over 2020 rates. As carriers negotiate contract rates up and close the contract-spot spread, carriers will naturally reject less contracted freight. OTRI and spot rates are highly correlated. When rejections fall, spot rates almost always follow.
Of the 100 lanes available in SONAR, only eight saw spot rates increase this week over last.
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.
Jobless claims fell slightly this week and came in below consensus expectations. The negative multiweek trend remains intact though as the four-week moving average continues to move up. Jobless claims were 900,000, which beat the consensus of 925,000, and was down from 926,000 last week. On the positive side, there was good news in the form of continuing claims (a rough proxy for unemployment), which fell this week by 127,000 to 5.1 million. The unemployment rate fell to 6.7% in November from 6.9% in October but held steady at 6.7% in December despite the loss of 140,000 jobs.
Initial jobless claims (weekly in 2020-2021)
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 was up 6% year-over-year. The picture is more optimistic when focusing on retail spending excluding auto, which was up 13.9% year-over-year last week. Overall card spending decelerated slightly this week from 9.7% year-over-year last week.
As we usually note, keep in mind there is an ongoing beneficial mix shift from cash to debit that is somewhat inflating these numbers. One can tell this is the case from the fact that debit card spending is currently running up 17% year-over-year and far outpacing credit card spending, which was down 6%. After consistently running deeply negative for months and being down precipitously in April, credit card spending does appear to have finally turned the corner.
The main takeaways this week are that card spending remains robust and primarily driven by stimulus as total spending for stimulus recipients was 12.7% year-over-year compared to just 2.8% for non-recipients. However, in a slightly negative development, the spread between these two cohorts has started to converge, suggesting the initial boost is strongest right when stimulus is first received. In other words, as stimulus cash comes into recipients’ bank accounts, it is being disproportionately quickly spent. Expanded UI benefits of $400 per week are also having a noticeable effect as UI recipient spending is outpacing non-recipients. Lastly, spending for low-income consumers receiving stimulus is the strongest group, with spending running up 22% year-over-year.
By category, online electronics (up 71% year-over-year this week) and online retail (up 73%) continue to be the standout performers. However, the former two categories have slowed meaningfully from their monthslong blistering pace but have settled in at a high level. Other strong categories include home improvement, furniture and general merchandise. The strong categories, as well as the weaker ones, have been remarkably persistent since the pandemic began, with the former weakening slightly and the latter improving gradually. We would note, however, that we expect 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, likely sometime in the second or third quarter of 2021.
In a major departure from the trend since March 2020, department store sales grew strongly for the second straight week last week, up 18% year-over-year. The former is likely a function of stimulus payments juicing spending on the clothing, online electronics, general merchandise and home improvement categories, according to Bank of America. Grocery was up 15% year-over-year this week, extending the winning streak we have seen in the rate of grocery spend in recent weeks and months. Interestingly, restaurant and bar spending rebounded this week and is well off the recent lows of down 22% year-over-year, finishing last week down 10% year-over-year. Given COVID case counts are still extremely high and winter weather remains, the improvement in this category is somewhat puzzling, with the improvement likely due to stimulus. Finally, airlines, lodging, transit and entertainment continue to be the worst-performing categories by far, but all three categories are way up off the bottom. Airlines and entertainment are now declining about 60%-75% year-over-year compared to the trough of down 90%-100% in early April.
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
On the whole, it was a very poor week for our transportation indexes despite a spate of strong earnings reports. Logistics was the best performer this week at -1.4%, while Parcels was the worst performer at -4.2%.
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