The trucking industry operates on a market based on real-time demand and supply. When demand is higher than capacity, carriers have the negotiating power for rates. When supply is higher than demand, shippers have the negotiating power for rates.
FreightWaves’ Pricing Power Index uses the analytics and data contained in 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 eight indicators:
Load Volumes: Momentum and Trend Positive for Carriers.
- Outbound Tender Volumes (OTVI.USA) are on a 6-week upward trajectory after spending most of 2019 below 2018 levels. Currently, OTVI is tracking up 3.87 percent year-over-year, 3.73 percent month-over-month and 3.14 percent week-over-week.
Spot Rates: Momentum and Trend Positive for Carriers. Absolute levels are positive for Shippers.
- Spot rates appear to be troughing, but at very low levels on an absolute basis. Spot rates, according to DAT’s National Longhaul Dry Van Freight Rate (DATVF.VNU), are currently running at $1.38 per mile, up 10 percent off the lows of approximately $1.25 in April of this year. On a year-over-year basis, spot rates are tracking down about 17 percent, but this is up from earlier in 2019 when spot rates were down 35 percent year-on-year. We expect the divergence between spot and contract to narrow in the coming months, with spot rising to converge towards downwardly sloping contract rates.
Contract Rates: Momentum and Trend Positive for Shippers.
- Contract rates respond to downwardly trending spot rates with a lag. Spot rates peaked and started to turn down in the late fall/winter of 2018 and inflected negative on a year-over-year basis in November 2018. Contract rates also peaked around the same time as spot rates, but are only beginning to go negative on a year-over-year basis 9 months later despite spot rates tracking down as much as 35 percent during this timeframe. We expect contract rates to trend negatively from a rate that is currently flattish on a year-over-year basis to the negative low-to-mid-single-digit range in the coming months as shippers renegotiate rates lower in their favor.
Tender Rejections: Momentum, Trend and Absolute Levels Positive for Shippers.
- Outbound Tender Rejections are currently 4.83 percent, up 24 percent off the trough experienced mid-August. Despite the uptick in the past two weeks, outbound tender rejections are near historical lows. Year-over-year comparables are difficult because of OTRI.USA did not fall below double-digits in 2018. That being said, tender rejections are down 75 percent from this time last year. We suspect the recent uptick will continue into the retail season, but with the capacity expansion that occurred in the second half of 2018 and early 2019, and with used truck prices not faltering we have no reason to believe rejection rates will trend anywhere near 2018 levels.
Critical Events: Short term positive for Carriers.
- Hurricane Dorian has accelerated towards an East Coast landfall as a Category 3 hurricane. FEMA and large shippers including Home Depot, Walmart, and Aldi have staged supplies at military installations (Maxwell Air Force Base in Montgomery, AL and auxiliary airfields in the Carolinas) and retail locations in preparation for increased demand post the storm. East Coast ports from Jacksonville to Georgetown, South Carolina are closed; the vital transshipment terminal at Freeport, Bahamas, has been closed indefinitely. Savannah is scheduled to reopen September 5; Charleston is scheduled to re-open at 9 AM on September 6, assuming there is no storm damage.
Trucking Regulations: Neutral for both Carriers and Shippers.
- The final switch over from AOBRDs to ELDs in December 2019 should not impact capacity. FreightWaves have been surveying carriers weekly and have determined only six to eight percent of carriers need to convert to ELDs. Most of these are smaller regional fleets operating in a range of 150 to 500-mile radius of their terminals. Proposed hours of service changes that are more flexible for drivers is likely to expand capacity. These proposed changes will not go into effect for months.
Economic Policy: Neutral for both Carriers and Shippers.
- Economic policy is neutral for both carriers and shippers. We would argue the scales could be tipped slightly in favor of shippers as tariffs are inherently a drag on economic growth and therefore a drag on-demand/volumes and rate per mile for carriers. However, we view this as offset by the boost to carriers from lower interest rate policy, which could stimulate the economy at a lag.
Economic Stats: Neutral for both Carriers and Shippers.
- The industrial and manufacturing economy is on the verge of a recession, while the consumer economy is quite strong in the U.S. This week, the August ISM manufacturing index number came in at 49.1 percent. Any reading below 50 indicates a contraction in manufacturing activity. This is the lowest reading since January 2016. While this is a drag on economic activity, the reduced volume of goods bodes positively for shippers’ pricing power. Despite manufacturing flashing warning signs of slowing economy, consumer data is healthy. Heading into the upcoming holiday season, the strong consumer economy should be positive for carriers. Overall economic growth is decelerating and, while not recessionary, is tepid at best.