This week’s DHL Supply Chain Pricing Power Index: 80 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 85 (Carriers)
Three-month DHL Supply Chain Pricing Power Index Outlook: 85 (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.
Although volumes, spot rates and tender rejections moved in favor of the shippers this week, carriers remain in a dominant pricing power position. Despite the weekly decline, volumes remain above 15,000, the tender rejection rate remains above 25% and spot rates are still at $2.89/mile on a national level.
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) has been slowly slipping since Labor Day but still remains at stratospheric levels. The index currently sits at 15,154, which is 4% lower than the beginning of the month and nearly 2% off last week. Today’s value is the lowest non-holiday value since mid-August, but still well above each of the previous two years.
We believe this should not be a concern for either shippers or carriers as we enter the holiday season. Despite the lukewarm recovery of the labor market, consumer spending and confidence have improved and stabilized. Retail spending (excluding auto) is up 8% year-over-year, according to the latest consumer data from Bank of America. The lack of service spending opportunities has allowed consumers to purchase more goods. We have no reason to believe this trend will reverse before or during the holiday season.
As we mentioned in last week’s update, the market has not exhibited an abundance of volatility in recent weeks. There has been scattered strength in lanes across the country. On a national level, the holiday demand will fuel higher volumes and more volatility. We should start seeing this thesis play out over the next couple of weeks. Retailers are already preparing for volatility by offering Black Friday prices and major discounts in an attempt to smooth out demand over the next 75 days.
Tender rejections: Absolute levels and momentum positive for carriers
This week marks the first material cooldown of the Outbound Tender Reject Index (OTRI) since the second week of September. On a national level, tender rejections are down more than 5% since last week. Although trending better for shippers, capacity is still very difficult to secure right now. OTRI still remains above 25%, meaning 1-in-4 electronically tendered loads are being rejected at contracted prices. This week notches the sixth in row in which OTRI has been above 25%, far and away the longest such period in the index’s three-year history.
Logistics providers are feeling the challenges brought on in this tight environment. A September supply chain survey shows transportation capacity has reached new lows. The Logistics Managers’ Index (LMI), a survey of leading logistics executives, showed capacity fell to new lows, dipping another 770 basis points during the month to a 23.8% reading.
The lack of available capacity was also “reflected in the premium firms are paying.” The transportation pricing subindex of the LMI increased 410 basis points in the month to 87.9%, the highest reading since October 2018. “Observing the last two years of transportation prices shows a U-shaped trend, with September’s rate of growth representing a return to the heady days of mid- to late 2018,” the report stated.
While outbound tenders retreated slightly this week, we believe this is more a function of loosening capacity, and thus less retendered loads, than a declining demand. The next few weeks will be fascinating to see how effective shippers can be at prolonging the peak holiday season and avoiding major disruptions and delays.
Spot rates: Absolute levels positive for carriers, momentum neutral
Spot rates have oscillated between $2.90 and $3/mile since the first week of September. This week, Truckstop.com spot rates trended in line with tender rejections and total tenders. Rates remain high at $2.89/mile for dry van and $3.29/mile for reefer, inclusive of fuel.
Of the 100 lanes available from Truckstop.com in SONAR, only 28 were positive this week. Of the 72 negative lanes, more than 20 fell 5% or more this week. We don’t see this as a concern for carriers. This is a function of contract rates inflecting upward and carriers rejecting fewer loads rather than faltering demand.
In the latest trucking markets update from Passport Research titled “Conditions ease but carriers retain pricing power,” the team cited the differences in rates between attractive and unattractive destinations as evidence of carriers’ ability to retain pricing power.
On a national level, rates are still up 26.5% year-over-year, down from 28% each of the previous three weeks. Rates have been positive on a yearly basis since mid-June but have recently accelerated as carriers have been rejecting tenders at 20%-plus rates. The yearly comps do not get tougher until the typical holiday peak season beginning in November. Until then, we expect to see spot rates running 20%-25% up year-over-year.
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.
For the second week in a row, initial jobless claims increased and came in higher than expectations. After rising 3,000 to 840,000 last week, this week’s value jumped more than 50,000 to 898,000. This is the highest value since mid-August and came in much higher than the consensus expectation of 830,000. The good news is that continuing claims (a rough proxy for unemployment) fell sharply again this week, down from 10.97 million to 10.01 million, after falling more than 1 million last week. The unemployment rate has come down to 7.9% but is still more than double its pre-pandemic level.
Initial jobless claims (weekly in 2020)
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 was up 2.8% year-over-year. This is the highest yearly gain over the past three weeks. The picture is even brighter when focusing on retail spending. Retail spending (excluding auto) was up 8% year-over-year for the week ending Oct. 10.
As we usually note, keep in mind there is a beneficial mix shift from cash to debit ongoing that is somewhat inflating these numbers. One can tell this is the case from the fact that debit card spending is currently running up 9% year-over-year and far outpacing credit card spending, which is down 5% year-over-year.
Source: Bank of America Merrill Lynch
The main takeaways this week are that the full month of September showed improvement in the form of stronger spending trends than August and retail excluding auto spending is now running up 8% year-over-year.
By category, online electronics (up 58% year-over-year this week) and online retail (up 58%) continue to be the standout performers. Other strong categories include home improvement, furniture and general merchandise. The strong categories, as well as the weaker categories, have been remarkably persistent since the pandemic began, with the former weakening slightly and the latter improving gradually.
Grocery is still strong but well off the highs, running up 10% year-over-year. Restaurant and bar spending has staged a huge comeback and is now down just 7% year-over-year. Brick-and-mortar retail spending has improved dramatically as most states reopen and was down 4% year-over-year this week. Finally, airlines, lodging and entertainment continue to be the worst-performing categories by far, but lodging is way up off the bottom and appears to have gained momentum in recent weeks. Airlines and entertainment are now declining about 60%-70% 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 Merrill Lynch
Transportation stock indices: Absolute levels and momentum positive for carriers
Our transportation indices cooled off this week after several blazing hot weeks. The truckload index continues to benefit from high spot rates and elevated volumes; the index led the way this week up 3.5%. The LTL index also performed very well, up 3.6% over the past seven days and was carried by ODFL’s strong action.
Check out the newest episodes of our podcast “Great Quarter, Guys” here.