The Outbound Tender Volume Index (OTVI) has recovered from the holiday disruption and now sits at 14,344. Tender volumes are now on par with the last weeks leading up to Christmas, and the index is back in an uptrend. Since the OTVI does encompass some rejected contract tenders, it’s important to adjust the index to account for this. On a rejection-adjusted basis, outbound tender volumes are up ~20% year-over-year. It is unlikely that there will be any meaningful correction back toward historically normal Q1 freight levels, especially with stimulus disbursement adding fuel to the fire.
In the most recent Bank of America card spending report, the impact to overall card spending from stimulus disbursement has proved immediate and impactful. Total card spending was up 10% y/y last week, near the strongest levels since the pandemic began in March, and for those who received stimulus payments, total card spending is up 20% y/y.
The lowest-income households are seeing the biggest boost in spending from stimulus checks. For the lowest-income tier, total card spending is up a remarkable 22% y/y in the latest week of data. Stimulus spending is providing the biggest tailwind to clothing, online electronics, general merchandise and home improvement items, all of which travel by truck.
This is evidence that the American consumer is managing well given the economic backdrop. Unemployment is back on the rise thanks to rising COVID case counts as 140,000 jobs were lost last month and the unemployment rate held steady at 6.7%. But consumers are still spending and not exhibiting any material weakness that suggests they will no longer be able to carry both the freight market and the economy.
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 (with 35 container ships awaiting berth according to Hapag Lloyd). All anchorage space in both ports is full while six of the 10 contingency anchorages in Huntington, California, are being occupied by liners destined for LA.
The Signal, a digital forecasting tool provided by the Port of LA, indicates no slowdown in freight anytime soon. It expects imports to rise sequentially every week through the end of the month. This makes sense given most retailers are still months behind on inventory replenishment. Although retail imports were up 15% y/y each of the past five months of the year, it just barely made up for the weakness in the first half of 2020. Looking at 2020 as a whole, retail imports were only up 1.5% y/y, while retail sales were up 4.1% y/y as of November, the latest month of data.
Even if consumer spending falters a bit, and we expect the opposite given imminent stimulus, there should be enough replenishment demand to keep freight flowing at an elevated pace relative to recent years.
On a positive note, all 15 of the 15 major freight markets that we monitor as a broad, representative benchmark were positive on a week-over-week basis. This ratio maintained the stronger levels it has become accustomed to in recent months as the freight market rallies. The markets with the largest gains this week in OTVI.USA were Seattle (35.17%), Ontario, California (33.04%), and Los Angeles (32.44%).
Tender rejections slipping but still elevated
The Outbound Tender Reject Index (OTRI) continued its steady descent from the all-time high on Christmas Day near 28% to 22.38% currently. While the decline is significant, it shouldn’t be taken as a sign that the market has gained a material amount of capacity. Rather, the ongoing rebidding of contract freight for 2021 is likely pushing contract rates higher more in line with spot rates, resulting in improved routing guide compliance. The fact that contract tenders jumped 25% week-over-week confirms a lack of drop-off in physical load volumes.
The freight market is still incredibly tight, and capacity is not easy to source relative to historical standards. Now that a tight market is being rewarded with higher contract rates from shippers, there may be gradual downward pressure on both tender rejections and spot rates in the coming weeks.
Tender rejection rates are unlikely to fall back near historical averages in our view, though, given a still 1,500-basis-point gap with the previous two years. Freight volumes remain up 20% y/y and are not exhibiting signs of slowing anytime soon. Undoubtedly the striking new equipment orders that have captivated industry participants will drive capacity higher at some point but likely not until the second half of 2021. But first, the sustained bottlenecks at driver training schools will need to be resolved and the new trucks will need to be seated in order to ultimately tip the market back in favor of shippers.
From a geographic perspective, carriers serving the West Coast markets, which have fed the entire country in recent months, are showing signs of being able to manage freight better. Tender rejections in both LA and Ontario have fallen dramatically since the Christmas holiday and even over the last week as volumes have begun to pick up. Our best guess is that this is due to a combination of slower-moving freight, a mix shift to intermodal (given less urgency relative to pre-holiday freight) and capacity reentering Southern California increasingly moving freight at now higher contracted rates.
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