Outbound tender rejections fell this week due to the Thanksgiving holiday and so it is best not to read too much into current trends. Declining volumes are typical this time of year due to driver preferences aimed at seeking out freight that gets them home. Prior to the holiday drop-off, spot rates, tender volumes and rejections were all affirming the continued strength of the market and we expect a rebound moving forward.
The truckload market has been driven by the consumer in 2020. And while we still expect a strong holiday truckload and parcel market due to a resilient U.S. consumer, the latest retail spending data from the Commerce Department did modestly disappoint. However, in contrast, the latest weekly card spending data from Bank of America shows the highest year-over-year spending week (up 9.1% year-over-year) since the COVID outbreak in the U.S. took place in March. Also, card spending data shows that the 2020 holiday season is off to a good start with holiday spending season to date running above 2019 levels.
In order to alter our thesis, economic data will need to deteriorate across multiple data sets and for longer than one month. This is yet to occur. One potential risk to consumer spending is a failure to pass another round of fiscal stimulus. Another is the continued canary in the coal mine of negative year-over-year brick-and-mortar spending in the top COVID hot spots compared to spending growth in the rest of the U.S., according to Bank of America data this week. If the pandemic outbreak continues to accelerate and spreads to other pockets of consumer spending, the current momentum in the truckload market could be compromised.
Our thesis is largely the same: extremely tight capacity, strong volumes and positive cyclicality. The low inventory-to-sales ratio, strong consumer sentiment and spending, lack of service-based spending options and acceleration of e-commerce growth all bolster our belief. The arrival of vaccines is an eventual headwind but still a long way off at this point.
On a negative note, 15 of the 15 major freight markets that we monitor as a broad, representative benchmark were negative on a week-over-week basis. The drop-off was due to the holiday and we expect a rebound next week. This ratio fell this week from the stronger levels it has become accustomed to in recent months as the freight market rallies. The markets with the largest declines this week in OTVI.USA were Laredo, Texas (-26.07%), Savannah, Georgia (-25.67%), and Fresno, California (-23.10%).
Tender rejections remain elevated
Tender rejections notched another all-time high this week, currently sitting at 28.31%. Any moves up or down from this level are marginal and do not materially affect capacity. Many industry observers contend that there is a natural ceiling for the Outbound Tender Reject Index (OTRI) and that the market is at or nearing that point. The rationale is that contract rates will be significantly upwardly negotiated as bid season approaches given the strength of the spot market.
At this stage in the cycle, it is unlikely that there will be incremental capacity added to the trucking industry that will materially affect the market in 2020. While a record number of motor carrier authorities are being granted by the FMCSA, it’s our view that these are primarily company fleet drivers who have chosen to go independent and leverage their earning power in a very hot market. The fact that enterprise carriers — from Schneider to Heartland Express and many more — are aggressively raising wages and sign-on bonuses for team and solo drivers tells us that the largest fleets are actually struggling to seat their trucks, much less grow their fleets. However, if new Class 8 truck orders continue to run so far above replacement levels, capacity could become much more of an issue in the second half of 2021 or in 2022.
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