This week’s DHL Supply Chain Pricing Power Index: 70 (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.
The Outbound Tender Volume Index (OTVI) is up ~20% yoy and shows no signs of slowing soon. The stimulus disbursements had an immediate positive impact on spending, especially for lower-income households. The West Coast has freight backed for weeks and projects it only to continue growing throughout the month. Although tender rejections have been steadily declining, this shouldn’t be taken as a sign of material loosening. Rather, this is an effect of rising contract rates. As the contract-spot spread closes, carriers will naturally reject less freight and spot rates will fall.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels positive for carriers, momentum neutral
The 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, but the index is trending higher. 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% yoy. Don’t expect there to be any meaningful correction back toward historically normal Q1 freight levels.
In the most recent Bank of America Special: COVID and the Consumer report, the impact to spending from stimulus disbursement is immediate and material. For those who received stimulus payments, total card spending is up 20% since Jan. 1. That is nearly 4x the December average growth rate.
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% yoy in the latest week of data (ending Jan. 9).
This is evidence the American consumer is managing, given the economic backdrop. Unemployment insurance registrations are back on the rise, and 140,000 jobs were lost last week. But Americans are still spending and still giving us little reason to doubt their ability to carry both the freight market and the economy as a whole.
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.
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.
Tender rejections: Absolute levels positive for carriers, momentum positive for shippers
The Outbound Tender Reject Index (OTRI) continued its methodical descent from the all-time high on Christmas Day 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 and has loosened. Rather, the ongoing rebidding season is pushing contract rates higher toward spot rates, leaving carries 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 any time soon. Indeed, the striking new equipment orders that have captivated industry participants 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, 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, California, have fallen dramatically since the Christmas holiday, even over the last week when volumes began to pick up.
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 5% this week to $3.04/mi., inclusive of fuel. 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 13 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 rose this week and came in well above consensus expectations. The negative multiweek trend remains intact. Jobless claims were 965,000, which missed the consensus of 800,000, and was up significantly from 784,000 last week. In a reversal from the past several months, there was more negative news in the form of continuing claims (a rough proxy for unemployment), which rose this week by 199,000 to 5.3 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)
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 9.7% year-over-year. The picture is more optimistic when focusing on retail spending excluding auto, which was up 2.5% year-over-year last week. Overall card spending markedly accelerated this week from 2.2% 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 18% 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 accelerated by a large amount this week, primarily due to the initial disbursement of stimulus payments (which total $112 billion out of the $900 billion so far through the first week of January). Total card spending last week for those receiving stimulus payments was up 20% year-over-year last week compared to flat year-over-year for those not receiving stimulus, an enormous disparity. Finally, total spending for the lowest income cohort, which disproportionately receives stimulus, is running up 22% year-over-year.
By category, online electronics (up 70% year-over-year this week) and online retail (up 66%) 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 last week, up 19% 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, which raises eyebrows as COVID cases reaccelerate. Restaurant and bar spending is still quite weak but 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%-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 Securities
Transportation stock indices: Absolute levels and momentum positive for carriers
On the whole, it was a solid week for our transportation indexes. LTL was the best performer this week at 11.4% (heavily driven by ODFL), while logistics was the worst performer at 1.4%.
For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at email@example.com, Seth Holm at firstname.lastname@example.org or Andrew Cox at email@example.com.
Check out the newest episodes of our podcast, Great Quarter, Guys, here.