This week’s DHL Supply Chain Pricing Power Index: 75 (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.
We believe the winter storms tip the scales in carriers’ favor ever so slightly. Freight markets were already imbalanced with seemingly insatiable demand overwhelming already strained carriers, and it’s only February. The storms are damaging to carriers as well. Werner guided down 5% for Q1 on a call with analysts this week as a result of the storms — 1,000 of its 8,000 trucks are out of commission, not earning revenue while drivers remain getting paid. But for the assets still available, carriers should be able to fetch higher rates as shippers look to work through the storm-induced backlog.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels positive for carriers, momentum neutral
Winter storms across the country — in particular the nor’easter in Pennsylvania and New Jersey and the damaging ice storms in Texas — have caused many retailers to close down and disrupted freight operations. Subsequently, tender volumes have taken a nosedive in the southern U.S. this week.
It is not typical for tender volumes to decline and rejections rise midseason. It’s a common occurrence to see this dynamic play out on major holidays when capacity is taken off line at a faster rate than volumes.
This is a short-term story, but it could have a major impact on freight networks for weeks to come due to the tight environment currently. If this would have occurred at a time when capacity was plentiful and carriers’ assets underutilized, networks could be shifted much easier to absorb the disruption. But with an already tight market, and a meaningful percentage of drivers sidelined, freight will pile up. It will take weeks for already strained carriers to accommodate this freight.
Retailers are still struggling to replenish depleted inventories, especially those coming in from any major port. Consumer demand remains elevated, aided by government stimulus and boosted by the expectation of more to come. Consumer sentiment fell in early February, but the nation is making promising progress with vaccine deployment. One-in-20 Americans have received at least one vaccination. There is now light at the end of the tunnel.
With another round of stimulus, and the likelihood of a meaningful reopening in the summer growing each day, the snow won’t cool this sizzling economy. Freight volumes are poised to bounce back in a major way sooner than later. It is projected to be 65 and sunny on Tuesday in Dallas.
Tender rejections: Absolute levels positive for carriers, momentum positive for shippers
Only three states in the continental U.S. didn’t receive meaningful amounts of snow this past week. Tender rejections across the nation have risen substantially over the past week, particularly in Texas, Arkansas and much of the Midwest. Carriers are rejecting half of all outbound tenders from Arkansas, Missouri, Iowa, Nebraska and all of Illinois, excluding the Chicago area.
The national average for the Outbound Tender Reject Index (OTRI) rose more than 5 percentage points from 21% last week to 26.3% currently. Unlike the typical falling volumes and rising rejections events, this occurrence will not revert back to normal quickly. The reasons were laid out above — elevated demand potentially growing with stimulus and reopening hopes on top of an already strained capacity network.
We expect volumes to snap back quickly next week, but it will take some time for carriers to work through the freight disrupted by the storms. This will keep upward pressure on tender rejections and spot rates through the end of the month and right into the beginning of the spring freight season. Buckle up.
Spot rates: Absolute level positive for carriers, momentum positive for shippers
Spot rate data from Truckstop.com is visible at a one-week lag, so the last day of data available in SONAR is the week ending Feb. 14. The latest data marks two consecutive positive weeks for national spot rates after declining since the Christmas holiday. The national average sits at $2.85/mile, inclusive of fuel. That’s more than 45% over this time last year.
A meaningful amount of capacity has been taken off the market momentarily. Werner said on a call this week 1,000 of its 8,000 trucks are out of commission. Given the sharp rise in tender rejections, spot rates will likely leg up in the next dataset.
There have been no fundamental changes to the market besides volumes and capacity declining sharply, but temporarily. We believe this dynamic is fleeting given the sunshine and warm weather due next week.
So carriers may be able to squeeze a few extra cents per mile over the next couple of weeks, but when assets come back online, tender rejections and spot rates will decline.
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 missed badly this week and came in way above consensus expectations. Jobless claims were 861,000, which missed the consensus of 773,000, and were up slightly from 848,000 last week. On the positive side, there was good news in the form of continuing claims (a rough proxy for unemployment), which fell this week by 64,000 to 4.5 million. Jobs numbers for January were released last week — the U.S. added 49,000 jobs and the unemployment rate fell to 6.3%.
Initial jobless claims (weekly in 2020-21)
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 0.9% year-over-year. The picture is more optimistic when focusing on retail spending excluding auto, which was up 6.2% year-over-year last week. Overall card spending decelerated significantly this week from 9.7% 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 6% 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 spending slowed dramatically for two very good reasons: Valentine’s Day calendar distortions and the major snowstorm hurting spending. Bank of America expects the storm to weigh on next week’s spending results negatively again. Signs of the storm were clearly seen in Texas grocery store spending skyrocketing and restaurant spending plummeting. Overall, Bank of America views the reversal over the several weeks to end February as fleeting and weather driven as opposed to indicative of any major change in underlying consumer fundamentals.
By category, online electronics (up 52% year-over-year this week) and online retail (up 60%) 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 very high level. Other strong categories include home improvement, furniture, general merchandise and — for several weeks in a row now — department stores. 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 9% 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 10% year-over-year this week, extending the winning streak we have seen in the rate of grocery spend in recent weeks and months. Restaurant and bar spending fell this week by 17% and is back down near the recent lows of down 22% year-over-year. This is likely a function of the massive snowstorm blanketing most of the U.S. However, we expect this category to continue to improve as the weather warms and COVID case counts fall. 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 by 60-80% 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
This past week was another solid week for our transportation indexes (the third in a row) aside from parcels. LTL was the best performer at 8.1%, while parcels was the worst performer at -1.9%.
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