This week’s DHL Supply Chain Pricing Power Index: 80 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 80 (Carriers)
Three-month DHL Supply Chain Pricing Power Index Outlook: 75 (Carriers)
The DHL Supply Chain Pricing Power Index uses the analytics and data contained in FreightWaves SONAR to analyze the market and estimate the negotiating power for rates between shippers and carriers.
The carriers did not lose ground this week, but rather further solidified their dominant pricing position. Volumes remain well above 2018 and 2019, running in the +20% to 25% range. The elevated volumes are giving carriers options in the market and they are exercising those options at a high clip. The outbound tender rejection index suggests one in every five contracted loads is being rejected currently. Rates have pushed towards $2.00/mile (excluding fuel) with little signs of slowing down.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels and momentum positive for carriers
The outbound tender volume continues to impress even most bullish of us in the industry. This week, the Outbound Tender Volume Index (OTVI) climbed another 3.6% to a new all-time high of 14,238. OTVI has posted a string of consecutive new all-time highs for many weeks now. It is worth noting that our volume index does include some level of rejected tenders, so the overall level of freight is slightly lower than the index reading. However, this does not mean the index is not indicative of the overall freight level. Freight volumes remain well above either 2018 or 2019 by roughly 20-25%.
This freight level is remarkable for a few reasons. First, there are no signs of any sort of typical seasonality this year; secondly, other parts of the economy have stalled and unemployment remains extremely high; lastly, OTVI has crossed into uncharted territory by climbing higher than the March panic-buying spree.
The extension of the federal unemployment benefits is a positive for both shippers and carriers. And while the extension was a reduction in the overall benefits, it is still enough to keep freight moving at an elevated level. How elevated it can remain is to be seen in the next couple of weeks. Demand remains extremely high for truckload freight in almost every corner of the country.
The possibility of another round of fiscal stimulus should also be on both shippers’ and carriers’ minds. Despite the possibility of House Democrats and Senate Republicans being unable to get a third round of stimulus completed, there is little evidence that freight volumes will fall off significantly in the coming weeks. The threat of lockdowns created a panic-buying situation in March, then freight volumes plummeted because the majority of businesses were closed. Now, regions are going back into lockdown but the restrictions are less severe. The sectors being locked down are predominantly service-based industries that do not move a large percentage of the nation’s freight. In addition, the lack of service options for consumers to spend money on has increased the demand for goods and transportation of said goods. Consumer demand remains fairly strong given that economic backdrop. Despite this, we do not believe the typical seasonal decline will be as pronounced this year. Carriers remain in a wonderful pricing position.
Tender rejections: Absolute levels and momentum positive for carriers
After five days of declining tender rejections, the Outbound Tender Rejection Index (OTRI) turned upwards again this week. There will be fluctuations in the index as the industry stabilizes at this tighter capacity level. OTRI now sits at 21.85%, meaning one in every five tendered loads are being rejected at contracted prices.
The index continued exhibiting stickiness at a high level for a sixth week in a row. OTRI is now well above its July Fourth peak, sits even with its March 2020 panic-buying-induced peak and even crossed over 2018 tender rejection levels for the first time last week and has stayed above this week. We have heard from large asset-based carriers that they are rejecting more freight than they have in a very long time.
The supply-demand dynamic of May, June and July has been much different than March and April. During March we saw volumes and rejections rise in stepwise fashion to all-time highs in a matter of weeks. This time around the rise in freight volumes and tender rejections has been slower but consistently upward and gradual.
Spot rates: Absolute levels neutral, momentum positive for carriers
Spot rates climbed again this week to another yearly high. DAT Long-haul Van Freight Rates sit just under $2.00/mile. Rates have been gradually rising off the bottom in early May, and are now near the 2018 summer peak. Rates are up nearly 10 cents since last week.
One thing to note is that rates have now pushed above the 2018 comparable – 2018 was a strong year for volumes and rates, especially during the early summer months. While rates had begun to exhibit normal seasonality in August 2018, it is still noteworthy to see rates above that mark now.
After two weeks of rapidly declining spot volumes, the Truckstop.com spot volume lane pairings bounced back in a big way last week. We felt this may be an early indictment of overall volumes coming to a halt, but that may not be the case. One week does not create a trend, but it is very encouraging to see spot volumes rebound last week and stay mostly green this week.
Rates are elevated right now and the supply-demand dynamic suggests they will remain so for some time. Carriers are rejecting loads at a high rate and volumes are flowing at historic levels. Carriers have options and they are exercising them in search of margins.
Economic stats: Momentum and absolute level neutral
Several economic releases this week are worth noting.
Weekly jobless claims were released Friday and give us one of the best close-to-real-time indicators of the overall economy.
This week’s jobs news was very encouraging and reaffirmed the improved momentum and change in tone we had seen in recent weeks and months. Initial jobless claims came in at 960,000 last week, which was far better than consensus expectations of 1.1 million and was the first week that initial jobless claims fell below 1 million since mid-March. This means that jobless claims have now fallen in 18 of the past 20 weeks dating back to the peak weekly jobless claims number from late March. There was more good news too. Continuing claims (a rough proxy for unemployment) dropped 604,000 to 15.5 million.
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 actually up 2% year-over-year. This is an acceleration and a nice reversal compared to last week’s decrease of 3% year-over-year and is well off the ~40% declines from late March and early April. 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 double digits year-over-year and far outpacing credit card spending, which is down in the low to mid-teens range year-over-year.
A warning sign emerged this week that bears watching – spending among those no longer receiving unemployment insurance (UI) benefits is starting to fall and is particularly acute with lower income Americans. Spending from lower income Americans that previously received UI insurance is falling over 4% year-over-year; previously, the low income population was the strongest spending cohort. If Washington does not quickly renew the expired benefits, there could be a sharp drop-off in consumer spending data in coming weeks and therefore trucking volumes. The current talk in Washington now is that a deal is far away as negotiations have reached a stalemate. However, President Trump is calling for $400 extra per week in UI benefits (compared to $600 previously). In any event, the amount of unemployment insurance extended to nearly 16 million people is likely to fall at least slightly in coming weeks and will have a negative flow-through impact on the U.S. economy measured in billions of dollars.
A warning sign: spending among those affected by delayed UI is falling
By category, online electronics (up 100% year-over-year this week) and online retail (up 71%) continue to be the standout performers. Other strong categories include home improvement and furniture. Grocery has stabilized at about 10% year-over-year. Brick-and-mortar retail spending has improved dramatically as most states reopen but has stalled in the negative mid-single-digit range year-over-year as the case count remains elevated in many states. Finally, airlines, lodging and entertainment continue to be the worst-performing categories by far but lodging is significantly up off the bottom.
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
It was a great week for our transportation indices following several strong weeks over the past couple of months. LTL was the standout performer at 4.3%, and logistics was the worst performer but still up 1.6% this past week.
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