This week’s DHL Supply Chain Pricing Power Index: 85 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 85 (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.
To account for the rejected tenders in our Outbound Tender Volume Index, a new metric, accepted tenders, has been calculated. Using this correction, volumes are running up 18% year-over-year and are at a three-year high. Carriers are rejecting one in four contracted load tenders, and spot rates have pushed north of $2.75 per mile on a national basis. We see no signs of the market making any near-term changes and expect the carriers to be in a dominant position through the end of the year.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels and momentum positive for carriers
The rate of volume acceleration has begun to slow. The Outbound Tender Volume Index posted another series high this week, increasing 3.15% to 16,128.3.
OTVI has posted a string of consecutive all-time highs for many weeks now. As we have written over the past few weeks, the extremely high level of tender rejections is distorting the true volume level. To account for that, we can use this simple formula to calculate the level of accepted tenders: OTVI * (1-OTRI) for any given day.
16,128 * (1 – .25) = 12,096 accepted tender volume index value for Sept. 2, 2020
10,660 * (1 – .046) = 10,127 accepted tender volume index value for Sept. 2, 2019
Using this metric to control for the high level of rejected tenders allows us to get a more accurate understanding of the true demand level. This does not mean demand is not at a historically high level — it is. With this metric, trucking volumes (van, reefer, flatbed) are running up over 18% year-over-year.
Jim Monkmeyer, president, transportation, DHL Supply Chain North America, stated to FreightWaves that “Freight volumes are currently well above 2018 or 2019 levels, despite the high (but declining) levels of unemployment. The fact is that this demand is not related to seasonal/peak trends. It appears to be supported mainly by economic stimulus efforts and growth in consumer spending (particularly online electronics and online retail, as well as home improvements), and companies “catching up” on inventories and orders from earlier in the year. Demand is outstripping capacity, which is good for carriers, who are being selective in the loads that they accept for tender and are driving rates up.”
Fortunately, Hurricane Laura did not create the major regional disruption event that many thought was possible. Also, Laura missed major population centers in Houston and New Orleans. However, the waters and atmosphere of the Atlantic and Gulf of Mexico are primed for storms in the height of hurricane season. FreightWaves will be closely monitoring any developments in the coming weeks.
Tender rejections: Absolute levels and momentum positive for carriers
As Monkmeyer stated, demand is simply outstripping capacity right now and nothing points to that changing anytime soon. Accepted tenders remain at a historically high level, and carriers are exercising their options in searching for the highest rates and best loads. In doing so, carriers are being selective — only accepting three of every four tenders. The Outbound Tender Reject Index (OTRI) climbed slightly over the course of the past week, up 1.1% to 25.28%.
The demand throughput has carriers sitting comfortably rebidding or rejecting loads full-stop. OTRI at 25% indicates one in four contracted loads is being rejected across the country. This is historically an extremely high rate and is close to what we believe is the upper bound of the index. We believe the market dynamic shifts at this level and we begin seeing contracted freight renegotiated at higher rates, thus leading to lower rejection rates. The managing director of a large, national freight brokerage confirmed to us that the market has already reached this level and renegotiations have begun. He believes this rebidding season will be the toughest for shippers (and brokers) in some time.
We believe there may be some normalizing after the Labor Day holiday, but we see no signs pointing to a major freight slowdown anytime soon. Consumer demand remains elevated on a yearly basis, and services spending has shifted to marginal good demand. This has benefited both shippers and carriers to this point, but capacity constraints are causing transportation costs to surge.
Spot rates: Absolute levels and momentum positive for carriers
Spot rates surged again this week to another yearly high. Below are the 100 lane pairings from Truckstop.com in SONAR. Spot rates increased in a vast majority of markets this week. The West Coast, specifically routes in and out of LA, cooled off this week but are coming off of stratospheric levels so rates remain extremely high (still over $3 per mile LA – DAL).
Rates have been gradually rising off the bottom in early May and are now above the 2018 summer peak. Rates are up 9 cents a mile, or 3.3% since last week, which brings the Truckstop.com national all-in rate to $2.76 a mile. Compared to this time last year, rates are up nearly 33% and trending higher.
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 reflects the improved momentum and change in tone we have seen in recent weeks and months. Initial jobless claims came in at 881,000 last week, which was significantly better than consensus expectations of 950,000. This comes on the heels of three weeks ago being the first week that initial jobless claims fell below 1 million since mid-March. Jobless claims have now fallen in 20 of the past 23 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 1.2 million, to 13.3 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 down -0.7% year-over-year. This is within the recent flattish range but 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 6% year-over-year and far outpacing credit card spending, which is down 9% year-over-year.
The main takeaways this week are that while overall spending is up modestly, there are clear winners and losers in terms of spending categories and income cohorts. As we have noted for a few weeks, a warning sign has emerged recently 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 by lower-income Americans who previously received UI is falling at a rate of over 18% year-over-year; previously, the low-income population was the strongest spending cohort. It is less bad for those in the middle- and upper-income cohorts that previously received enhanced UI but still falling materially. If Washington does not quickly renew the expired benefits, there could be a sharp drop-off in consumer spending and therefore trucking volumes in coming weeks. The current talk in Washington is that a deal is far away as negotiations have reached a stalemate.
The other primary differences to emerge this week are twofold. One, while spending among those no longer receiving enhanced UI is falling at an accelerating rate, spending from the employed is rising and more than offsetting the drag from the unemployed. Second, the spending drag from the lower-income unemployed missing out on an extra $600 per week is clearly manifesting itself in discretionary categories, where spending on apparel, home improvement and general merchandise is slipping on the low end. However, spending on essentials and hybrid categories like restaurants and bars is faring far better among the low-income unemployed.
A warning sign: Spending among those affected by delayed UI is falling
By category, online electronics (up 92% year-over-year this week) and online retail (up 65%) continue to be the standout performers. Other strong categories include home improvement and furniture. Grocery has decelerated to 4% year-over-year. Restaurant and bar spending has staged a huge comeback. Brick-and-mortar retail spending has improved dramatically as most states reopen but has stalled in the negative mid- to high-single-digit range year-over-year as the case count remains elevated (but falling) 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 and appears to be gaining momentum in recent weeks.
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 rough week for our transportation indices following mostly strong weeks over the past couple of months. Parcels was the best performer at -1.1%, and logistics was the worst performer at -2.3% this week.
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