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 in FreightWaves SONAR to analyze the market and estimate the negotiating power for rates between shippers and carriers.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels and momentum positive for carriers
After the winter storm disruptions, freight tender volumes have stabilized and moved horizontally this week. The Outbound Tender Volume Index is up ~16% yoy when adjusting for the high level of rejected tenders. Yearly comps will soon become tougher given the 30% volume surge last March on the backs of consumer panic buying and hoarding of grocery and household staples.
We are entering the seasonal second-gear freight markets find toward the end of Q1. Not only does the warm weather bring about elevated consumer demand, but retailers have quarterly results to report, and dragging inventories are not applauded by Wall Street.
In this week’s special topic report, the Passport Research team covered asset operators with a piece titled “It’s good to be a trucker” and highlighted that carrier key performance indicators (KPIs) are at the healthiest levels in years. The team wrote, “There was some seasonal giveback in operating ratios but this is to be expected. The bull market for freight is alive and well; the question is how long it will last. At this point, our answer is longer than we previously thought.”
Over the past week, there were a swath of stock upgrades in the transportation sector from various sell-side shops. As I wrote last week, since the market was already so tight and imbalanced, any event that removed trucks from the roads would have an outsized and lasting impact. Retailers and their transportation partners are finally working through the winter storm-induced glut just as the spring season heats up. To add fuel, President Biden said this week the U.S. will have enough vaccinations for every American by the end of May. It will take several months past that date to dole out the inoculations, but consumer behavior will change.
In this week’s “COVID and the Consumer” report from Bank of America, the team highlighted airline and lodging spending by generation to show the oldest cohort (the most likely to receive vaccines thus far) has begun spending much more on flying, but minimally more on lodging. The team suggests the eldest generations are flying to visit family rather than vacation. But vaccines are beginning to hit the younger generations, who will be more likely to vacation and spend on services than their elders did upon vaccination.
The generational pent-up demand for services is the only headwind to freight volumes in the short to midterm. The industrial economy is recovering at a solid clip, the housing market is soaring and consumers continue to do their part, aided by the hopes of further stimulus. So although year-over-year comps will tighten over the next few weeks, there is no sign of slowing down soon.
Tender rejections: Absolute levels and momentum positive for carriers
The Outbound Tender Reject Index also moved horizontally this week, stable at a very high level of 27.6%. OTRI has ranged up toward 30% four times over the past year, but never quite touched the handle. I believe we are near the natural ceiling for tender rejections, and this is evidenced by surging spot rates.
Capacity remains scarce across many regions of the country, especially the Midwest and upper Midwest. Carriers have realigned more capacity to West Coast markets as rejection rates have fallen considerably in California while tender volumes have risen.
This week, Old Dominion Freight Lines announced it would be hiring 800 drivers to expand its operations. This isn’t the first such announcement and Old Dominion won’t be the last carrier to do so. The length of this bull market seems to be extending with every passing week. Equipment orders are at multi-decade highs, so it’s a matter of time before some capacity is added to the market. However, bottlenecks at driver training schools have not been relieved and the Drug and Alcohol Clearinghouse has removed tens of thousands of drivers, so seats are difficult to fill.
I expect no material change to capacity through the middle of the year. We may see some downward pressure on tender rejections as routing guides are recalibrated and contract rates market toward spot, but capacity will remain difficult to source.
Spot rates: Absolute level and momentum positive for carriers
Carriers are rejecting freight at a high level and leveraging shippers’ desire to work through the glut for higher rates in the spot market. The national dry van spot rate average form Truckstop.com available in SONAR is now $3.32/mile, inclusive of fuel. This is a new all-time high for the series, surpassing the peak holiday rate by 10 cents/mile.
Of the 100 lane pairings in SONAR, all but 12 were positive this week. As mentioned above, I believe we will see some downward pressure on spot rates in the coming weeks as the glut is worked through, routing guides somewhat restored and freight networks better balanced.
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 matched consensus estimates this week. Jobless claims were 750,000, which matched the consensus of 750,000, and increased from 736,000 last week. Also on the positive side, there was good news in the form of continuing claims (a rough proxy for unemployment), which fell this week by 124,000 to 4.3 million (a new low in the COVID era). The latest unemployment report from February that came out Friday was very encouraging (the U.S. economy added 379,000 jobs in February) and suggests the economic recovery is gaining steam from an employment perspective.
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 increased by 3.5% year-over-year. The picture is more optimistic when focusing on retail spending excluding auto, which was up 8.6% year-over-year last week. Overall card spending accelerated significantly this week from last week’s blizzard-affected -2% but was still down materially from 9.7% two weeks ago.
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 7% year-over-year and far outpacing credit card spending, which was down 1%. 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 total card spending bounced back significantly from last week’s depressed levels as a snowstorm had blanketed 73% of the U.S. We expect continued improvement back to the recent run rate in the mid- to high single digits positive y/y range. Second, the states hardest hit by the storm (in the Southwest and south-central U.S.) saw spending up 6.5% y/y, a huge reversal from -25% y/y the week before. Also, spending by low-income Americans is slowing due to a delay in tax refunds and, fascinatingly, spending by older Americans who have been vaccinated is starting to strongly ramp in COVID-sensitive areas like airlines.
By category, online electronics (up 47% year-over-year this week) and online retail (up 57%) 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 20% year-over-year. This 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 just 3% year-over-year this week, the lowest increase in recent memory, which is notable. Restaurant and bar spending only fell this week by 4% and was previously hard hit by weather, as previously discussed. However, we expect this category to continue to improve as the weather warms and the 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. Lodging has actually dramatically improved recently. Airlines and entertainment are now declining by 50-60% 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 a great week for our transportation indexes. LTL was the best performer at 5.7%, while parcels was the worst performer at 2.9%.
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