This week’s DHL Supply Chain Pricing Power Index: 80 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 75 (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 three consecutive weeks of very little volatility, the Outbound Tender Volume Index (OTVI) showed signs of life, jumping ~4% this week. Besides a pre-Thanksgiving surge last year, OTVI is at an all-time high at 15,871 currently.
We are in the final week of Q1, and it seems shippers still have freight they’d like to work through. I feared that a meaningful portion of this typical end-of-quarter rush had been pulled forward in the wake of the winter storms, but this isn’t the case.
As detailed in the economic data section, the third round of stimulus is having a massive impact on consumer spending. According to Bank of America, total card spending was up 45% over last year and up 23% over 2019 for the seven days ending March 20.
The stimulus is providing a huge boost to Americans, who by and large, still remain unable to spend on big-ticket services like concerts, sporting events or amusement parks. The recent stimulus has created the strongest spending gains in furniture, online electronics and clothing. The reversion back to services has not begun in earnest, and I’m beginning to think consumer balance sheets are strong enough to generate a strong service recovery in the back half while maintaining elevated goods demand throughout the year. The savings rate in the U.S. has come down sharply since the early onset of the pandemic, but it’s still more than double the previous 10-year average.
Yearly comparisons have become increasingly difficult over the past few weeks as we comped over the lockdown-induced panic buying and consumer hoarding that sent OTVI up 30% in 10 days. After adjusting for the extremely high level of tender rejections, OTVI is running up 13% year-over-year.
Last year’s volume surge was gone as quickly as it came. OTVI went from up 30% year-over-year to down 20% in a matter of a couple weeks. With that said, yearly volume comparisons will be meaningless for the majority of Q2 when freight demand plummeted. For the next several weeks, I will be showing freight demand on a two-year comparison to mitigate the distortion in one-year comps.
Given how strong freight demand is currently, it may seem there’s not much more room to run, but we haven’t entered the true spring freight season. With produce season approaching, stimulus-driven consumer demand unbridled and the industrial economy continuing to blossom, the setup couldn’t get much better for carriers.
Tender rejections: Absolute levels positive and momentum for carriers
The Outbound Tender Reject Index has been retreating marginally for a month since the blizzard disrupted freight flows across the country. This week, OTRI jumped back toward the familiar 30% natural ceiling. Over the past six months, the national rejection index has flirted with 30% four times, including currently. I believe this is the natural ceiling for the market, but in December, the index remained above 28% for two weeks.
The rejection leg up seems to be mostly volume driven. The market in which OTRI increased the most this week was Savannah, Georgia, where volumes also surged to a new all-time high. Savannah is of course home to one of the nation’s most important eastern ports and is home to millions of warehouse square footage. To see outbound volumes surge in the last week of the quarter is unsurprising, but it is slightly odd that carriers seem to have not anticipated this. On the other hand, it could simply be that carriers have optimized their networks to serve the West Coast, where volumes are never-ending.
I anticipate higher freight demand in the coming months, and there are no immediate signs of capacity relief visible. The port congestion has prompted retailers to seek alternative routes, which will benefit East Coast ports, but with carriers optimized for LA/Long Beach, it may create lasting volatility. Spot rates will feel some upward pressure, but I don’t foresee rates testing the recent highs again given contract rates continue to be marked up to spot, even if in the form of shorter-term contracts.
Spot rates: Absolute level positive for carriers, momentum positive for shippers
The national spot rate average continued its descent from the all-time high of $3.22/mi., inclusive of fuel to $3.15/mi. currently. Of the 100 lanes available from Truckstop.com in SONAR, only 19 were positive this week.
Spot rates have peaked for this mini-cycle that was created by the winter storms, but with freight demand picking up in the final week of the month, we could see spot rates increase marginally next week.
Contract rates are quickly being marked up toward spot rates. Spot rates will remain elevated if the current environment of high demand and relatively scarce capacity remains. There are catalysts including new truck orders and the ending of social distancing measures that will add capacity, but the question remains when and how much. For now, carrier networks remain strained with this level of demand, and I anticipate demand will increase from here when the produce season begins in earnest and more regional economies reopen.
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 came in way below consensus estimates this week, a continuation of the recent momentum. Jobless claims were 684,000, which came in below the consensus of 735,000, and a big decline from 781,000 last week. On another positive note, there was good news in the form of continuing claims (a rough proxy for unemployment), which were down 264,000 this week to 3.87 million, which marks a new low in the COVID era. The latest unemployment report from February 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)
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 a whopping 45% year-over-year. The picture is slightly less optimistic when focusing on retail spending excluding auto, which was up 32% year-over-year last week. Overall card spending accelerated enormously this week from last week’s 7.4%. This week’s increase by far marks a pandemic high.
As we usually note, there has been an ongoing beneficial mix shift from cash to debit that is somewhat inflating these numbers. One can typically tell this is the case because debit card spending has been far outpacing credit card spending for the past year. This week, credit card spending increased 35% year-over-year, while debit card spending was up 51% year-over-year. 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 the stimulus dramatically increased card spending on both a one- and two-year basis (i.e., it was still remarkably strong even after removing the effects of very easy comparisons). Second, only about one-sixth of the $1.9 trillion stimulus payments have been disbursed so this sharp rise likely has some legs for the next several weeks. Third, it is easy to see the effects of the stimulus payments because spending in the cohorts that have received stimulus payments is skyrocketing on both a one- and two-year basis. For example, on a two-year basis (removing easy comparisons), total spending for those receiving stimulus payments was up 49% compared to 9.7% for those who didn’t (which is still a very strong number). Lastly, low-income individuals are spending much faster than higher income cohorts and the most popular categories for stimulus spending have been furniture, online electronics and clothing.
We have been noting that we are expecting 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. The COVID winners and stay-at-home beneficiaries still haven’t dropped off much because overall spending is so strong but previously weak categories are surging. For example, we are already starting to see this phenomenon play out with airline spending up 397% y/y (down 33% on a two-year basis), entertainment spending up 353% y/y (down 47% on a two-year basis), department stores spending up 282% y/y (up 37% on a two-year basis) and clothing spending up 272% y/y (up 38% on a two-year basis).
Card spending by American consumers has a strong correlation with truckload volumes, so we will continue to monitor this data closely going forward.
Transportation stock indices: Absolute levels and momentum positive for carriers
This past week was a good one overall for our transportation indexes. Parcels was the best performer at 6%, while logistics was the worst performer at -0.1%.
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