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.
There are many variables converging that will keep upward pressure on spot rates and tender rejections for the coming weeks. Carriers will be able to squeeze extra cents per mile over the next couple of weeks. Assets will come back online sooner rather than later, but volumes are beginning to pick up both seasonally and due to a whipsaw effect from the storm. But given the elevated nature of rejection rates to begin the year, in what is seasonally the softest time for truckload freight, any catalyst to keep drivers off the road is amplified. This spells higher rates and better times for the carriers for the foreseeable future.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels and momentum positive for carriers
The story this week is the whipsaw effect the winter storms have had on tender volumes not only in the hardest-hit regions but across the country. In Texas, winter blizzards rampaged last week, leaving millions without power and creating major disruptions to economic activity. The Outbound Tender Volume Index for the states of Texas and Oklahoma both sank roughly 25% last week as residents and businesses hunkered down.
But this week volumes have snapped back in a major way well above pre-storm levels. Both Texas and Oklahoma have seen outbound volumes surge 60% off the bottom, with Texas volumes ~20% above pre-blizzard levels and Oklahoma up ~30%.
On a smaller scale, the same volume movement has played out on a national level. OTVI.USA fell ~6% last week as snow and ice blasted all but six states, but volumes have roared back more than 20% off the bottom. Some of this can be attributed to normal seasonality — freight volumes have risen in the last week of February/first week of March each of the last three years.
The storm may have frozen freight markets, but this was a fleeting event and caused absolutely no change in the underlying fundamentals. There is no definitive end for this freight bull market in sight. Consumers continue to spend on goods, driving freight and diminishing already depleted inventories. Even if consumer spending diverged from its current trajectory (which I see as unlikely, especially given the additional stimulus, accelerating vaccine rollout and strong consumer balance sheet), the mass inventory restocking ahead will be sufficient to keep freight flowing from a consumer perspective.
In addition to consumer goods demand, the housing market is white hot and there’s a blooming recovery in our industrial economy underway. All of these variables, along with a week of catching up from the winter storms, are converging just as the spring freight season kicks off.
Tender rejections: Absolute levels and momentum positive for carriers
A week after winter weather ravaged a majority of the country, networks are still under immense pressure as tender rejection rates are near all-time highs. The Outbound Tender Reject Index (OTRI), a measure of relative capacity, jumped by 522 basis points to 27.87%, just 59 bps off the all-time high. The 522 bps increase in rejection rates is the largest single-week jump in rejection rates since the initial surge at the onset of the COVID-19 pandemic in the United States at the end of March 2020.
Given the elevated nature of rejection rates to begin the year, in what is seasonally the softest time for truckload freight, any catalyst to keep drivers off the road is amplified. Over the past week, reefer rejections increased by over 460 bps, currently sitting at 47%, over 3,500 bps higher than year-ago levels. As the produce season is set to take off in the upcoming months, the pressure to secure reefer capacity that is already being felt will be more problematic after networks work to catch up from the past week.
The aggregate index has cooled off slightly and seems to be leveling out above 25%, indicating carriers are rejecting 1-in-4 contracted tenders across the country. In the Midwest and Plains regions, capacity is extremely difficult to source and rejection rates are above 40% in most markets. Routing guides in the hardest-hit regions like Texas have recovered slightly and rejections are trending down, but volumes remain above pre-storm levels.
I wrote last week that volumes were expected to snap back but that it would take some time for carriers to work through the freight disrupted by the storms. This is playing out now and will keep upward pressure on tender rejections and spot rates right into the beginning of the spring freight season.
Spot rates: Absolute level and momentum positive for carriers
Like clockwork, spot rates have followed tender rejections throughout the storm disruption. The national spot rate average from Truckstop.com available in SONAR surged another 26 cents per mile this week to $3.11, inclusive of fuel. This is just 11 cents off the peak holiday high the week after Christmas. Dry van spot rates are now up 56% over this time last year.
As I wrote last week, a meaningful amount of capacity was taken off the market last week. While many of those trucks have resumed operations, there is a week’s worth of freight to work through in Texas, one of the largest freight markets in the country. Already strained routing guides have been upended and carriers are being rewarded for stopgaps.
There are many variables converging that will keep upward pressure on spot rates and tender rejections for the coming weeks. Carriers will be able to squeeze extra cents per mile over the next couple of weeks. Assets will come back online sooner rather than later, but volumes are beginning to pick up both seasonally and due to a whipsaw effect from the storm. This spells higher rates and better times for the carriers.
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 730,000, which easily beat the consensus of 845,000, and were a sharp decline from 841,000 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 101,000 to 4.4 million (a new low in the COVID era). The latest unemployment report from January saw the unemployment rate fall to 6.3%.
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 was down 2% year-over-year. The picture is more optimistic when focusing on retail spending excluding auto, which was up 3.4% year-over-year last week. Overall card spending decelerated significantly this week from 0.9% year-over-year last week and 9.7% the week before.
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 3% year-over-year and far outpacing credit card spending, which was down 8%. 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 the snowstorms that blanketed the U.S. hit the spending data for the second week in a row last week. Bank of America expects a sharp rebound next week. There was a huge dichotomy in spending in states covered in snow and ice and those not (as can be seen in the chart below). In fact, in the hardest-hit six states — Texas, Louisiana, Oklahoma, Mississippi, Arkansas and Tennessee — spending was down 25% y/y. Removing those six states, total card spending was actually up 1.3% y/y last week and even that number was still negatively affected by snow as the snowstorm covered about 75% of the U.S. Lastly, no sector or industry was immune from the weather-impacted downturn, though restaurant spending was hit hardest.
By category, online electronics (up 48% year-over-year this week) and online retail (up 49%) 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 12% 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 7% 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 13% and was hard hit by weather as previously discussed. 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. Lodging has actually dramatically improved recently. Airlines and entertainment are now declining by 60-70% 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.
Transportation stock indices: Absolute levels and momentum positive for carriers
This past week was mixed for our transportation indexes. LTL was the best performer at 2.8%, while parcels was the worst performer at -2.7%.
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