The Outbound Tender Rejection Index (OTRI) pushed above 16% for the second time in 2020 last week, after being as low as 2.5% in early May, which was the lowest value seen since the index was created in March 2018. To put it in perspective, the highest value recorded for the national index that measures the rate at which carriers reject their electronic load requests from shippers was 26.8% in March 2018 when carriers were taking advantage of an overheated spot market. What are the odds we reach similar levels in 2020?
When the initial shutdown of the nation’s economy began in March, daily freight volumes surged to all-time highs, with the Outbound Tender Volume Index (OTVI) topping 13,000 for the first time in its two-year history, and tender rejection rates were higher than in all of 2019, exceeding 19%. No one anticipated volumes and subsequently rejection rates would return to something resembling the panic-induced shipping spree in March.
The two indices support the V-shaped recovery theory that states the economy will recover as quickly as it fell. The problem with this comparison is that the recovery looks more like an N than a V. Looking at the OTRI chart, there appears to be a gravitational pull around a 5%-6% value. This does appear to be as close as possible to what one can call a normal market value over the past two years. When conditions are stable — no holiday influence or volume spikes — carriers accept around 95% of their load tenders.
The idea of a normal market is somewhat laughable at this point, but this figure is probably as close to a baseline as we can get considering the economy and supply chains will not have a chance to stabilize until a consistent solution to handling COVID-19 is present. This means that a 20% rejection rate is not out of the question, but neither is a 3% if a second shutdown occurs.
In the near term, there are many positive signs of economic recovery, with the jobs report showing continued progress. The unemployment rate fell to 11.1% in June, which was far better than expectations but still extremely high.
The Purchasing Managers Index (PMI) issued by the Institute for Supply Chain Management, which is used for gauging manufacturing activity in the United States, increased from a historic low of 43.1 in May to 52.6 in June. This is the highest value since May 2019.
Some of the traditional relationships between macroeconomic indicators and trucking have been broken over the past quarter. Many of these indicators do not have a direct relationship to freight volumes, at least in near time. Over the long run, manufacturing volumes and freight have a strong relationship, but the current environment is more like a restart than an established economy.
There are changes in demand that influence the normal flow of order fulfillment and inventory management cycles. Consumers are purchasing different items than they were six months ago due to significant lifestyle changes. Businesses are trying to get in front of these changing behaviors by moving inventory and trying to find their place in the post-COVID world.
The world has changed rapidly, which causes shippers to change rapidly. This means orders will surge and recede rapidly as well, which should ripple throughout the freight market into 2021.
About the Chart of the Week
The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real time. Each week a Market Expert will post a chart, along with commentary, live on the front page. After that, the Chart of the Week will be archived on FreightWaves.com for future reference.
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