Truckload contract market showing early signs of deterioration

The National Truckload Index (NTI), which measures the national average truckload spot rate for van loads, had been falling slowly since the first of the year but accelerated its descent about a week after the OTVI started its strong downward push. The NTI fell 6.3% from mid-January to mid-March and then 14% from mid-March to the middle of May. 

It is important to note the differences between the spot market, which tends to get most of the attention, and the contracted freight market. The spot market represents roughly 15-25% of the total truckload volume in the U.S. Rates are negotiated with up to three-day lead times on average and are generally only good for a few days before expiring. Because of all of this, rates are much more volatile than their contracted counterparts. 

Until this month, contract volumes have not deteriorated significantly from a year-over-year (y/y) perspective. The Contract Load Accepted Volume Index (CLAV), which measures only accepted contract tenders, was above or even with 2021 levels through May. June was the first month in over two years that showed an annual contraction, averaging about 2% lower than the previous year. 

Considering contract rates are up approximately 11% y/y, heavily contracted carriers have not yet felt a significant hit to revenue with only a marginal drop in volume. The CLAV is showing that things may be changing to start the third quarter. 

Since July 1, the CLAV is showing an acceleration in annual decline, expanding from a 2% to 5% yearly differential. Pair this with the dip in contract rates and it shows the first signs of contract market deterioration since early 2020. 

How far will rates fall?

The current spread between contract and spot rates excluding fuel suggests that contract rates could fall another 14% if the spot market remains stable, but the timing is in question. 

The spread between contract and spot rates has been lower than the early pandemic, which was historically low. That is starting to correct as contract rates fall. 

Contract rates declined about 4-5% from late 2018 to early 2020 after gaining 16% from 2017. The point is that contract rates increase at a much faster rate than they decline and a quick contraction will probably not occur, but the current trend suggests that they will fall further. 

J.B. Hunt’s newly appointed president, Shelley Simpson, stated, “We’re having a seasonally normal July,” which may have sounded like a positive. For those who know trucking, July is a slower month compared to June and this may have been a veiled comment about what is to come. 

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