This week’s DHL Supply Chain Pricing Power Index: 10 (Shippers)
Last week’s DHL Supply Chain Pricing Power Index: 10 (Shippers)
Three-month DHL Supply Chain Pricing Power Index Outlook: 50 (Balanced)
The DHL Supply Chain Pricing Power Index uses the analytics and data contained in FreightWaves SONAR to analyze the market and estimate the negotiating power for rates between shippers and carriers.
Outbound tender volumes have risen nearly 10% off the bottom on April 6th, but the momentum has stalled and the rate of acceleration has declined. Many parts of the economy are testing reopening strategies and beginning to phase the economy back to normal. Capacity remains very loose despite the Outbound Tender Reject Index (OTRI) rising for the first time since March. Unemployment continues to swell despite parts of the economy reopening. Tomorrow’s nonfarm payroll data will easily be the worst contraction on record.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels and momentum neutral
Outbound tender volumes have continued to climb slowly. The rate of acceleration has decreased this week compared to last, only up 2.3% week-over-week. National volumes have now bounced nearly 10% off the bottom on April 6th.
Despite warnings from health and disease experts, the majority of U.S. states have moved forward or are moving forward with relaxing some restrictions. Unfortunately for freight volumes, most of the businesses reopening are service-based and do not move much freight. However, there was encouraging news for freight volumes out of Detroit this week when the major auto manufacturers set a soft reopening date for May 18th.
It is not that the auto industry moves a high percentage of domestic freight. But auto producers are well-positioned to create the blueprint for a wider manufacturing reopening. The strong union presence of the UAW and other unions may be able to secure cleaner and safer work environments, as well as enough protective equipment. Also, the inherent structure of auto plants makes them better suited for working through COVID-19 for a couple reasons. First, the plants are highly automated and workers use heavy machinery, which means they typically are already wearing gloves; secondly, auto plants are much less dense than an ecommerce fulfillment warehouse or meat processing plant. It is our belief that auto producers can lead the way towards a manufacturing and industrial reopening. The issue will then be demand, which will be damaged by the economic losses of the next few months.
It may be some time before OTVI reaches pre-crisis levels, but parts of the economy reopening and produce season will increase volumes slowly for the next couple of weeks.
Tender rejections: Absolute levels and momentum positive for shippers
Outbound tender rejections have increased week-over-week for the first time since the OTRI peaked at 19.25% on March 28th. While the index is only up a paltry 11 bps over the past week, it is positive for carriers that OTRI has found the bottom. Unfortunately for carriers, this is still one of the lowest values in the series’ three-year history.
The index has previously found a support level around 4%, getting close to it but rarely falling below. This is the longest time OTRI has been under that support line, and with volumes at national holiday levels, there is not much pointing towards a rebound.
Since peaking at 19.25% on March 28th, OTRI has plummeted more than 80%. OTRI is a measure of carriers’ willingness to accept loads at contracted rates and currently, carriers are moving whatever freight they can find. Contract rates have bounced off the bottom, but tender rejection rates will not trend up across the country until capacity is filled in most markets. Currently, this is not the case. Many trucks have been idled and capacity remains loose around the country. The reopening of some industries and the produce harvests will tighten capacity in pockets, but not on a national level.
In terms of pricing power, it is not constructive to either shippers or carriers when volumes are this low. So, to grasp where the power is in this underperforming environment, we must look to pre-crisis capacity, which was already excessive. Although we believe bankruptcies and company failures will re-accelerate during the second quarter, capacity is still very loose right now. Until volumes pick back up, or a swath of drivers leave the market, that environment will remain.
Spot rates: Absolute levels and momentum positive for shippers
For the first time since volumes began plummeting in late March, spot rates from Truckstop.com for at least one-third of the lanes in SONAR are positive week-over-week. Just two weeks ago, 97% of lanes in SONAR were negative. Spot rates are undoubtedly still well below what we would expect without a global pandemic, but it does seem we have found the bottom at least for the time being.
In general, spot rates have plummeted over the past month. There have been small pockets of upward pressure on rates, but overall rates remain depressed due to the lack of spot market volume.
We have heard stories from drivers who confirmed our belief that spot rates would quickly encroach upon operational costs per mile during April. There will be expectations for grocery, consumer staples and medical supplies, but overall rates will be down considerably on a yearly and sequential basis in May as well. As FreightWaves CEO Craig Fuller noted yesterday in a SONAR Freight Market Pulse, “Spot market activity won’t return until after the contract market does, so monitoring tender activity gives us a sense of market direction.” And with tender volumes and rejections pointing downward, it will be some time before the contract market returns to normal.
Economic stats: Momentum and absolute level neutral
There were several significant economic releases this week that are worth noting.
By far the most widely watched blockbuster economic data point this week was initial jobless claims, which came out today. Given its frequency, this is one of the best real-time indicators we have.
We just received the jobless claims for the week ended May 2 and they were 3.2 million; this comes on the heels of 3.8 million initial jobless claims last week and over 4 million the week before last. This brings the 7-week total to 33.5 million Americans applying for unemployment benefits, which more than wipes out all the job gains since 2009.
To put into context just how high that number is, 2% of the American workforce have lost their jobs in each of the last two weeks and 3-4% of Americans have lost their jobs in each of the previous five weeks. Just in the past seven weeks, more than 20% of Americans have lost their jobs. Although initial jobless claims are trending downward, the 3.2 million initial claims are roughly 5 times the previous peak of 665,000 in the 2008-09 recession and the all-time record of 695,000 in October 1982. If there is any good news at all, initial jobless claims fell for the fifth straight week and marked the lowest weekly total since the coronavirus outbreak in March, indicating initial claims have peaked. The unofficial unemployment rate now sits at close to 24%, almost 7 times the 50-year low of 3.5% from about seven weeks ago.
U.S. Initial jobless claims (2007-present)
Source: CNBC, U.S. Department of Labor
Taking a deeper look at more granular credit card data from Bank of America Lynch for the week ending May 2, several things stand out. The good news is that consumer spending appears to have convincingly bottomed and stabilized, albeit at a low level.
Overall credit card spending was down an average of 18% for the trailing seven days, about equal to the pace last week after significant improvement in the prior few weeks from the roughly -30% trough and far better than second quarter GDP projections in the negative 30%+ range. If one adjusts the data one day further back and removes May 1 for the paycheck distortion, the trailing week averaged 22% lower spending. We think the modest slowdown stems from the gradual phaseout of spending boosts from the April 15th stimulus checks. Not surprisingly, airline, lodging, entertainment and restaurant spend all continue to plunge, while e-commerce is experiencing breathtaking growth of 77% on average for the past week (a slight deceleration from 87% in the prior week). Grocery is strong again after a few weeks of lull post-panic buying. Online electronics sales are still booming as $150 billion in stimulus checks and perhaps boredom and increased streaming hours make a positive impact. The good news is that nearly every category has bottomed and is experiencing at least a slight recovery. Consumer spending will be important to watch to gauge when the economy and freight volumes will pick up. With many businesses shuttered (but reopening on the margin) and 24% unemployment, it is tough to envision a dramatic improvement from the overall negative mid teens declines we have seen in overall consumer spending for the past two weeks.
Source: Bank of America Merrill Lynch
Transportation stock indices: Absolute levels positive for shippers, momentum positive for carriers
It was a decent week for our transportation indexes, though performance was uneven across modes. LTL and Logistics were both positive (up 2.6% and 2.5%, respectively) and Parcels and Truckload were both negative (down 0.1% and 1.3%, respectively)..
Earnings season continued this week and there were several notable transportation companies to report.
For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at firstname.lastname@example.org, Seth Holm at email@example.com or Andrew Cox at firstname.lastname@example.org.
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