This week’s DHL Supply Chain Pricing Power 50 (Balanced)
Last week’s DHL Supply Chain Pricing Power Index: 40 (Shippers)
Three-month DHL Supply Chain Pricing Power Index Outlook: 60 (Carriers)
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.
The volumes are bursting from the seams this week. Large asset-based carriers have begun to rapidly reject contracted freight. This is putting upward pressure on spot rates. Independence Day typically marks the beginning of the mid-summer slow down. If volumes continue flowing like this post-Fourth of July, and tender rejections remain elevated, we could be looking at a significant capacity event in the third quarter.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels and momentum positive for carriers
Outbound tender volumes continued to gush in many regions around the country this week. The Outbound Tender Volume Index (OTVI) is now above 12,000 for only the second time in its three-year history with the first coming just three months ago during the March panic-induced buying spree.
The current volume of freight flowing in the U.S. cannot be overstated – besides the March demand spike, there has not been freight demand like this in recent history. 2018 was considered a banner year for freight volume and OTVI currently sits more than 8% above the 2018 high point. The index is only 7% off the all-time high that was set on March 23rd.
There is typically a surge in volumes leading up to Independence Day as shippers try to clear as much inventory as possible before the close of the second quarter. After a lost April and depressed May, we believe shippers are particularly focused on pushing freight to paint the second quarter as rosy as possible. Independence Day often marks the beginning of the mid-summer slowdown that drags on throughout July and August before picking up at the edge of autumn. If 2020 is to follow historical patterns, we should expect this extremely high volume level to last only a few more days. That being said, 2020 has followed very few historical patterns, so there is a great deal of uncertainty about where demand will be in the third quarter.
Tender rejections: Absolute levels and momentum positive for carriers
Carriers began rejecting loads at a much higher rate this week that at any time since the panic buying spree. The Outbound Tender Rejection Index (OTRI) jumped more than 400 basis points (bps) over the past week, which is one of the largest one-week jumps in its three-year history. OTRI currently sits at 11.2%, which is the highest non-holiday value outside of the March spree since the tight summer of 2018.
We have written over the past three weeks that we believed capacity had been slow to adjust to the volume levels, but this week that has changed. Volumes have remained elevated since Memorial Day, but carriers have been slow to reject freight. This was likely an attempt to make up for those “lost” months of April and May.
Much like volumes, tender rejections tend to trend higher in the week(s) leading up to a national holiday. However, this spike is unlike those of any leading up to a summer holiday in the past few years. This change in rejections cannot only stem from holiday disruption, but also from carriers looking for other opportunities in this time of freight abundance. This level of tender rejections indicates upward pressure on rates and carriers have begun to test the waters.
Spot rates: Absolute levels positive for shippers, momentum positive for carriers
Spot rates have climbed from the gutter over the past few weeks and now are nearing 2019 highs on many lanes for which Truckstop.com provides SONAR data. Truckstop.com also provides spot volume data and this week, the vast majority of lanes are once again positive.
Spot volumes have been gradually filling markets across the country as carriers began to reject contracted rates over the past few weeks. In turn, the spot rates from Truckstop.com have also steadily risen. This week, more than 80% of lanes are showing positive weekly growth.
As mentioned above, Independence Day typically marks the beginning of a slow season for freight. Whether that trend continues this year is yet to be seen. The cognitive dissonance in our economy is dizzying. When looking at employment, production and spending in many major categories, the outlook is grim. But when looking at consumer confidence, income levels and the housing market, it seems we have weathered the storm quite well. In either case, COVID-19 is spreading faster now in this country than ever before. This will certainly impact freight volumes are rates, but to what extent?
Economic stats: Momentum and absolute level neutral
Several economic releases this week are worth noting.
By far the most widely watched economic data point this week was initial jobless claims, which came out on Thursday. Given its frequency, this is one of the best real-time indicators we have.
Jobless claims for the past week were 1.5 million (which missed expectations of 1.4 million); this comes on the heels of 1.5 million initial jobless claims last week. This brings the 13-week total to 50.2 million Americans applying for unemployment benefits, which more than wipes out all the job gains since 2009. Continuing claims, a good measure of the persistence of unemployment, clocked in at 19.5 million, which fell by 767,000 and continued the multi-week streak of falling continuing claims – suggesting some people are being rehired as states open back up. The resurgence of the virus in some Southeastern and Southwestern states is a worrisome factor for both claims and continuing claims moving forward.
This week marked the fourth straight week since early March that initial claims were less than 2 million. In the past 14 weeks, 30% of Americans have lost their jobs. Although initial jobless claims are trending downward, the 1.5 million initial claims are still more than two times the previous peak of 665,000 in the 2008-09 recession and the all-time record of 695,000 in October 1982. The other good news, in addition to the trend of falling continuing claims, is that initial jobless claims fell for the 12th straight week and marked the lowest weekly total since the coronavirus outbreak in March, indicating initial claims have peaked.
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 Merrill Lynch for the week ending June 20, several things stand out. The good news is that consumer spending appears to have convincingly bottomed and stabilized and is now getting close to positive year-over-year (y/y) overall and was up 11% y/y for retail ex-autos. We would continue to note that there is a positive benefit to this data because there is an ongoing aggressive mix shift from cash to debit card spending due to the health risks of cash. Debit card spending is faring much better than credit card spending (up 12% y/y compared to down 14%).
Overall card spending (both debit and credit) was flat y/y for the trailing seven days, an improvement from -5% last week and a huge improvement from the trough of -40% during the last five days of March (and -18% seven weeks ago). While we do not want to throw cold water on the stunning progress in consumer spending since the bottom, the fact that there is a COVID-19 resurgence in many states could stall the momentum going forward.
Amazingly, retail sales ex-autos is running up 11% y/y for the trailing seven days, (a significant acceleration from 3% last week). Again, we would never have imagined that consumer spending ex-autos would be positive (much less strongly positive) y/y in the midst of the worst recession since the Great Depression.
It remains to be seen how sustainable this boost in consumer spending is. It has been aided by stimulus checks, generous unemployment insurance and the reopening of most states, but it is certainly good news for now. This could be an issue if unemployment benefits are allowed to expire after July.
Every category has distinctly bottomed, though airlines, lodging and entertainment continue to show 55%-80% declines in revenue. Lodging is clearly improving, now running down close to 55% from 90%-100% earlier. Restaurant spending is now down only about 20% over the past week, well off the lows of down 65%-75%; however, the COVID-19 resurgence is a major risk to this category (as well as to hotels, travel and leisure). Online electronics and e-commerce continue to exhibit scorching growth of 131% and 76%, respectively, on average, for the past week. We expect some of the strong COVID-19 categories to increasingly delecerate as the economy continues to open. Grocery has accelerated and is still up 18% as restaurant spending returns. Clothing spending is now positive year-over-year (an enormous jump) and home improvement remains strong, as it has been for months now. Lastly, brick-and-mortar retail spending has definitely bottomed (down only 4%) and is picking up as states reopen.
The fabulous news is that every category is experiencing a strong recovery and has bottomed now, even airlines and entertainment (which have been terrible for three months straight). Airlines only saw an 80% decline in spending this week, which sounds crazy but is up from down 100% or more (refunds) a few weeks ago. Consumer spending will be important to watch to gauge when the economy and freight volumes will pick up; the card data indicates momentum in terms of improving volumes off of the bottom should continue. The momentum in card spending closely matches the improvement in OTVI since the bottom in mid-April.
Source: Bank of America Merrill Lynch
Transportation stock indices: Absolute levels positive for shippers, momentum positive for carriers
It was a disappointing week for our transportation indices following several strong weeks over the last month. Parcels was the best performer at 0.7% and LTL was the worst at -3.5%.
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