Freight demand flatlined this week, with the Outbound Tender Volume Index rising 15 basis points to 15,522. OTVI has been roughly flat at an elevated level since mid-August. Freight market conditions eased considerably over the course of October compared to the two months prior, but capacity remains scarce and expensive.
On an accepted-tender basis, contract volumes are running up 24% over last year. Last year’s peak season was strong but not record-setting as this year is poised to be. The comps get slightly more difficult as we move into the traditional peak season, but we have no reason to believe that volumes will break down materially this holiday season.
The low inventory-to-sales ratio, strong consumer sentiment and spending, lack of service-based spending options, and acceleration of e-commerce growth all point to a strong holiday spending season for freight.
A strong holiday season is not a lock though. There are skeptics who are more wary of making this call with 8% unemployment and roughly 8 million Americans still on federal unemployment insurance. For example, Jay Sole, a retail analyst at UBS, believes U.S. holiday sales will fall 10% to 12% year-over-year for softline goods (clothing and accessories). He also believes we will see a “holiday head fake” in which the early shopping data is promising before seeing spending decline after Dec. 1. Sole bases this theory in part on a recent survey of U.S. shopper intentions and the idea that there will be a significant pull forward in holiday shopping demand that will fade in December. This year, 41% said the economy would affect their holiday spending versus 28% last year. That’s the biggest change since the global financial crisis more than a decade ago. There is a sharp increase in the number of shoppers who say they will start their holiday shopping by Nov. 1.
Sole’s perspective appears out of whack with the weekly Bank of America consumer spending data, which has remained strong for several months and even accelerated — climbing by 4% year-over-year last week with apparel spend up 5%. In other words, for Sole to be right, there would have to be a break from trend and a downward inflection. Further, softlines are just one part of consumer spending and Sole’s call is contrarian, with most analysts calling for strong holiday demand. How the holiday season shapes up will be important for trucking volumes and rates moving forward as this has been a consumer-driven rally.
On a positive note, eight of the 15 major freight markets that we monitor as a broad, representative benchmark were positive on a week-over-week basis. This ratio fell slightly this week from the stronger levels it has become accustomed to in recent months as the freight market rallies. The markets with the largest gains this week in OTVI.USA were Houston (17.77%), Savannah, Georgia (7.51%), and Indianapolis (5.06%). The markets with the largest declines this week in OTVI.USA were Chicago (-10.68%), Memphis, Tennessee (-6.69%), and Ontario, California (-4.64%).
Tender rejections remain elevated but slip below 25%
Capacity remains historically difficult to secure even though the Outbound Tender Reject Index (OTRI) has fallen steadily throughout October. This week, the index fell 85 basis points to 24.26%, indicating carriers are still rejecting nearly one in four freight tenders at contractual rates. For perspective, this time last year, carriers were rejecting about one in 20 contracted tenders.
The Gulf markets saw capacity tighten ahead of Hurricane Zeta. The West Coast markets have been volume hubs, especially the ports of Los Angeles and Long Beach, but capacity has loosened in almost every market on the West Coast in recent weeks.
Last week, Stephens released a note on the capacity constraints limiting truck driver training schools. After surveying 28 driving schools, it estimated 22% of all truck driving schools are currently closed — either temporarily or permanently; current throughput is running at only 57% of pre-pandemic capacity. Thus, some say carriers can order all the trailers they want, it still may take some time before the bottleneck at training schools is resolved. However, other recent data support increasing capacity in response to the strong market demand, as evidenced by rising trucking employment counts, new truck and trailer orders and commercial vehicle insurance registrations, as well as firming used truck prices.
Rapidly rising contract rates for capacity in 2021, which most expect and increasingly more data and commentary confirm, should ease tender rejections in the coming months and quarters, though rejections could still experience another spike in November and December during peak season.
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