This week’s DHL Supply Chain Pricing Power Index: 80 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 80 (Carriers)
Three-month DHL Supply Chain Pricing Power Index Outlook: 75 (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.
There is no change in the Pricing Power Index this week despite a continuation of the trends we’ve seen over the past few weeks: astounding volumes, carriers rejecting contracted freight at a high clip and rates continuing to trudge upward. DAT spot rates are now above 2018 levels, and spot market volumes on the Truckstop.com lane pairings bounced back in a major way this week.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels and momentum positive for carriers
Load volumes continue to soar, rising another 3.5% this week. The Outbound Tender Volume Index (OTVI) continues to surge upward and hit another all-time high Thursday at 13,739. This freight level is remarkable for a few reasons. First, there are no signs of any sort of typical seasonality this year; secondly, other parts of the economy have stalled and unemployment remains extremely high; lastly, OTVI has crossed into uncharted territory by climbing higher than the March panic-buying spree.
The yearly comparisons are stunning — up 33% over 2019 and 34% above the 2018 value. The pace of reefer volumes picked up again after a down week last week and is up a little over 3% this week.
The possibility of another round of fiscal stimulus should be on both shippers’ and carriers’ minds. The unemployment benefits that have been holding up consumer spending and much of the economy expired last week. The current expectation is that the $600 in extra unemployment compensation per week will be reduced to $200 and thereby likely result in at least modestly less consumer spending and freight demand. Bank of America estimates if this were the case, personal income would decline by ~$6.5 billion per week. Republicans and Democrats are reportedly far apart in terms of what they want, but rapid passage will be important. The chance of a decision not to extend these benefits is our main worry for freight volumes in the short term.
Besides the expiration of federal benefits via the CARES Act, there is little evidence that freight volumes will fall off significantly in the coming weeks. The threat of lockdowns created a panic-buying situation in March, then freight volumes plummeted because the majority of businesses were closed. Now, regions are going back into lockdown but the restrictions are less severe. The sectors being locked down are predominantly service-based industries that do not move a large percentage of the nation’s freight. In addition, the lack of service options for consumers to spend on has increased the demand for goods and transportation of said goods. Consumer demand remains fairly strong given that economic backdrop. Despite this, we do not believe the typical seasonal decline will be as pronounced this year. Carriers remain in a wonderful pricing position.
SONAR: OTVI.USA (2020 – Blue; 2019 – Green; 2018 – Orange)
Tender rejections: Absolute levels and momentum positive for carriers
The Outbound Tender Reject Index (OTRI) continued exhibiting stickiness at a high level for a fifth week in a row and now sits at 21.62%. OTRI is now well above its July Fourth peak, sits even with its March 2020 panic-buying-induced peak and even crossed over 2018 tender rejection levels for the first time last week and has stayed above this week. We have heard from large asset-based carriers that they are rejecting more freight than they have in a very long time.
The supply-demand dynamic of May, June and July has been much different than March and April. During March we saw volumes and rejections rise in stepwise fashion to all-time highs in a matter of weeks. This time around the rise in freight volumes and tender rejections has been slower but consistently upward and gradual. As a result, it has taken longer for carriers to gain the confidence to reject contracted loads in favor of spot market options, but this dynamic could be changing.
Another difference in this tightening environment is that volumes will remain elevated for some time, unlike in April when volumes plummeted to holiday levels due to nationwide lockdowns. We should expect to see tender rejections in the double-digit range as long as volumes remain elevated — all signs point to this happening, especially if another round of stimulus is announced. From a capacity standpoint, carriers are in the best position of 2020 right now. Carriers are rejecting loads at a higher clip than at any point since the summer of 2018.
SONAR: OTRI.USA (2020 – Blue; 2019 – Green; 2018 – Orange)
Spot rates: Absolute levels neutral, momentum positive for carriers
Spot rates stay flat this week but still sit at new highs for 2020 on a national level, according to DAT long-haul freight rate data. The per-mile rate (excluding fuel) is now $1.89, up incrementally from last week’s $1.88 per mile.
SONAR: DATVF.VNU (2020 – Blue; 2019 – Purple; 2018 – Green)
One thing to note is that rates have now pushed above the 2018 comparable — 2018 was a strong year for volumes and rates, especially during the early summer months. While rates had begun to exhibit normal seasonality in August 2018, it is still noteworthy to see rates above that mark now.
After two weeks of rapidly declining spot volumes, the Truckstop.com spot volume lane pairings have bounced back in a big way this week. We had felt this may be an early indictment of overall volumes coming to a halt, but that may not be the case. One week does not create a trend, but it is very encouraging to see spot volumes rebound this week.
SONAR: TSTOPVV
Rates are elevated right now and the supply-demand dynamic suggests they will remain so for some time. Carriers are rejecting loads at a high rate and volumes are flowing at historic levels. Carriers have options and they are exercising them in search of margins.
Economic stats: Momentum and absolute level neutral
Several economic releases this week are worth noting.
Weekly jobless claims were also released Friday and give us one of the best close-to-real-time indicators of the overall economy.
This week’s jobs news was very encouraging and reaffirmed the improved momentum and change in tone we had seen in recent weeks and months. Initial jobless claims came in at 1.2 million last week, which was far better than consensus expectations of more than 1.4 million and broke the previous streak of two straight weeks of rising jobless claims. This means that jobless claims have now fallen in 17 of the past 19 weeks dating back to the peak weekly jobless claims number from late March. There was more good news too. Continuing claims (a rough proxy for unemployment) dropped 844,000, to 16.1 million. If one is looking for green shoots in the report, jobless claims in Florida and Georgia (two Sun Belt hot spots) actually ticked down this week.
Initial jobless claims (weekly in 2020)
Source: CNBC, U.S. Department of Labor
Turning to consumer spending as measured by Bank of America weekly card (both debit and credit) spending data, total card spending in the latest week was actually down 3% year-over-year. This is a slight deceleration compared to last week’s increase of 0.5% year-over-year but is well off the ~40% declines from late March and early April. As we usually note, keep in mind there is a beneficial mix shift from cash to debit ongoing that is somewhat inflating these numbers. One can tell this is the case from the fact that debit card spending is currently running up double digits year-over-year and far outpacing credit card spending, which is down in the mid-teens range year-over-year.
There were several main takeaways from the card spending data this week. First, we would point out that next week’s data will be critical because it will be the first week of data covering the period where expanded unemployment insurance checks are missing and the card spending data could potentially take a significant hit. Second, there is a two-day paycheck-driven distortion on July 30 and 31 that caused wild swings in the data that can be ignored. Interestingly, card spending in states that reopened later and where the COVID-19 case count is flattening or falling are no longer seeing disproportionately higher spending than states where the opposite is true, which brings this multiweek trend to an end. Finally, lower-income consumer spending is still running higher than middle- or high-income spending — due to the generous unemployment insurance and stimulus more than replacing pre-COVID incomes for this cohort. This represents a major risk to both the economy and freight volumes as the extra unemployment insurance and benefits expired on July 31; the current talk in Washington is that a deal is getting close so we will have to see what happens. In any event, the amount of unemployment insurance extended to over 16 million people is likely to fall at least slightly in coming weeks and will have a negative flow-through impact on the U.S. economy measured in billions of dollars.
Card spending data by income cohort
By category, online electronics (up 99% year-over-year this week) and online retail (up 70%) continue to be the standout performers. Other strong categories include home improvement and furniture. Grocery has decelerated and stabilized at about 10% year-over-year. Brick-and-mortar retail spending has improved dramatically as most states reopen but has stalled in the negative mid-single-digit range year-over-year as the case count remains elevated in many states. Finally, airlines, lodging and entertainment continue to be the worst-performing categories by far.
Card spending by American consumers has a strong correlation with truckload volumes, so we will continue to monitor this data closely going forward.
Source: Bank of America Merrill Lynch
Source: Bank of America Merrill Lynch
Transportation stock indices: Absolute levels and momentum positive for carriers
It was a great week for our transportation indices following several strong weeks over the past couple of months. Parcels was the standout performer at 14.3%, and LTL was the worst performer but still up 1% this past week.
For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at khill@freightwaves.com, Seth Holm at sholm@freightwaves.com or Andrew Cox at acox@freightwaves.com.
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