Carrier Pricing Power Now At An All-Time High

This week's DHL Supply Chain Pricing Power Index: 80 (Carriers)

Last week's DHL Supply Chain Pricing Power Index: 75 (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.

Carriers continue to deal with a lot of high-quality problems this week, such as not being able to handle the sheer volume of freight coming their way. Carriers are rejecting loads at a clip unseen since the summer of 2018, and volumes continue to soar. The wider U.S. economy declined by 33% in the second quarter (the single worst quarter in U.S. history), but that is in the rearview mirror and freight volumes (thus far) appear immune anyway. 

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 4% week-over-week. The Outbound Tender Volume Index (OTVI) currently sits at 13,417. 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 31% over 2019, and 34% above the 2018 value. The pace of reefer volumes slowed this week, falling 1%.  

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 expire today. 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. 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 leads us to believe 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. 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 – Purple; 2018 – Green)

Tender rejections: Absolute levels and momentum positive for carriers

The Outbound Tender Reject Index (OTRI) continued exhibiting stickiness at a high level for a fourth week in a row and now sits at 19.4%. 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. 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 – Orange; 2018 – Green)

Spot rates: Absolute levels positive for shippers, momentum positive for carriers

Spot rates stayed 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 $1.88. 

SONAR: DATVF.VNU (2020 – Blue; 2019 – Orange; 2018 – Green)

However, spot volumes are receding in more than half of the Truckstop.com lane pairings available in SONAR, suggesting that spot rates may not continue to rise too much above this level.

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.

Second-quarter GDP, released Thursday, fell 32.9%. While this beat consensus expectations of -34.7%, it was the worst decline in U.S. GDP in history, including the Great Depression. Consumption, which accounts for roughly two-thirds of GDP, fell by 25%.

Weekly jobless claims were also released Thursday and give us one of the best close-to-real-time indicators of the overall economy.

This week's jobs news was slightly disappointing again relative to the improved momentum and change in tone we had seen in recent weeks and months. Initial jobless claims came in at 1.4 million last week, which was slightly better than consensus expectations of 1.5 million but marked the second straight week jobless claims rose, breaking the prior 15-week downtrend. Continuing claims (a rough proxy for unemployment) climbed by 867,000 to 17 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.

U.S. initial jobless claims/gains (2007-present)

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 (ending last Saturday) was actually up 0.5% year-over-year. This is a slight deceleration compared to last week 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. Card spending in states that reopened later and where the COVID-19 case count is flattening or falling are seeing higher spending than states where the opposite is true, although the difference is narrowing, which is a good sign. Online retail spending resumed its torrid pace, climbing by 77% year-over-year this week. Finally, lower-income consumer spending is 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 expiration date for the extra unemployment insurance and benefits is today; the current talk in Washington is for $200 extra per week instead of the current $600, though Republicans are aiming for only 70% income replacement. 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.

By category, online electronics and online retail continue to be the standout performers. Other strong categories include home improvement, grocery and furniture. 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 mixed week for our transportation indices following several strong weeks over the past month. Parcels was the standout performer at 12.2%, driven by a strong UPS earnings report, and truckload was the worst at -2.2%, even though USX had a banner week due to a strong earnings report.

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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