DHL Supply Chain Pricing Power Index: Chaos Is The New Norm (With Video)

This week's DHL Supply Chain Pricing Power Index: 85 (Carriers)

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

Three-month DHL Supply Chain Pricing Power Index Outlook: 85 (Carriers)

The DHL Supply Chain Pricing Power Index uses the analytics and data in FreightWaves SONAR to analyze the market and estimate the negotiating power for rates between shippers and carriers.

After a slight seasonal lull or breather between waves of restocking and imports, carriers have regained momentum this week. The environment is certainly chaotic, but not necessarily volatile. Since mid-August, OTVI has been above 15,000, OTRI above 25% and spot rates have been running up 20-25% yoy. Shippers, settle in. This holiday season will be very strong but transportation prices will be elevated. 

The Pricing Power Index is based on the following indicators:

Load volumes: Absolute levels and momentum positive for carriers

We have officially moved back into "broken record" territory that we have not seen since February. While volumes are flowing at record levels and capacity is as tight as it's ever been, there is little volatility at the moment. The Outbound Tender Volume Index (OTVI) has been above 15,000 since the middle of August, and the accepted tender volume index value has run between 16%-20% up year-over-year for many weeks. 

There have been some regional shifts in volume. For instance, over the past 30 days many of the markets in the Midwest have gained market share. But on a national level, supply chains are humming along at higher transportation costs. The record imports into Los Angeles give us confidence shippers believe the consumer rally will continue. Both the University of Michigan and the Conference Board's surveys of consumer households posted pandemic highs in September. 

Some worry that the lack of another round of stimulus will derail the holiday momentum, but we don't believe this is the case. Not only do we believe there may be a savings buffer for many households, but more importantly we believe the service-spending options will be limited for many months to come. Consumers have proved willing to fill service-spending gaps with additional goods spending, and we see no reason for this trend to reverse. 

SONAR: OTVI.USA (2020 – Blue; 2019 – Orange; 2018 – Green)

Tender rejections: Absolute levels and momentum positive for carriers

The same record is playing on the capacity front. The Outbound Tender Reject Index (OTRI) has been roughly at or above 25% for five consecutive weeks. This is far and away the longest time it has been above 25% in the three-year series history.

Logistics providers are feeling the challenges brought on in this tight environment. A September supply chain survey shows transportation capacity has reached new lows. The Logistics Managers' Index (LMI), a survey of leading logistics executives, showed capacity fell to new lows, dipping another 770 basis points during the month to a 23.8% reading. 

The lack of available capacity was also "reflected in the premium firms are paying." The transportation pricing subindex of the LMI increased 410 basis points in the month to 87.9%, the highest reading since October 2018. "Observing the last two years of transportation prices shows a U-shaped trend, with September's rate of growth representing a return to the heady days of mid-to-late 2018," the report stated. 

Carriers have been rejecting one in four loads since mid-August, and that number is trending worse for the shippers. We have long thought the natural ceiling for the index was roughly 25%. The next few weeks as we enter the beginning of a prolonged peak season will determine the true ceiling. Could we be headed for a time when carriers reject one in three loads? Time will tell. 

SONAR: OTRI.USA (2020 – Blue; 2019 – Green; 2018 – Orange)

Spot rates: Absolute levels positive for carriers, momentum neutral

National spot rates have bounced back similarly to tender rejections over the past two weeks. After a short lull, or seasonal breather before an elongated peak season, both rejections and spot rates have reclaimed their positions at or above 25% and $2.95 per mile, respectively. 

Of the 100 lanes available from Truckstop.com in SONAR, only 35 were negative this week, an improvement over the previous two weeks. Rates on the West Coast continue to outperform due to the influx of import volumes, but truly rates are fairly strong for carriers in every region of the country. Only 12 lanes posted spot rates below $2 per mile, and the majority of those lanes were headed into major headhaul markets like Los Angeles and Chicago. 

Demand will continue to outstrip capacity so long as there is a large gap between contract and spot rates. We have heard shippers are renegotiating early and attempting to secure capacity ahead of the holiday rush, but are having to do so at higher rates. 

SONAR: TSTOPVR

On a national level, rates are still up 28% year-over-year, no change from the previous three weeks. Rates have been positive on a yearly basis since mid-June but have recently accelerated as carriers have been rejecting tenders at 20%-plus rates. The yearly comps do not get tougher until the typical holiday peak season beginning in November. Until then, we expect to see spot rates running 20%-25% up year-over-year. 

SONAR: TSTOPVR.USA (2020 – Blue; 2019 – Orange)

Economic stats: Momentum and absolute level neutral

Several economic releases this week are worth noting.

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

This week's jobs news took a slight step back from the improved momentum and change in tone we have seen in recent weeks and months. Initial jobless claims came in at 840,000 last week, which was higher than consensus expectations of 825,000 and ends the multiweek downward trend. This week's 840,000 claims are up slightly from last week's 837,000, but the four-week moving average continues to trend lower. Jobless claims have now fallen in 22 of the past 28 weeks dating back to the peak weekly jobless claims number from late March. On the positive side, continuing claims (a rough proxy for unemployment) fell sharply by over 1 million to 11 million. 

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 up 0.7% year-over-year. This is slightly below last week's 2.3% but in line with the recent flattish trend and 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 6% year-over-year and far outpacing credit card spending, which is down 7% year-over-year.

The main takeaways this week are that the full month of September showed improvement in the form of stronger spending trends than August and retail ex-auto spending is now running up 7% year-over-year.

By category, online electronics (up 57% year-over-year this week) and online retail (up 56%) continue to be the standout performers. Other strong categories include home improvement, furniture and general merchandise. The strong categories, as well as the weaker categories, have been remarkably persistent since the pandemic began, with the former weakening slightly and the latter improving gradually.

Grocery is still strong but well off the highs, running up 6% year-over-year. Restaurant and bar spending has staged a huge comeback and is now down just 7% year-over-year. Brick-and-mortar retail spending has improved dramatically as most states reopen and was -5% year-over-year this week. Finally, airlines, lodging and entertainment continue to be the worst-performing categories by far, but lodging is way up off the bottom and appears to have gained momentum in recent weeks. Airlines and entertainment are now declining about 70% year-over-year compared to the trough of down 90%-100% in early April.

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

Transportation stock indices: Absolute levels and momentum positive for carriers

It was a fantastic week for our transportation indices following mostly strong weeks over the past couple of months. LTL was the best performer at 7.4%, and truckload was the worst at 4% this 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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