Will This Be A Record-setting Season For Carriers?

This week's DHL Supply Chain Pricing Power Index: 75 (Carriers)

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

Three-month DHL Supply Chain Pricing Power Index Outlook: 65 (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.

This week will likely be a bellwether for the fourth-quarter freight markets. If tender rejections take a leg up and we see widespread rate pressure to the upside, we can expect a volatile peak season. Further softening would signal that perhaps more capacity than expected has been added into the industry and that the operational changes made by shippers and transportation providers have been effective at keeping freight flowing smoothly. 

The Pricing Power Index is based on the following indicators:

Load volumes: Absolute levels positive for carriers, momentum neutral

Freight demand flatlined this week with the Outbound Tender Volume Index rising 28 basis points to 15,484. 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 ecommerce growth all point to a strong holiday spending season. There are skeptics who are more wary of making this call with 8% unemployment and roughly 10 million Americans still on federal unemployment insurance. 

Jay Sole, an 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 headfake" 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. 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.

We will certainly hold Sole's feet to the proverbial fire with the weekly Bank of America consumer spending data. The Passport Research team believes this week will be a bellwether for the holiday season. If in the last week of October tender rejections take a leg up and we see widespread rate pressure to the upside, we can expect a volatile peak season. Continued softening would signal that perhaps more capacity than expected has been added into the industry and that the operational changes made by shippers and transportation providers — including rails — have been effective at keeping freight flowing smoothly. 

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

Tender rejections: Absolute levels and momentum positive for carriers

Capacity remains historically difficult to secure even though the Outbound Tender Reject Index (OTRI) has fallen steadily throughout October. This week, the index fell 3.2% to 24.3%, indicating carriers are still rejecting nearly one in four freight tenders at contractual rates. This time last year, carriers were rejecting one in 20 contracted tenders. 

The Gulf markets saw capacity tighten ahead of the 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. 

SONAR: MAPS

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, carriers can order all the trailers they want, but it will be some time before the bottleneck at training schools is resolved.

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

Spot rates: Absolute levels positive for carriers, momentum neutral

After peaking a hair under $3 per mile, spot rates have tumbled all the way down to a measly $2.83 per mile, inclusive of fuel. We kid of course, but this is the lowest weekly spot rate average from Truckstop.com since before Labor Day. 

Of the 100 lanes available from Truckstop.com in SONAR, only 41 were positive this week, up from only 37 positive last week. We don't see this as a concern for carriers. This is a function of contract rates inflecting upward and carriers rejecting fewer loads rather than faltering demand. As JP Hampstead, director of Passport Research, worded it, "Carriers still hold pricing power in this market, and shippers have by and large switched from a strategy of controlling cost to ensuring service." 

SONAR: TSTOPVR

On a national level, rates are still up 24.7% year-over-year, down from 28% each of 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.

Jobless claims fell sharply this week and came in well below consensus expectations. Jobless claims were 751,000 this week, which easily beat the consensus of 778,000, and dropped 40,000 from last week. The great news is that this week marked the lowest weekly jobless claim total going all the way back to March 14, when COVID-19 first began to spread in the U.S. and jobless claims exploded. More good news came in the form of continuing claims (a rough proxy for unemployment, which fell sharply again this week, down by more than 700,000 to 7.75 million. The unemployment rate has come down to 7.9% but is still more than double its pre-pandemic level. 

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 3.8%  year-over-year. The picture is even brighter when focusing on retail spending. Retail spending (excluding auto) was up 10% year-over-year for the week that ended Saturday. 

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 10% year-over-year and far outpacing credit card spending, which is down 4% year-over-year.

The main takeaways this week are that the consumer spending data continues to accelerate and the new iPhone release temporarily increased online electronics sales (which we would expect to fade in the coming weeks).

By category, online electronics (up 86% year-over-year this week) and online retail (up 62%) continue to be the standout performers. Other strong categories include home improvement, furniture and general merchandise. The strong categories, as well as the weaker ones, 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 10% year-over-year. Restaurant and bar spending has staged a huge comeback and is now down just 5% year-over-year; this will be an important category to monitor going forward with COVID-19 cases skyrocketing globally. Brick-and-mortar retail spending has improved dramatically and was down 3% year-over-year this week. Finally, airlines, lodging and entertainment continue to be the worst-performing categories by far, but all of the former categories are way up off the bottom and appear to have gained momentum in recent weeks. Airlines and entertainment are now declining about 60-70% 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 very rough week for our transportation indexes after several strong months. That being said, the S&P 500 was also off nearly 5% this week. Transportation stocks, and particularly truckload, are in the midst of a pullback as the market wavers over whether spot rates have peaked and rising new truck orders will spoil the party. Truckload was the best performer this week at -5.3%, while logistics was the worst performer and down 7.7%.

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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