Capacity Tightening Ahead of Thanksgiving Week

This week's DHL Supply Chain Pricing Power Index: 70 (Carriers)

Last week's DHL Supply Chain Pricing Power Index: 70 (Carriers)

Three-month DHL Supply Chain Pricing Power Index Outlook: 75 (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. 

The Pricing Power Index is based on the following indicators:

Waiting for the seasonal rise in freight demand

The Outbound Tender Volume Index (OTVI), measured by shippers' requests for capacity, continues the sluggish quarter. Now halfway through the final quarter of the year, OTVI has fallen below the 15,000 mark for the first time since late February, when a severe winter storm hampered domestic transportation networks. Over the past week, tender volumes levels fell by 2.44% week-over-week (w/w).

Tender volumes now are significantly underperforming year-ago levels:
SONAR: OTVI.USA: 2021 (blue), 2020 (orange) and 2019 (green)
To learn more about FreightWaves SONAR, click here.

The recent decline in tender volumes comes as domestic intermodal, which is thought to be a direct competitor of truckload, has continued to grow outside of the traditional peak season. Loaded domestic intermodal container volumes grew by 8.8% month-over-month (m/m) in October. That has continued into November with intermodal volumes up nearly 2% m/m. That increase over the past couple of months has led domestic intermodal volumes to outperform and are up 1.2% year-over-year (y/y). 

At the same time, truckload tender volumes are down 4.5% so far in November. Volumes have declined 3.5% over the past month, but as this week's Chart of the Week points out, demand has been steady over the past eight months. The trouble is that the comps have become increasingly difficult over the past month, leading to tender volumes to be down 4.7% y/y.

Adjusting OTVI, which includes both accepted and rejected tenders, by the tender rejection rates shows the true level of freight moving through networks. Accepted tender volumes are running down 3.2% w/w,  a larger move than the tender volume index. The underperformance this week is due to an increase in tender rejections over the past week. Accepted volumes continue the outperformance compared to a year ago, though the gap has now narrowed to just 2.6% y/y, the narrowest the gap has been, outside of holiday affected weeks, in more than a year.

The outlook for the truckload market is still relatively strong, though some of the demand may be pushed back into the first quarter of 2022. Wth heightened intermodal demand, a modal shift closer to the holidays will drive truckload demand during the next month and a half. Throw in historically low inventory levels that will have to be built back up to pre-pandemic levels (or potentially higher) and the outlook for truckload demand for the next several months is strong.

A risk that lies ahead for truckload demand is the pushing back of goods that aren't needed on shelves for the holiday retail season. Pushing goods back to the first quarter of 2022 will keep demand elevated for a longer period.

Tender levels take a breather in a majority of the country:
SONAR: OTVIW (color) and OTMS (height)
To learn more about FreightWaves SONAR, click here.

Across the country, volume levels in 54 of the 135 markets tracked by FreightWaves SONAR were higher over the past week. The largest freight markets in the country took a significant breather over the past week, with the expectation of Harrisburg, Pennsylvania.

The two large Southern California markets, Ontario and Los Angeles, took a step backward over the past week. Tender volumes in Los Angeles fell by 8%. Tender volumes are still deeply depressed compared to last year, down 16.4% y/y. In Ontario, freight volumes are still relatively volatile, falling 8.6% w/w.

The Northeast, which has been an interesting region over the past couple of weeks, was a mixed bag this week. Harrisburg was the largest market to experience an increase in volume as tender levels jumped 4% w/w. In Elizabeth, New Jersey, volumes took a significant step lower, falling by 9.5% w/w.

By mode: Momentum in reefer demand disappeared over the past week. Reefer volumes as measured by the Reefer Outbound Tender Volume Index (ROTVI) decreased by 3.62% w/w. Reefer volumes continue to run down by over 15% y/y, though winter weather and increased demand around the holiday season are going to drive reefer demand through the winter months. 

Dry volumes did take a breather over the past week as the Van Outbound Tender Volume Index (VOTVI) decreased by 2.03% w/w. Much like the reefer market, van volumes are underperforming year-ago levels, down 5% y/y. If the holiday retail season is as strong as expected, anticipate dry van volumes picking up rather quickly in the coming weeks.

Rejection rates pick up ahead of Thanksgiving week

The Outbound Tender Reject Index (OTRI), a measure of relative capacity in the market, has increased over the past week after hitting 19.25% on Nov. 9. OTRI is currently 89 basis points (bps) higher than a week ago, the largest single-week increase since the end of 3Q.

Rejection rates starting to rise in a seasonal pattern
SONAR: OTRI.USA: 2021 (blue), 2020 (orange) and 2019 (green).
To learn more about FreightWaves SONAR, click here.

The uptick in rejection rates may signal the beginning of the capacity crunch surrounding the peak truckload season. Traditionally, drivers tend to stay closer to home around the holiday season, which places upward momentum on rejection rates. With Thanksgiving and the retail peak season just a week away, expect that rejection rates continue this positive momentum through the next two weeks. 

The increase in rejection rates continues to show that the capacity conditions in the market are still quite difficult. Though the rejection rates are down 656 bps y/y, compared to 2019 levels, rejection rates are 1,428 bps higher. In a normal period, rejection rates between 7% and 10% put inflationary pressures on spot rates. The past 18 months have been anything but normal, so spot rates haven't really been as tightly correlated with rejection rates, especially in the last quarter. 

New capacity in the form of new Class 8 trucks isn't likely to enter the market for a prolonged period as OEMs continue to be cautious, working through their own set of supply chain constraints. New Class 8 orders in October were down 12% from September levels and 39% y/y. Backlogs are now stretching well into the back half of 2022 and putting constraints on the used truck market as well. A used 3-year-old truck now costs over $95,000, an increase of 67% y/y.

Difficult capacity conditions continue to sweep the nation:
SONAR: OTRIW (color) and OTMS (height).
To learn more about FreightWaves SONAR, click here.

The increase in rejection rates on a national level comes as relative capacity across the country tightened. Of the 135 markets within SONAR, 81 experienced rejection rate increases during the past week. 

One of the only large freight markets that experienced loosening over the past week is Elizabeth. Rejection rates in the market fell by 98 bps during the past week to 15.76%. The current level is the lowest rejection rates have been since the middle of July and are 504 bps below year-ago levels.

In Southern California, capacity traditionally tightens earlier than other markets as drivers tend to avoid the market ahead of holidays when trying to stay closer to home. In Ontario and Los Angeles, rejection rates increased 292 bps w/w, but anticipate the increase to continue throughout the next week and a half. Rejection rates are still more than 600 bps below year-ago levels. 

The second-largest market in the country, Atlanta also experienced an uptick in tender rejections over the past week. The market's rejection rate increased by 55 bps over the past week to 16.65%. The rejection rate remains well below last year's level, currently down 750 bps y/y.

SONAR: VOTRI.USA (blue); ROTRI.USA (orange); FOTRI.USA (green)
To learn more about FreightWaves SONAR,click here.

By mode: Reefer rejection rates have started to trend higher over the past three weeks. Over the past week, reefer rejection rates increased by 73 bps to 38.36%. Rates are still way off the high of over 50% experienced earlier in the year but are sitting 870 bps below year-ago levels. Expect that reefer capacity will remain tight over the coming months, as low temperatures across the country prop up reefer demand.

A rebound in dry van rejection rates kicked off during the past week. The Dry Van Outbound Tender Reject Index (VOTRI) rose by 86 bps over the past week to 19.13%.  The largest equipment type in SONAR has been the most stable for the past year, but the recent jump in rejection rates signals that tightening capacity. Peak season traditionally leads to van rejection rates to climb as drivers come off the road as Thanksgiving is just a week away.

The flatbed market has ratcheted tighter as rejection rates took a significant step higher over the past week. The Flatbed Outbound Tender Reject Index (FOTRI) increased by 239 bps over the past week to 27.26%. The smallest equipment type in the dataset was the last to experience that run-up in rejection rates, which is why even with the large pullback this week, flatbed rejection rates are still 1,600 bps higher than 2020 levels.

Peak season is about to put upward pressure on trucking rates

The spot rate data available in SONAR from Truckstop.com is updated every Tuesday with the previous week's data.

Truckload rates moving in the opposite direction of tender rejections :
SONAR: Truckstop.com's national spot rate (blue, right axis) and dry van contract rate (green, left axis).
To learn more about FreightWaves SONAR,click here.

Moving in an opposite direction than tender rejection rates, Truckstop.com's national spot rate took another step lower last week. The national average spot rate fell by 3 cents per mile to $3.38/mi, including fuel and other accessorials. Spot rates are still up double digits compared to 2020 levels, now up ~16% y/y.

Of the 102 lanes from Truckstop.com's load board, 43 reported increases last week. Outbound of Los Angeles took a step higher on six of the eight lanes, with the northbound lane of Los Angeles to Stockton increasing the most, rising 19 cents per mile to $4.15/mi. The increases out of Southern California are no surprise given capacity has really started to tighten ahead of peak season.

As Thanksgiving is rapidly approaching, now just eight days away, upward pressure on spot rates will ensue as drivers come off the road. 

Contract rates also pulled back over the past week, decreasing by 3 cents per mile to $2.65. Dry van contract rates, which are reported on a two-week lag, are just 12 cents per mile off the all-time high set in mid-September. 

Contract rates, which are just the base linehaul rate excluding fuel surcharges and other accessorials that are included in spot rates, have closed the gap with spot rates significantly over the past year. Contract rates are outperforming spot rates, continuing to run 17% higher than in 2020.

FreightWaves released the Trusted Rate Assessment Consortium (TRAC) spot rates last week during the F3 Virtual Experience. The spot rates are the average buy rate derived from 3PLs' and freight brokerages' reported booked and covered dates. FreightWaves TRAC rates are updated daily and weighted based on proximity to a specific origin/destination with a maximum of 300 miles and length of time to the current date. 

FreightWaves TRAC provides average all-in spot rates for more than 650,000 unique van lanes and over 300,000 unique reefer lanes. Additionally, it provides a range, with the low rate representing the 33rd percentile and the high rate representing the 67th percentile. FreightWaves TRAC provides a confidence score between 1 and 5, with 5 being high confidence, based on the metadata to determine the rate.

SONAR: FreightWaves TRAC rate from Los Angeles to Dallas.
To learn more about FreightWaves TRAC, click here.

The chart above is the FreightWaves TRAC rate from Los Angeles to Dallas, showing that the current rate is $4.11 a mile with a confidence score of 5. This lane has a lot of volume moving from a tight radius, which leads to the high confidence score in the rate. 

Ultimately, upward pressure on freight rates is likely to remain in place for at least the next six months and beyond as supply chain constraints continue to be worked through.

For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at khill@freightwaves.com or Tony Mulvey at tmulvey@freightwaves.com.

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