This week’s DHL Supply Chain Pricing Power Index: 55 (Carriers)
Last week’s DHL Supply Chain Pricing Power Index: 50 (Balanced)
Three-month DHL Supply Chain Pricing Power Index Outlook: 60 (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.
Volumes have continued to burst all around the country this week. Carriers are rejecting loads at rates only seen during the March panic-buying spree buildup. Spot rates have been bid up above 2019 levels in many markets around the country, but this trend is unlikely to continue given typical seasonality. However, volumes are so high currently that a significant decline could still keep OTVI above 2018/2019 comparables.
The Pricing Power Index is based on the following indicators:
Load volumes: Absolute levels and momentum positive for carriers
Outbound tender volumes continued to gush in many regions around the country this week. The Outbound Tender Volume Index (OTVI) is now almost at 13,000 for only the second time in its three-year history, with the first coming just three months ago during the March panic-induced buying spree.
The current volume of freight flowing in the U.S. cannot be overstated — besides the March demand spike, there has not been freight demand like this in recent history. 2018 was considered a banner year for freight volume and OTVI currently sits more than 14% above the 2018 high point.
There is typically a surge in volumes leading up to Independence Day as shippers try to clear as much inventory as possible before the close of the second quarter. After a lost April and depressed May, we believe shippers are particularly focused on pushing freight to paint the second quarter as rosy as possible. Independence Day often marks the beginning of the midsummer slowdown that drags on throughout July and August before picking up at the edge of autumn. If 2020 is to follow historical patterns, we should expect this extremely high volume level to last only a few more days. That said, 2020 has followed very few historical patterns, so there is a great deal of uncertainty about where demand will be in the third quarter.
As mentioned above, Independence Day typically marks the beginning of a slow season for freight. Whether that trend continues this year is yet to be seen. Many view the cognitive dissonance in our economy as perplexing. When looking at employment, production and spending in many major categories, absolute levels are often still depressed though improving dramatically. But when looking at consumer confidence, income levels and the housing market, it seems we have weathered the storm quite well. In either case, COVID-19 is spreading faster now in this country than ever before. This will certainly impact freight volumes and rates, but to what extent?
In any case, it seems unlikely for volumes to continue in this range after the Fourth. In each of the past two years, OTVI has averaged roughly 10,200. A major retraction in tender volumes would need to take place for the index to average similar levels as the previous two years.
SONAR: OTVI.USA (2020 – Blue; 2019 – Green; 2018 – Orange)
Tender rejections: Absolute levels and momentum positive for carriers
Carriers continued for a second week rejecting loads at a much higher rate this week that at any time since the panic-buying spree. The Outbound Tender Rejection Index (OTRI) jumped an additional 500 bps over the past week after running up more than 400 bps last week. The last two weeks have been among the more volatile weeks for OTRI in its three-year history.
During late May and early June capacity proved slow to adjust to the volume levels, but last week that changed. Volumes have remained elevated since Memorial Day, but carriers have been slow to reject freight until now. This was likely an attempt to make up for those “lost” months of April and May.
Much like volumes, tender rejections tend to trend higher in the week(s) leading up to a national holiday. However, this spike is unlike those of any leading up to a summer holiday in the past few years. This change in rejections may not only stem from holiday disruption, but also from carriers looking for other opportunities in this time of freight abundance. This level of tender rejections indicates upward pressure on rates and carriers have begun to test the waters.
Spot rates: Absolute levels positive for shippers, momentum positive for carriers
Spot rates continued to climb this week and in many lanes are now nearing 2019 highs on many lanes for which Truckstop.com provides SONAR data. Truckstop.com also provides spot volume data and while many of the lanes have cooled off this week, the previous two weeks of data suggests this was necessary.
Spot volumes have been gradually filling markets across the country as carriers began to reject contracted rates over the past few weeks. In turn, the spot rates from Truckstop.com have also steadily risen. This week, all but six of the 100 lanes from Truckstop.com are showing positive weekly growth.
Economic stats: Momentum and absolute level neutral
Several economic releases this week are worth noting.
By far the most widely watched economic data point this week was the monthly employment report for June and initial jobless claims, which came out on Thursday.
This week’s jobs news changed the tone dramatically from the past 14 weeks since COVID-19 began to lead to massive layoffs, cumulatively more than 40 million jobs lost over that time frame. The job losses continued to smash old records for layoffs each week even though job losses had been moderating for several weeks recently. Well, this week saw the exact opposite, with the U.S. adding 4.8 million jobs in June, which annihilated the previous record for job gains in a single month and came in well above expectations of 2.9 million. The unemployment rate now stands at just 11.1% (even though it is strange to say 11% is low) and bested expectations for a 12.4% jobless rate. There is one caveat to all the optimism, however, which is that the unemployment survey was conducted midmonth in June and may not reflect any lost momentum from COVID resurgence in much of the Sun Belt across the U.S.
Initial jobless claims for the past week still came in at 1.43 million and continuing claims jumped 59,000 to 19.3 million.
U.S. initial jobless claims/gains (2007-present)
Source: CNBC, U.S. Department of Labor
Taking a deeper look at more granular card spending data from Bank of America Merrill Lynch for the week ending June 27, several things stand out. The card spending data took its first step back in months due to the resurgence of COVID in primarily the Sun Belt of the U.S.
The good news is that consumer spending appears to have convincingly bottomed and despite taking a step back from positive year-over-year (y/y) overall spending last week (the first such week since the COVID outbreak began in March), the absolute level of spending was pretty strong all things considered (though going in the wrong direction).
As we have noted, there is a benefit to this data because there is an ongoing aggressive mix shift from cash to debit card spending due to the health risks of cash. Debit card spending is faring much better than credit card spending (up 8% y/y compared to down 17%).
Overall card spending (both debit and credit) was -3.8% y/y for the trailing seven days, a big step back from flat last week but still a huge improvement from the trough of -40% during the last five days of March (and -18% eight weeks ago). While we do not want to throw cold water on the stunning progress in consumer spending since the bottom, the fact that there is a COVID-19 resurgence in many states could stall the momentum and determine the path for consumer spending going forward.
Amazingly, retail sales ex-autos continues to run up 6% y/y for the trailing seven days. Again, we would never have imagined that consumer spending ex-autos would be positive (much less strongly positive) y/y in the midst of the worst recession since the Great Depression.
It remains to be seen how sustainable this boost in consumer spending is. It has been aided by stimulus checks, generous unemployment insurance and the reopening of most states, but it is certainly good news for now. This could be an issue if unemployment benefits are allowed to expire after July, though there was talk of forthcoming extensions this week in Washington.
Every category has distinctly bottomed, though airlines, lodging and entertainment continue to show 50%-80% declines in revenue. Lodging is clearly improving, now running down closer to 50% from 90%-100% earlier. Restaurant spending is now down only about 20% over the past week, well off the lows of down 65%-75%; however, the COVID-19 resurgence is a major risk to this category (as well as to hotels, travel and leisure). Online electronics and e-commerce continue to exhibit scorching growth of 123% and 72%, respectively, on average, for the past week. We had previously expected some of the strong COVID-19 categories to increasingly delecerate as the economy continues to open, but now we are not so sure as visibility is clouded. Grocery has decelerated and now only up 10% year-over-year as restaurant spending returns. Clothing spending was flat year-over-year (an enormous jump off the trough) and home improvement remains strong, as it has been for months. Lastly, brick-and-mortar retail spending has definitely bottomed (down only 7%) but turned down from -4% last week.
The fabulous news is that every category is experiencing a strong recovery and has bottomed now — even airlines and entertainment, which have been terrible for three months straight. Airlines only saw an 80% decline in spending this week, which sounds crazy but is up from down 100% or more (refunds) a few weeks ago. Consumer spending will be important to watch to gauge when the economy and freight volumes will pick up; the card data indicates momentum in terms of improving volumes off of the bottom should continue. The momentum in card spending closely matches the improvement in OTVI since the bottom in mid-April. This week’s early warning sign could be something to watch very closely in terms of implications for trucking moving forward if the weakening continues.
Source: Bank of America Merrill Lynch
Transportation stock indices: Absolute levels positive for shippers, momentum positive for carriers
It was a great week for our transportation indices following several strong weeks over the past month. Parcels was the best performer at 9% (following a much-better-than-expected quarter from FedEx) and truckload was the worst at 1.4%.
For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at [email protected], Seth Holm at [email protected] or Andrew Cox at [email protected].
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