Relative reefer capacity at loosest point since mid-September

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: 70 (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:

Load volumes: Absolute levels positive for carriers, momentum neutral

Due to the seven-day moving average calculation of our outbound tender volume indices, OTVI is currently distorted due to Memorial Day. Weekly comparisons are near meaningless around any national holiday, but just prior to Memorial Day OTVI hit a year-to-date high north of 16,000. Only amid the last-minute freight rush in the weeks leading up to Christmas 2020 was OTVI ever higher. 

As I wrote last week, we saw typical freight activity in the days leading up to the holiday, as tender lead times expanded and tender volumes rose. Outbound Tender Lead Times topped out at three days, a year-to-date high on Memorial Day, but have since retreated as normal operations resume. 

Last week’s movement upward was driven by dry van volumes, with the Van Outbound Tender Volume Index (VOTVI.USA) rising 3% and reefer volumes staying flat. However, over the three weeks prior to Memorial Day, reefer volumes rose 4% after tumbling for two months post-February winter vortex. I suspect we’ll see continued upward pressure from reefer volumes as we progress through the produce season and into the warm summer months of elevated beverage and food consumption. 

The congestion at our nation’s ports has spread from Los Angeles and Long Beach to Oakland, California. The California coastline is a parking lot of container ships, most of which are full to the brim with imports, awaiting berth. As detailed in the economic section, there are some signs that the reversion is underway with Americans paring back spending on pandemic superstar categories in favor of airlines, lodging and entertainment. But spending remains exceptional despite the moderation, and low inventory levels offset much of the decline that will occur from slowing demand. Real inventories are 3% higher now than pre-pandemic, but real sales growth is far outpacing inventory growth, leading to the lowest inventory-to-sales ratio in decades. 

On the manufacturing side, the ISM Manufacturing PMI did decline 4 percentage points in April, but it’s still well in expansionary territory for the 11th consecutive month. New orders, production, imports/exports and employment are all growing. The major issues should come as no surprise: Deliveries are slowing, backlogs are growing and inventories are too low. 

In all, there are many, many catalysts to keep freight demand strong for the foreseeable future. Americans are beginning to ramp up services-based spending at a high clip, but the high savings rate is enabling it to occur without a massive detriment to goods spending. Airbnb CEO Brian Chesky said he’s seeing the biggest-ever rebound in travel in America. That may be true, but people keep buying stuff, and retailers don’t have enough of it. That will keep the freight flowing throughout the year. 

Tender rejections: Absolute levels positive for carriers, momentum positive for shippers

Unlike freight demand, the typical things we see play out on the capacity side of the equation prior to a holiday never really did. While volumes rose and lead times extended, tender rejections didn’t move up meaningfully as I expected.  Often prior to an extended weekend we see carriers reject more tenders as managers work to get drivers closer to home or try to find higher-paying loads in the spot market. But the Outbound Tender Reject Index (OTRI) has been fairly stable at a very high level around 25%. Meaning, one-in-four electronically tendered loads at contracted prices are currently being rejected across the country. Indeed, it’s an improvement from the nearly 30% rejection rate from mid-February to early April, but it doesn’t mean logistics managers’ lives have gotten much easier. 

By mode. Reefer rejection rates tumbled once again over the past week, and the national reefer rejection average is now below 40% for the first time since the second week of September. At 38.6% nationally, reefer carriers are still rejecting a lot of freight but it’s progress versus an average of 45.2% over the past 90 days. 

Dry van tenders make up the majority of all tenders, so the van rejection rate mirrors the aggregate index closely. Van rejections have risen 2 percentage points since the midpoint of May to 25.8% currently. Over the same period, van tenders rose more than 5%, suggesting the move up was demand-driven. 

Yes, one-in-four loads being rejected is not ideal, but it’s better than 30%. I am unaware of any meaningful signals that capacity is being added at a rate that would change my outlook. With so many catalysts for demand, and many constraints on drivers including the Drug & Alcohol Clearinghouse, driver training school closures and continued government unemployment benefits, the outlook is tight throughout this year and into 2022. That’s not to say we won’t see improvement as consumers revert to pre-pandemic spending habits and drivers enter or reenter the market. But I’m not expecting any quick reversal of this environment; there are simply too many catalysts driving volume and suppressing capacity. 

Freight rates: Absolute level and momentum positive for carriers

Both spot and contract rates pushed higher throughout the month of May, each about 5% higher now than on May 1. Despite the recent rise, I still believe the Truckstop.com dry van national average will not retest the post-vortex surge pricing that brought spot rates up an all-time high of $3.30. But there aren’t many catalysts to bring spot rates down anytime soon either. 

Demand is unwavering with continued strong consumer goods demand, humming industrial recovery and a potentially cooling yet still sizzling hot housing market. And carriers can’t fill enough trucks to keep up with demand. 

Routing guides do continue to be fortified heading into the peak summer season, and we should continue to see a convergence between spot and contract rates. But spot rates will remain historically very elevated throughout the summer as demand simply outstrips capacity. 

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, the data was again very promising as the labor market continues on a bumpy but trajectorially stable recovery path. 

Initial jobless claims last week fell to another pandemic low of 385,000, from 405,000 the prior week, the Labor Department said Thursday. This is the fifth-consecutive week that claims have reached new pandemic lows.

Despite the decline in initial claims, continuing claims ticked up for the second time in three weeks. There are still 3.77 million Americans receiving insured unemployment benefits, but it’s a far cry from the 20 million we were staring at this time last year. It’s not encouraging to see continuing claims sputtering, but it’s also not worrisome. There are still large gaps in the labor market, particularly among those at the lower end of the economic spectrum. 

Initial jobless claims (weekly in May 2020-May 2021)

Consumer. Turning to consumer spending, as measured by Bank of America weekly card (both debit and credit) spending data, total card spending (TCS) in the latest week grew 20% over 2019. Smoothing through the weekly gyrations, total card spending has been running at a roughly 18%-20% pace over a two-year period since mid-April. This is considerably above the average pre-pandemic two-year growth rate of about 8% (from 2012 to 2019). 

In its most recent report, Bank of America analysts said total card spending is running up 20% over 2019, up from 18% last week but also influenced by a late Memorial Day. Services spending has really picked up in the past three weeks, with restaurant spending now up 18% over 2019, and spending on lodging is now positive vs. 2019 for the first time (up 3%). The BofA team did warn of Memorial Day falling four days later this year than 2019, but it’s a great sign for the health of the services economy. 

Despite the strong rebound in services spending, goods demand remains extraordinary. Spending at clothing stores, furniture and home improvement stores, and department stores is still running up between 28 and 45% over 2019. Online retail spending is up a remarkable 86% vs. 2019. So we have seen Americans spending much more on services throughout May, but it hasn’t come at the expense of goods spending, which has remained very high across basically every product category.

FreightWaves’ Flatbed Outbound Tender Reject Index, both a measure of relative demand and capacity, moves directionally with the ISM PMI. 
SONAR: ISM.PMI (Blue); FOTRI.USA (Green) 
To learn more about FreightWaves SONAR, click here.

Manufacturing. The ISM Manufacturing Purchasing Managers’ Index for May was released this week and gives us a timely look at our nation’s manufacturing sector. For the 12th-consecutive month, the industry is in expansion mode with the PMI clocking 61.2% in May, up .5% from April. Of the respondents, optimistic sentiment increased significantly despite major supply chain, labor and commodity cost challenges. Demand expanded in May with the New Orders Index growing at a strong level, supported by the New Export Orders Index continuing to expand. The Customers’ Inventories Index hit another all-time low and the Backlog of Orders Index is continuing at a record-high level. 

“Manufacturing is hot. Labor and commodity shortages present significant headwinds and are extending delivery times. As a result, prices for raw materials are soaring but not slowing business demand at the moment. We’ll likely continue to see those increased prices flow downstream,” FreightWaves Lead Economist Anthony Smith told me about the report. 

Record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy, but demand remains strong. Consumption (measured by the Production and Employment indexes) indicated slowing expansion, but expansion once again. 

For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at khill@freightwaves.com or Andrew Cox at acox@freightwaves.com.

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