Carriers in strongest pricing power position since 2018, but it won’t last (with video)

Domestic freight volumes began to decline over the past two days but remain astronomical. Capacity has continued to tighten and the outbound tender reject index is higher than at any point in 2019 and to-date in 2020. Carriers remain in a position of power, but the dynamic is rapidly evolving due to the state of the economy. Roughly 3 million Americans lost their jobs last week, and more than 50% of the country is under shelter-at-home orders. 

The Pricing Power Index is based on the following indicators:

Load volumes: Absolute levels and momentum positive for carriers

Peak domestic freight volumes are likely behind us. For two straight days, the outbound tender volume index has declined a total of 3%. However, the truckload volume is still well above any other time in the index’s history and has risen 3% on a week-over-week basis. 

We estimate only 40% of domestic freight volumes are safe from lockdown and recessionary pressures. These include food, medical supplies and consumer packaged goods (CPG). That being said, the panic buying and hoarding by consumers in the preceding weeks pulled forward much of the demand for CPG (think about those who bought seven months of toilet paper). 

That leaves most of the freight throughput static while we are operating in this environment. The demand for durable goods, industrial production, autos and many more industries will be all but non-existent for the foreseeable future. We are fully expecting volumes to rapidly return to, and soon thereafter fall below, normal springtime levels. 

SONAR: OTVI.USA (Blue — 2020; Purple — 2019; Green — 2018) 

Tender rejections: Absolute levels and momentum positive for carriers

The outbound tender reject index now sits at 18.71%, which is higher than any point in 2019 and to-date in 2020. This marks three straight weeks of rapid movement to the upside indicating more carriers are declining contracted rates in favor of the spot market. While the pace of acceleration slowed this week, carriers are still wielding significant pricing power in spot rate negotiations. 

Capacity will remain tighter than it would in a balanced market for the next few weeks, but this week may be the peak for OTRI. Volumes will soon dissipate due to retail, food, hospitality, manufacturing and many other industries halting operations. 

SONAR: OTRI.USA (Blue – 2020; Purple – 2019)

Spot rates: Absolute levels neutral, momentum positive for carriers

The changing supply-and-demand dynamics are beginning to show in the Truckstop.com data in SONAR. More than two-thirds of the 100 lanes provided to us by Truckstop.com have increased over the past week, with almost 10% of markets up by double digits.

While volume acceleration has sputtered, capacity remains much tighter than it was two months ago. Spot rates will remain elevated as long as capacity loosens slower than volumes fall. Both will return to normal levels in the coming weeks, but until then shippers are still at the mercy of the carriers in rate negotiations. 

SONAR: TSTOPVR

Economic stats: Momentum and absolute level positive for shippers

Backward-looking economic data is relatively useless at this point. Nonetheless, several economic data releases this past week are worth examining.

By far the most widely watched blockbuster economic data point this week was initial jobless claims, which came out today. Given its frequency, this is one of the best real-time indicators we have. Unfortunately, the news was not pretty – 3.283 million Americans lost their jobs last week.

To put into context just how high that number is, 2% of the American workforce lost their jobs last week and the 3.283 million initial claims are about five times the peak of 665,000 in the 2008-09 recession and the all-time record of 695,000 in October 1982. It is also 12 times more than last week’s 282,000 claims (which was up substantially from 210,000 two weeks ago). The chart of initial claims going back to the 1960s is stunning and an anomaly unlike any we have ever seen before. Pennsylvania experienced the largest jump, with a 20-fold increase in jobless claims in one week.

Source: CNBC, U.S. Department of Labor

In an attempt to offset jobless claims from skyrocketing further, a $2 trillion stimulus package was passed by the U.S. Senate and now heads to the U.S. House of Representatives for quick passage before the President signs it into law. Expediency is paramount as many American businesses are generating little to no revenue and many Americans have little to no savings to buy essentials and pay their bills should they be laid off. The largest economic rescue package in U.S. history passed with a 96-0 vote after overcoming a few speed bumps. The chief components of the package include a one-time direct payment to individuals and families making below a certain threshold, a boost in unemployment insurance, forgivable Small Business Administration (SBA) loans to businesses that agree to not lay off any employees and additional health care resources.

Going a layer deeper in the details, individuals who make less than $75,000 (and families making less than $150,000) will receive a one-time payment of $1,200 and $500 more per child. In terms of the additional unemployment insurance, individuals who lose their jobs will receive an extra $600 per month for up to four months and the duration of jobless claims benefits was extended by 13 weeks. The latter benefit was highly debated and a sticking point in the passage as several Republican senators worried it could encourage workers to claim unemployment insurance rather than stay employed.

The stimulus package also contains a $500 billion aid provision for large American corporations, with $425 billion from the Federal Reserve for loans to distressed companies and $75 billion in direct aid for specifically hard-hit industries like travel and leisure. Companies accepting aid will be banned from buybacks and the government may take equity stakes in certain companies.

Transportation stock indices: Absolute levels positive for shippers, momentum positive for carriers

Transportation stocks had an outstanding week as performance radically improved after the plunge over the last month. Less-than-truckload led the way to the upside with a stunning 19.2% weekly increase, driven primarily by a 23% jump in Old Dominion Freight Lines (ODFL). Our Logistics index was second with a 15.0% gain, driven primarily by a 45% gain at XPO Logistics (XPO). Carriers saw a 10.5% increase overall with some of the smaller-capitalization names seeing huge gains. Lastly, Parcels was up the least at 8.2%, still a phenomenal week in any other environment.

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.
Check out the newest episodes of our podcast “Great Quarter, Guys” here.