Increasingly difficult yearly comps are a distraction; the market is rolling

The Pricing Power Index is based on the following indicators:

Load volumes: Absolute levels positive for carriers, momentum neutral

The freight markets have reentered “chaos is business as usual” territory. There has been very little change to any of the major indices this week as the Outbound Tender Volume and Reject Indices have both walked along the x-axis for two weeks now. Since the winter blizzard disruption, tender volumes took a leg up and have remained elevated since. We seem to be near the natural peak in tender volumes (and rejections), but the spring freight season is upon us. 

Year-over-year comparisons are becoming increasingly more difficult given the 30% surge in volumes on the back of consumer panic buying and hoarding at the beginning of the pandemic. For this reason, two-year comparisons glean more meaningful insights throughout the rest of 1H21. 

After adjusting for counted rejected tenders, OTVI is up ~25% over 2019 and up ~13% over last year. The lasting impact of the winter storms is being felt in the reefer market. The power outages meant many goods were left without a way to manage their environment, putting many perishables and other goods at risk for spoilage or damage. Demand for reefer trailers exploded in Texas, with the Reefer Outbound Tender Volume Index for the state increasing over 50% in a 10-day stretch, potentially leaving a vacuum in other parts of the country.

Over the past three months, growth in outbound reefer tender volumes (ROTVI.USA) has outpaced dry van growth, with the disparity accelerating during the storms. As a result of the imbalance, major produce regions like California, North Carolina and Florida have all seen severe reefer capacity shortages over the past two weeks. 

The significant produce harvests typically don’t occur until April through June, so it’s likely that when domestic produce begins to move in earnest, it could set up for a historic year for reefer carriers. 

I don’t know how freight demand gets much better from here. President Biden signed the newest round of fiscal stimulus this week and $1,400 checks will be hitting American pockets as early as next week. Inventories remain decimated, the housing market is on fire, the industrial economy is recovering and the reopening of the economy is inching closer with every passing day. The vaccination efforts are extremely promising — 1-in-4 adult Americans has received at least one dose. 

Tender rejections: Absolute levels positive for carriers, momentum neutral

The Outbound Tender Reject Index (OTRI) declined marginally this week to 26.5%. OTRI has ranged up toward 30% four times over the past year, but never quite touched the handle. I believe we are near the natural ceiling for tender rejections, and this is evidenced by surging spot rates. 

From a geographic standpoint, there is simply not much to report this week. Markets around population centers on the West Coast and in the Northeast experienced very little change in tender rejections this week, while southern regions saw tightening capacity. 

I expect no material change to capacity through the middle of the year. We may see some downward pressure on tender rejections as routing guides are recalibrated and contract rates market toward spot, but capacity will remain difficult to source. 

Spot rates: Absolute level and momentum positive for carriers

The national dry van spot rate average showed basically no change this week, falling 1 red cent to $3.31/mile, inclusive of fuel. Much like with tender volumes and rejections, year-over-year comparisons are becoming more difficult. To a lesser degree, spot rates spiked with the panic buying and consumer hoarding this time last year. 

Geographically, spot rates were a mixed bag this week with exactly half positive week-over-week. I believe we are nearing peak spot rates for this mini-cycle induced by the winter storms. Contract rates are quickly being marked up toward spot rates. This should lead to downward pressure on tender rejections and spot rates as routing guides are more fortified. Spot rates will remain elevated if the current environment of high demand and relatively scarce capacity remains. There are catalysts including new truck orders and the ending of social distancing measures that will add capacity, but the question remains when and how much. 

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 matched consensus estimates this week. Jobless claims were 712,000, which came in below the consensus of 725,000, and decreased from 750,000 last week. Also on the positive side, there was good news in the form of continuing claims (a rough proxy for unemployment), which fell this week by 193,000 to 4.1 million (a new low in the COVID era). The latest unemployment report from February was very encouraging (the U.S. economy added 379,000 jobs in February) and suggests the economic recovery is gaining steam from an employment perspective.

Initial jobless claims (weekly in 2020-21)

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 available increased by 9.7% year-over-year. The picture is slightly more optimistic when focusing on retail spending excluding auto, which was up 9.9% year-over-year last week. Overall card spending accelerated significantly this week from last week’s 3.5% and is now matching the peak of 9.7% from several weeks ago. 

As we usually note, keep in mind there is an ongoing beneficial mix shift from cash to debit that is somewhat inflating these numbers. One can tell this is the case from the fact that debit card spending is currently running up 14% year-over-year and far outpacing credit card spending, which was up 6%. After consistently running deeply negative for months and being down precipitously in April, credit card spending does appear to have finally turned the corner.

The main takeaways this week are that we are nearing the one-year mark from when COVID-19 became widespread in the U.S., which is dramatically altering the one-year growth figures. For this reason, Bank of America has introduced the two-year growth figures (compared to the same time in 2019 pre-pandemic), which can glean more insight in most cases. Good examples of this phenomenon are how airline spending improved dramatically this week on a one-year basis while the two-year comparison was consistent. Grocery, on the other hand, was the mirror opposite. Lastly, Bank of America believes that the February retail sales report could be weak based on its data, although this should be taken with a grain of salt because winter weather significantly dragged down the numbers. This is a temporary phenomenon and the data is already bouncing back aggressively as stated above.

By category, online electronics (up 58% year-over-year this week) and online retail (up 58%) continue to be the standout performers. However, the former two categories have slowed meaningfully from their monthslong blistering pace but have settled in at a very high level. Other strong categories include home improvement, furniture, general merchandise and — for several weeks in a row now — department stores. 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. We would note, however, that we expect a near-complete reversal and decisive change in terms of the winning and losing categories from a year-over-year growth perspective once a large number of Americans are vaccinated, likely sometime in the second or third quarter of 2021.

In a major departure from the trend since March 2020, department store sales grew strongly last week, up 24% year-over-year. This is likely a function of stimulus payments juicing spending on the clothing, online electronics, general merchandise and home improvement categories, according to Bank of America. Grocery was up 0% year-over-year this week, the lowest increase in recent memory, which is notable. However, the two-year comp was up 11% so the weakness is almost certainly due to the massive bump in grocery spending at this time last year. Restaurant and bar spending only fell this week by 1% and is actually now flat on a two-year basis, which is fairly incredible. We expect this category to continue to improve as the weather warms and the COVID case counts fall. Finally, airlines, lodging, transit and entertainment continue to be the worst-performing categories by far, but all three categories are way up off the bottom. Lodging has actually dramatically improved recently. Airlines and entertainment are now declining by 30-50% year-over-year compared to the trough of down 90-100% in early April 2020. Again, much of the recent improvement is due to base effects as the two-year comparison is still down over 50% for each.

Card spending by American consumers has a strong correlation with truckload volumes, so we will continue to monitor this data closely going forward.

Transportation stock indices: Absolute levels and momentum positive for carriers

This past week was a great week for our transportation indexes. Parcels was the best performer at 6.8%, while truckload was the worst performer at 3.9%.

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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