As freight volumes collapse, shippers hold all the pricing leverage

Freight volumes have been horizontal for more than 10 days, and while some sectors of the economy are beginning to reopen, these businesses do not move much freight. As a result, the weekly DHL Supply Chain Pricing Power Index continues to shift heavily in favor of shippers.

The Index recorded a reading of 15 this week, down from the 25 of last week and off its high of 65 on April 3.

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. A reading of 50 is considered neutral while any reading below 50 indicates an advantage for shippers and a reading above 50 indicates an advantage for carriers.

Capacity is still extremely loose and carriers are accepting almost all contract freight as spot rates have plummeted in reaction to falling volumes. There is no indication that they will rebound anytime soon. Another 4 million Americans applied for unemployment benefits this week, bringing the total to one-fifth of all working Americans currently unemployed. 

Load volumes: Absolute levels and momentum neutral

National freight volume movement has nearly come to a halt over the past week. The Outbound Tender Volume Index (SONAR: OTVI.USA) has been flat for more than 10 days within the 8,500-8,700 range. The current freight volume is typical for a national holiday like Independence Day or Labor Day. The current OTVI reading is the lowest of any non-holiday value in its three-year history. 

There are sectors of the economy and regions of the country that are beginning to come back online. This week, Tennessee, Georgia and South Carolina all announced plans to open some businesses in the coming week. Unfortunately for the freight industry, many of these businesses are service-related and do not move much freight. 

OTVI is reported as a seven-day moving average in order to smooth out day-to-day volatility. The index is currently in limbo and we believe looking at the weekly change (SONAR: OTVIW.USA) will give better insight into the strength of any volume momentum swings.  

The reopening of service industries will be positive for freight volumes, but not nearly as significant as when the manufacturing and industrial sectors come back online. Currently, all public manufacturing data is very weak. The Empire State Manufacturing Index posted its lowest reading in history for April at -78.2; and Markit’s Flash Purchasing Managers Index also reported a new series low for April at 27.4. While it is constructive for freight volumes that service industries open back up, volumes will continue to underperform so long as the backbone industries are shuttered.

Tender rejections: Absolute levels and momentum positive for shippers

Outbound tender rejections have fallen from the previous series low last week to a paltry 3.13%. This is well below any point in the index’s three-year history. 

The index has previously found a support level around 4%, getting close to it but rarely falling below. This is the longest time the Outbound Tender Reject Index (SONAR: OTRI.USA) has been under that support line, and with volumes at national holiday levels, there is not much pointing towards a rebound. 

Since peaking at 19.25% on March 28, OTRI has plummeted more than 80%. OTRI is a measure of carriers’ willingness to accept loads at contracted rates and currently, carriers are moving whatever freight they can find. Contract volumes are at Independence Day levels, and spot rate volumes from Truckstop.com are in the Christmas Day range for most major lanes. 

In terms of pricing power, it is not constructive to either shippers or carriers when volumes are this low. So, to grasp where the power is in this underperforming environment, we must look to pre-crisis capacity, which was already excessive. Although we believe bankruptcies and company failures will reaccelerate during the second quarter, capacity is still very loose right now. Until volumes pick back up, or a swath of drivers leave the market, that environment will remain. 

Spot rates: Absolute levels and momentum positive for shippers

Spot rates have plummeted over the past month. Last week, only 3 of 100 lanes Truckstop.com provides spot rate data for in SONAR were positive week-over-week. This week, the picture is slightly brighter, but still quite bleak: 90% of lanes (SONAR: TSTOPVR) are negative week-over-week.  

We have heard stories from drivers who have confirmed our belief that spot rates would quickly encroach upon operational costs per mile during April. There will be expectations for grocery, consumer staples and medical supplies, but overall rates will be down considerably on a yearly and sequential basis in April. As FreightWaves CEO Craig Fuller noted this week in a SONAR Freight Market Pulse, “Spot market activity won’t return until after the contract market does, so monitoring tender activity gives us a sense of market direction.” And with tender volumes and rejections pointing downward, it will be some time before the contract market returns to normal.  

Economic stats: Momentum and absolute level neutral

There were several significant economic releases this week that are worth noting.

By far the most widely watched blockbuster economic data point was initial jobless claims, which came out yesterday. Given its frequency, this is one of the best real-time indicators we have.

We just received the jobless claims for the third week of April and they were 4.4 million; this comes on the heels of over 5 million initial jobless claims last week and over 6 million the week before last. This brings the 5-week total to roughly 27 million Americans applying for unemployment benefits, which more than wipes out all the job gains since 2009. 

To put into context just how high that number is, 3% of the American workforce lost their jobs in a single week, after more than 4% had lost their jobs in each of the previous three weeks. Just in the past five weeks, more than 16% of Americans have lost their jobs. Although initial jobless claims are trending downward, the 4.4 million initial claims are more than six times the peak of 665,000 in the 2008-09 recession and the all-time record of 695,000 in October 1982. If there is any good news at all, initial jobless claims fell for the third straight week, indicating initial claims have peaked. The unofficial unemployment rate now sits at close to 20%, more than five times the 50-year low of 3.5% from just over a month ago. 

U.S. Initial jobless claims (2007- present)

Taking a deeper look at more granular credit card data from Bank of America Lynch for the week ending April 16, several things stand out. Overall card spending was down an average of 28% for the trailing seven days, a slight uptick from the prior week and consistent with second quarter GDP projections in the negative 30% plus range. Not surprisingly, airline, lodging, entertainment and restaurant spend all continue to plunge, while e-commerce is experiencing breathtaking growth (averaging about 50% in the past week). Grocery is accelerating to the upside after a few weeks of lull post-panic buying. The good news is that nearly every category has bottomed and is experiencing at least a slight recovery. Consumer spending will be important to watch to gauge when the economy and freight volumes will pick up.

Finally, a wild, historical development took place as WTI oil prices briefly went negative this week when the oil market broke storage levels. While this is typically a big boon to consumer spending (and particularly discretionary spending) in normal times, unfortunately the potential “tax cut” of lower oil prices is relatively meaningless to American consumers given they are driving far fewer miles and the overall economy is so bad.

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.