This week’s FreightWaves Supply Chain Pricing Power Index: 40 (Shippers)
Last week’s FreightWaves Supply Chain Pricing Power Index: 40 (Shippers)
Three-month FreightWaves Supply Chain Pricing Power Index Outlook: 35 (Shippers)
The FreightWaves 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:
Volume levels have essentially flatlined
A worrisome trend to start August turned a little brighter this week as truckload volumes experienced a slight bounce. August has traditionally brought stronger volume levels than July as back-to-school season is in full swing and the doldrums of summer wrap up. This year has been quite a different story, however.
Barring a significant move higher in volume levels over the final five days of the month, the Outbound Tender Volume Index (OTVI) will end the month lower than where it began. This hasn’t happened in the month of August since the onset of the data set in 2018. In the last bear market (2019), OTVI from Aug. 1 to 31 increased by 2.2%, in line with the volume increase in 2018 (+2.2%) and just slightly below the 2021 increase (+3.1%).
Currently, OTVI is 0.7% lower than where it began the month. Erasing that 0.7% decline is certainly feasible, especially since the Labor Day holiday looms on Sept. 5.
Over the past week, OTVI has increased by 0.25% week over week (w/w) as volume levels started to move higher throughout the back half of the week. Despite the slight increase in volume levels over the past week, the softness this August is showing up as OTVI is 23.2% lower year over year (y/y), the negative reading so far this year.
It is important to note that OTVI itself includes both accepted and rejected tenders, thus when the rejection rate is extremely high (or low) can skew the actual volume levels. That’s where CLAV, or Contract Load Accepted Volumes, comes into play. CLAV is an index that measures accepted load volumes moving under contracted agreements. In short, it is similar to OTVI but without the rejected tenders.
Over the past week, CLAV has increased by 0.34%. Accepted contracted volume levels are still down 0.3% from the beginning of the month, meaning it’s likely CLAV exits August slightly higher than where it began as shippers attempt to move freight at the end of the month. Even with the slight increase this week, CLAV is still 7% lower than this time last year.
Retailers are combating elevated inventory levels and with the more discretionary-focused retailers, the trends look even more worrisome. Target, which has canceled billions in new orders, made little progress in clearing inventory. In Q2, inventory levels increased by 2% quarter over quarter and are up 36% y/y, an indication that the inventory trouble isn’t going to be alleviated immediately.
The number of markets that experienced volumes increase this week is essentially equal to the number that experienced volume levels decline w/w.
Of the 135 freight markets, 67 experienced tender volumes increase over the past week. The largest increases came from markets that are relatively small freight markets in nature: Billings, Montana (+58.73%); Austin, Texas (+42.33%); and Elmira, New York (+39.82%). As for the largest freight markets in the country, the past week wasn’t all that bad. In Ontario, California, tender volumes increased by 5.02%, while in Atlanta volume levels were 6.37% higher w/w.
By mode: The reefer market has continued its upward swing into this week as the Reefer Outbound Tender Volume Index (ROTVI) increased by 3.23% w/w. Compared to this time last year, reefer volumes are 25.52% lower.
The dry van market has started to turn on as well as the Van Outbound Tender Volume Index (VOTVI) increased w/w after last week’s disappointment. VOTVI increased by 0.58%, outpacing the overall index, but like in the reefer market, volumes are 23.83% lower than they were this time a year ago.
Capacity conditions remain loose as rejection rates tick slightly lower
While the volume situation improved over the past week, the overall capacity situation remains relatively unchanged. The freight market continues to deal with a market that is overcorrected throughout 2021 and early 2022 and is now facing the ramifications of that overcorrection.
The Outbound Tender Reject Index (OTRI), which is a measure of relative capacity in the freight market, is relatively unchanged this week, falling just 5 basis points (bps) w/w, currently sitting at 5.71%, near the lowest level is has been in more than two years. Since the beginning of the month, OTRI has declined by just 38 bps, a relatively small decline, but a decline nonetheless.
Compared to this time last year, OTRI is down by 1,636 bps. This decline is driven by numerous factors: higher contract rates enticing carriers to fulfill contracted agreements, more available capacity and decreased spot market activity. The current levels of OTRI resemble that of the last bear market that plagued the truckload market in 2019, when rejection rates were near 4% throughout most of the year.
As you would expect when there is limited change in the market at a national level, there aren’t a lot of markets that are experiencing significant changes in capacity.
The map above shows the Weighted Rejection Index (WRI), the product of the Outbound Tender Reject Index – Weekly Change and Outbound Tender Market Share, as a way to prioritize rejection rate changes. The markets shaded in red are the areas where rejection rates made a significant downward move, indicating capacity conditions eased while markets in blue indicate areas where capacity tightened as shown by rises in rejection rates.
Of the 135 markets, 56 reported higher rejection rates over the past week, though 36 of those reported increases of only 100 or fewer bps.
Denver, one of the markets that had been holding up relatively well in recent weeks, experienced capacity conditions ease this week as rejection rates declined rapidly. Compared to this time last week, OTRI in Denver is 288 bps lower, the fourth largest decline in the country.
Louisville, Kentucky, also experienced a meaningful slowdown in rejection rates over the past week, falling 278 bps w/w.
By mode: The flatbed market continues to soften at a rapid pace, erasing all of last week’s rise in rejection rates and then some. The Flatbed Outbound Tender Reject Index (FOTRI) fell by 259 bps w/w to 13.29%. Like nearly all of the rejection rate data, FOTRI is more than 1,000 bps lower than it was this time last year, which will ultimately lead spot rates lower as the market corrects itself.
The reefer market reversed course as well, especially in the back half of the week as the Reefer Outbound Tender Reject Index (ROTRI) fell slightly, but is still higher than where it was two weeks ago. In the past week, ROTRI is 14 bps lower, falling to 6.7%, a far cry from the 35.75% reefer rejection rate at this time last year.
The van market is largely unchanged from where it was a week ago. The Van Outbound Tender Reject Index (VOTRI) fell just 3 bps to 5.89%. VOTRI is 1,674 bps lower than it was a year ago, but as we head into the Labor Day holiday week, there may be a slight bump in rejection rates next week.
Both contract and spot rates maintain downward momentum
After holding up relatively well throughout the beginning of the third quarter, optimism arose that contract rates may not react as severely to the decline in spot rates.
Then the calendar turned to August.
Contract rates, which are just the linehaul rates and exclude fuel surcharges and other accessorials, fell 4 cents per mile over the past week, reaching $2.74 per mile. Contract rates now sit at the same level that they did to close out 2021, erasing all of the gains established throughout the first half of 2022. As contract rates continue to retreat from their highs, there doesn’t seem to be a catalyst in the near term to stop contract rates from falling further.
Spot rates have continued their descent as the market has further softened in August. Over the past week, the National Truckload Index, which is an all-in spot rate, fell 2 cents per mile to $2.65. The FreightWaves NTI is 17% lower than it was this time a year ago despite diesel prices surging more than 50% over the past year.
The decline in the overall NTI has been propped up slightly from those higher diesel prices. When you remove fuel from the equation, the NTI – Linehaul Only (NTIL) currently sits at $1.88, 29.9% below year-ago levels.
As the calendar is set to turn to September, the NTIL has traditionally exited the month lower than it began, so the outlook for any upward movement in the underlying rate doesn’t look great over the next month.
Even with the rapid decline in contract rates, declining spot rates have held the spread between the linehaul spot rate and the contract rate near record levels. The spread between contract and the linehaul spot rate currently sits at negative 82 cents per mile. In June, the spread touched negative 98 cents per mile, so the decline in contract rates is having an impact, but not enough for the spread to approach the historical average.
Flooding in Dallas to begin the week had little to no impact on the FreightWaves TRAC rate from Los Angeles to Dallas. Over the past week, the rate increased by 2 cents per mile to $2.62 per mile, but the gap with the NTID widened from 6 cents to 8 cents.
Since the beginning of May, the FreightWaves TRAC spot rate from Los Angeles to Dallas has been relatively stable around the $2.60 per mile mark, fluctuating just a few cents either way.
Rates on the East Coast continue to fall, especially out of Atlanta to a major metropolitan area in the mid-Atlantic, Philadelphia. Over the past week, the FreightWaves TRAC rate from Atlanta to Philadelphia has fallen by 9 cents per mile, adding to last week’s 10 cent per mile decline. The rate currently stands at $2.92 per mile, 22 cents per mile above the NTID, but is 74 cents lower than its June peak.
One thing is for certain, the freight market is slowing in the third quarter as attempts to rightsize inventory levels have fallen short so far. Moving into the final month of the quarter, the freight market seems entrenched in a downward slide. Hopefully there will be some upward movement throughout the next four months or else the first quarter of 2023 will be a difficult ride for some carriers.