Small carriers are facing pressure from multiple sources

This week’s FreightWaves Supply Chain Pricing Power Index: 45 (Shippers)

Last week’s FreightWaves Supply Chain Pricing Power Index: 45 (Shippers)

Three-month FreightWaves Supply Chain Pricing Power Index Outlook: 40 (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.

This week’s Pricing Power Index is based on the following indicators:

Accepted volumes make a muted recovery following holiday week

In case you missed it, many retailers advertised deep discounts this week, largely in competition with Amazon’s Prime Day. These (mostly online) sales should have given tender volumes a notable boost, but the Outbound Tender Volume Index (OTVI) only shows a modest return to levels from two weeks prior.

Tender volumes fail to impress:
SONAR: OTVI.USA: 2022 (blue), 2021 (green) and 2020 (orange)
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OTVI fell 0.83% on a two-week basis. Given that last week’s holiday caused freight demand to fall across the board, a two-week basis is used to provide accurate comps and insight into current market trends. On a year-over-year (y/y) basis, OTVI is down 18.68%, although y/y comparisons can be colored by significant shifts in tender rejections. OTVI, which includes both accepted and rejected tenders, can be artificially inflated by an uptick in the Outbound Tender Reject Index (OTRI).

Accepted volumes are below year-ago levels:
SONAR: CLAV.USA: 2022 (blue), 2021 (green) and 2020 (orange)
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Contract Load Accepted Volumes (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. Looking at accepted tender volumes, we see slim growth (0.28%) on a two-week basis but also a dip of 3.73% y/y. This y/y difference confirms that actual cracks in freight demand — and not merely OTRI’s y/y decline — are driving OTVI to lower levels.

The U.S. economy added 372,000 jobs in June, vastly outperforming economists’ consensus of 268,000 but failing to meet May’s revised growth of 384,000 jobs. Unemployment remained at 3.6% for the fourth consecutive month. There are, however, a few important caveats behind June’s numbers: The number of participants in the labor force fell by 353,000, nearly as much as total nonfarm job growth.

More tellingly, the above numbers come from the establishment survey, a print that is frequently cited for definitive data on the U.S. labor market. The Bureau of Labor Statistics also releases employment data under a household (or “current population”) survey. 

Numerous methodological differences exist between the two prints, but the important one here is that the household survey counts the employment status of each individual, while the establishment survey counts each job. In short, job growth figures in the household survey do not account for employees working at multiple positions, while the establishment survey counts each new payroll as job growth, whether or not it was gained by someone already employed elsewhere.

This difference between the two surveys is significant, as June’s household survey reported negative full-time job growth of 315,000 but an increase of 239,000 multiple jobholders. These data suggest that, while fewer individuals are working overall, many people are now holding more than one position. This rise in multiple jobholders suggests that inflationary pressures are outpacing wage growth.

What does this have to do with trucking? Freight volume depends on the physical movement of goods, particularly of those purchased directly by consumers. If the current levels of inflation have backed the consumer into a corner, leading them to take on multiple concurrent jobs and put more charges on credit, demand for freight will continue to be reduced. Such demand destruction will have untold ramifications for carriers, shippers and brokers alike.

Volumes rise in Detroit:
SONAR: Outbound Tender Volume Index – Two-Week Change (OTVIF).
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Of the 135 total markets, 54 reported increases in tender volume on a two-week basis.

Detroit was one of the biggest winners this week, with freight demand increasing almost 40% on a two-week basis. This gain comes on the heels of the Fed’s June 15 print on industrial production, which reported a m/m decline of 0.2% across the board. Production of motor vehicles and parts in particular were down 1.2% m/m, but still up 10% y/y compared to the peak of the semiconductor crisis.

Port markets on the West Coast were less impressive. Ontario, California, saw tender volumes decline by 2.46% on a two-week basis. Capacity in the region was disrupted this week by hundreds of truckers, who gathered to protest California’s controversial AB5 law. While freight demand is up in the San Francisco market nearly 20% on a two-week basis, that trend could soon reverse as truckers are planning a similar protest at the Port of Oakland on Monday.

By mode: Reefer volumes rallied strongly against their levels from two weeks ago. The Reefer Outbound Tender Volume Index (ROTVI) is up 3.91% on a two-week basis. On a yearly basis, accepted reefer volumes are up 3.56%. Elevated reefer volumes could be a shining beacon for the industry during the late produce season, although disruptions in California’s capacity might stifle that growth.

Van volumes are on a bit of a decline, as the Van Outbound Tender Volume Index (VOTVI) is down nearly 2% on a two-week basis. Excepting the volume growth driven by summer sales, much of which will go to last-mile carriers, van volumes should be expected to remain soft until the back-to-school season kicks off.

Rejection rates quickly rebound after dip below 7%

In the nine days since July began, OTRI fell 141 basis points (bps) to its lowest level in over two years: 6.7%. In the three days following that bottom, OTRI clawed back 50 bps. At present, however, it seems as though any upward momentum upon which it could have built has been lost.

OTRI sinks to 6.7%:
SONAR: OTRI.USA: 2022 (blue), 2021 (orange) and 2020 (green)
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Over the past two weeks, OTRI, which measures relative capacity in the market, fell to 7.15%, a change of 103 bps from the end of June. OTRI is now 1,415 bps below year-ago levels.

Adding to the complications at Southern California ports caused by AB5 and the subsequent protests, the Port of Los Angeles is currently seeing containers bound for transport over the rails pile up. Per Gene Seroka, the port’s executive director, “the rail cargo sitting nine days or longer now makes up 75% of all our aging cargo.” Given that rail service is suffering from disastrous congestion, mostly caused by a record mismatch between volume and employment, this data is not terribly surprising.

And if America’s small carriers were not battered enough by AB5, the Securities and Exchange Commission has proposed new rules concerning the disclosure of greenhouse gas emissions

These rules, if enacted, would have an outsized effect on smaller fleets. Since such carriers typically operate with razor-thin margins (even in the best of markets), any additional financial burden incurred by hiring employees to monitor emission data would be considerable. It goes without saying that such additional costs, either directly or indirectly, would eventually be passed down to the consumer, potentially worsening current levels of inflation. 

As of now, the SEC has no clear timeline for the adoption or retraction of its proposal. Even if adopted, however, it would almost certainly face legal challenges. A recent decision by the Supreme Court, West Virginia v. EPA, held that a federal agency must clearly show that “Congress intended to delegate authority ‘of [the proposed Clean Power Plan’s] breadth to regulate a fundamental sector of the economy.’” In other words, such sweeping regulations must be decided by the Legislature and not the executive branch.

Capacity tightens in Houston:
SONAR: WRI (color)
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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. As capacity is generally finding freight, a couple of regions this week posted blue markets, which are the ones to focus on.

Of the 135 markets, 62 reported higher rejection rates over the past week, though 34 of these markets reported increases of only 100 or fewer bps.

Although Houston saw tender rejections rise 285 bps w/w, its local OTRI is still 18 bps below levels from two weeks prior. An increasing amount of volume is being directed away from West Coast seaports and to their Gulf Coast counterparts, especially those of Houston and New Orleans. Current uncertainties around West Coast port capacity, congestion and future rates are making Gulf and East Coast ports very attractive. Even so, the infrastructure supporting these networks is not as fully developed as those on the West Coast.

SONAR: VOTRI.USA (blue); ROTRI.USA (green); FOTRI.USA (orange)
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By mode: Even though flatbed rejection rates took a small bump over the past two weeks, they still have yet to recover from their decline in mid-June. The Flatbed Outbound Tender Reject Index (FOTRI) rose 55 bps on a two-week basis to 23.86%. Granted, despite becoming more available relative to earlier months, flatbeds remain the most difficult mode in which to secure capacity. Industrial production, while currently declining, should provide upward pressure on rates for the coming season, softening other losses from housing construction.

On the flip side, reefer rejection rates have not lost the gains made in mid-June, even though their upward momentum is slowing. The Reefer Outbound Tender Reject Index (ROTRI) fell 54 bps over a two-week period to 8.19%. Dry van rejection rates, meanwhile, have had the worst performance across all three modes. Since June 30, the Van Outbound Tender Reject Index (VOTRI) has fallen 105 bps to 7.28%.

In a week, spot rates have fully erased their previous gains — and then some

The spot market continues to look grim. In the run-up to Independence Day, the National Truckload Index (NTI) saw rates climb by a national average of 10 cents per mile. Topping out at $2.94/mi, spot rates had reached highs not seen since late May. Sadly, like a judo flip, that momentum was quickly reversed and the NTI has fallen to a 17-month low.

Spot rates decline at a frightening rate:
SONAR: National Truckload Index, 7-day average (blue; right axis) and dry van contract rate (green; left axis).
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Over the past week, the NTI has declined by 10 cents per mile to $2.84/mi. While this downward trend is somewhat expected, given that July is typically a slower month for freight, the rate of decline is nevertheless shocking. It is currently unclear whether carriers will be able to claw back pricing power before the (historically busier) month of August.

The NTIL, which is the linehaul rate that removes fuel from the all-in NTI, likewise fell 8 cents per mile to $1.97/mi. While there is a 2-cent difference between the two rates, indicating that the decline is partially due to diesel prices coming off their peak, the NTIL’s performance is similarly abysmal.

Contract rates, which are base linehaul rates like the NTIL, rose 1 cent per mile this week to $2.92/mi. Contract rates, which are reported on a two-week delay, are still in the throes of that holiday rising tide that lifted the NTIL by 10 cents per mile. The latest data point, however, marks the first official day of Q3. If my suspicion — which is supported by recent survey data — is correct, next week will be an interesting one for contract rates. If I’m wrong, then next week will be all the more interesting.

To learn more about FreightWaves SONAR, click here.

The chart above shows the spread between the NTIL and dry van contract rates, showing the index has continued to fall to all-time lows in the data set, which dates to early 2019. Throughout 2019, contract rates exceeded spot rates, leading to a record number of bankruptcies in the space. Once COVID-19 spread, spot rates reacted quickly, rising to record highs on a seemingly weekly basis, while contract rates slowly crept higher throughout 2021. 

Once spot rates started the rapid descent from the stratosphere in late February, the spread between contract rates and spot rates narrowed as contract rates continued to increase throughout the first quarter. This caused the spread between contract and spot rates to turn negative for the first time since July 2020.

The spread quickly fell to minus 94 cents, where it stands today. This wide spread will place downward pressure on contract rates as the calendar turns to the back half.

SONAR: FreightWaves TRAC rate from Los Angeles to Dallas.
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The FreightWaves TRAC spot rate from Los Angeles to Dallas, arguably one of the densest freight lanes in the country, did not tip the scales whatsoever. Over the past week, the TRAC rate remained unchanged at $2.67 a mile. Compared to the NTID, or the National Truckload Index — Daily, rates from Los Angeles to Dallas are lower than the national average, but that was not the case at the start of the year. When carriers flooded Southern California back in January, they pushed down spot rates rapidly.

SONAR: FreightWaves TRAC rate from Atlanta to Philadelphia.
To learn more about FreightWaves TRAC, click here.

On the East Coast, especially out of Atlanta, rates are rising and are still beating the daily NTI. The FreightWaves TRAC rate from Atlanta to Philadelphia gained 7 cents per mile this week to reach $3.47/mi. Part of this rate’s increase likely has to do with the erratic weather (namely, severe winds and thunderstorms) that tore through Pennsylvania earlier this week.

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Source: freightwaves - Small carriers are facing pressure from multiple sources
Editor: Michael Rudolph