The Arrive Monthly Market Update, created by Arrive Insights, is a report that analyzes data from multiple sources including but not limited to FreightWaves SONAR, DAT, FTR Transportation Intelligence, Morgan Stanley Intelligence, Bank of America Internal Data and FRED Economic Data from the past month as well as year-over-year.
We know that market data is vital to making real-time business decisions, and at Arrive Logistics, we are committed to giving you the data you need to better manage your freight.
Looking forward, our research continues to indicate the domestic freight market will experience increased capacity tightness, stemming from the highly unpredictable nature of current truckload volumes, that will drive elevated truck costs nationwide through at least the end of 2020. Below are a few high-level takeaways from the report:
• Truckload demand increased throughout the month of August, a reversal of the perennial softening trend that normally occurs as the summer peak winds down
• High demand volatility has resulted in an increasingly problematic capacity disruption by creating imbalances in carrier networks
• The dry van linehaul rate per mile (rpm) of $2.23 for the month of August is the highest ever recorded; evidence of just how impactful the demand volatility has been on capacity
• Dry van and refrigerated spot rates have both eclipsed their respective contract rates, an indication that shippers are likely struggling to maintain routing guides and control costs
• Challenges in getting new drivers on-boarded are resulting in lower levels of active truck utilization for carriers, a sign that driver availability is more constrained than truck availability
• Long haul freight volumes and capacity tightness will remain elevated out of southern CA through at least the month of September as the peak of imports make landfall and inventories are distributed to regional DC’s across the country
• Americans continue to spend less on travel, lodging and entertainment and more on durable goods such as retail, furniture and home improvement
• The shift to e-commerce continues to be a major trend seen in the retail sector as consumers drive more than 60% year-over-year growth in online retail spending
• Nearly 60 million have filed for unemployment since the beginning of the pandemic, with weekly continuing claims remaining above 13 million. Spending among those receiving unemployment benefits has declined rapidly
• $7.9 billion less in stimulus money is hitting our economy weekly now that the enhanced unemployment benefit has been allowed to expire
In August, the freight markets continued to defy normal seasonal trends. Spot market activity picked up considerably, in a month when truckload demand is typically on the decline. Different indices continue to paint a different picture of year-over-year demand trends, but all currently available indices are pointing to month-over-month increases from July to August.
FreightWaves SONAR Outbound Tender Volume Index (OTVI), which measures contract freight volumes across all modes, is up more than 50% year-over-year, and more than 20% month-over-month in August. The Dry Van Tender Volume Index is up more than 50% and Reefer Tender Volume Index is up more than 60% year-over-year in August.
DAT is reporting Dry Van Load Posts have reached a new record in August, with full month volumes up more than 83% year-over-year and 3.6% month-over-month. The record spot volumes were seen in the final week of the month and were driven by an increase in activity related to the relief and recovery efforts associated with Hurricane Laura’s landfall in LA and TX.
In the final week in August, FTR’s Total All Mode Spot Volume Index was up nearly 20% from July, 80% year-over-year and more than 50% above 2018. The growth was driven by a 23% month-over-month and 118% year-over-year increase to a new record high for Dry Van Spot Volumes. Reefer Spot Volumes also saw strong growth in August, increasing by 28% month-over-month and 63% year-over-year.
Managing contract freight agreements has become a challenge for shippers as carriers struggle to adjust to the volatility in contracted freight volumes. Depending on the industry or commodity, shippers are seeing deviations from expected volumes in both directions. In situations where shippers have an overflow of demand, overwhelmed carriers are unable to provide additional capacity and the freight makes its way to the spot market. When volumes are below expected levels, carriers are often forced to abandon contract agreements as they look to the spot market for ways to improve utilization and maintain profitability within their fleets. This dynamic resulted in a double whammy of more freight being moved to the spot market in August.
Freightwaves Sonar Outbound Tender Reject Index (OTRI) and the DAT Load to Truck Ratio are both similar in that they measure supply (truckload capacity) relative to demand. In August, both indices increased, acting as evidence that the regional capacity imbalance is becoming greater and is leading to tighter overall market conditions.
Sonar Outbound Tender Reject Index (OTRI) measures the rate at which carriers are rejecting the freight that they are contractually required to take. Tender rejections are approaching all-time highs as they climbed to 25.3% in late August, an increase of more than 400% year-over-year and 25% month-over-month. The Dry Van Tender Reject Index of 26.75% is up more than 500%, and Reefer Tender Reject Index of 38.58% is up about 200% year-over-year in August.
The DAT Load to Truck Ratio measures the total number of loads posted compared to the total number of trucks posted on their loadboard. In August, the Dry Van Load to Truck Ratio climbed to 5.31, an increase of 133% year-over-year and 19.3% month-over-month. The Reefer Load to Truck Ratio rose to 9.32, an increase of 106% year-over-year and 25% month-over-month.
The capacity tightness that we are experiencing is highly unusual and points to just how disrupted the domestic freight market has become. High demand volatility is creating inefficiencies and inconsistencies in both shippers’ and carriers’ networks, forcing both to spend more time looking for options to cover short term needs in the spot market.
As the market tightened in August, truck costs increased across all three modes. The DAT reported dry van spot rates have increased by 30.9% from $1.81 per mile in June to $2.37 in the first week in September. The dry van linehaul rpm of $2.23 for the month of August is the highest ever recorded and shows just how impactful the demand volatility has been on capacity. Although not pictured, contract rates climbed 14.6% from $1.99 to $2.28 over the same time period.
Reefer spot rates have increased by 19.9% from $2.16 per mile in June to $2.59 in the first week in September, the highest reefer rates ever seen in the month of August and September.
The Contract-Spot Van Rate Spread fell rapidly from $0.04 in July to -$0.08 in August. Spot rates have now climbed above contract rates for the first time since 2018 and just the second time ever.
A tight dry van market impacts both the reefer and flatbed markets as well. Reefer capacity is particularly susceptible to increased tightness when van capacity is reduced due to the ability of reefer equipment to carry dry van freight when van rates surpass reefer rates in some markets. This effectively removes capacity from the reefer market and creates upward pressure on truck costs, even if reefer volumes remain flat.
Reefer spot rates are also now above contract rates. It is not as uncommon to see this trend in the Reefer market, but it still has the same resulting effect. When spot rates are above contract rates, it is a clear sign that we are going through an inflationary cycle in the market, and shippers are likely struggling to maintain their routing guides. This tends to lead to increases in annual contract pricing, which eventually results in a reduction in tender rejections as carriers settle into new contract agreements.
Challenges with keeping drivers seated in trucks and getting new drivers on-boarded are resulting in lower levels of active truck utilization. Simply put, there is more of a shortage of drivers than there is a shortage of trucks.
Several forces are working against driver availability in the market. Truck drivers are an aging workforce that is more susceptible to the dangers of COVID-19, and some drivers are choosing to stay home to avoid the risk and reap the benefits of the increased unemployment benefit that had been in place through July.
Additionally, new regulations are making it harder for carriers to place new drivers in trucks. Drug testing policies now require all carriers to check on drug and alcohol violations prior to hiring new drivers, and restrictions on driver throughput at CDL driving schools have limited the availability of new drivers.
Data from the drug Clearinghouse shows that new queries for drivers have increased, but not as quickly as spot loads increased, a sign that new drivers are not being added to the labor force at a rate fast enough to support shifts in demand.
According to the Commercial Vehicle Training Association, social distancing guidelines due to the pandemic has reduced the number of drivers per truck in commercial driving schools from three or four to just one or two. Estimates indicate the count of new CDL holders could be down as much as 40% year-over-year in 2020.
The result of all these challenges has been decreasing levels of active truck utilization. Trucks are waiting to be seated by drivers. As spot market rates picked up in June, utilization jumped to up 87%. This is proof that utilization rates could shift quickly, especially if demand continues to surge and spot rates continue to climb. The better the opportunity for carriers and drivers to make money, the sooner we will see utilization rates return to the levels seen throughout 2018.
Despite the fact that the driver shortage is currently more dire than the truck shortage, we still look to new Class 8 truck orders to inform capacity forecasting in the mid-to-long term. FTR is reporting that new orders in July increased to more than 20,000 units. While this is a large improvement from the less than 5,000 units ordered in April, it is still below the estimates by FreightWaves of 23,000 units required to sustain the trucks that are on the road and aging. FreightWaves is also reporting that through the first half of the year, new Class 8 truck orders were running -25% year-over-year, an indication that we could see large shortages in future truck capacity if truckload demand continues to remain high.
Our forecast for longer term capacity trends remains consistent with our stance from last month, with one slight adjustment. We expect relative capacity to remain tight through at least the end of the year when capacity can be rationalized through a new RFP cycle, assuming shippers begin to see more predictable volumes through the normal seasonal slowdown in Q1. That being said, we do expect to see some slight easing of tightening capacity in October, after the end of quarter push and before the holiday shipping season really kicks off in mid-November.
According to the Journal of Commerce, a CEO of a major big box retailer said they are preparing for a “very different” and “extended holiday shopping season” in 2020 as analysts are expecting the volumes that ignited in the early days of the pandemic to continue unabated through the holiday season. There is concern as FedEx and UPS have already been running at “Black Friday levels on a daily basis since mid-March.” This is pretty strong evidence that we should not expect much relief until January at the earliest as retail season is expected to prolong the market tightness throughout Q4.
Industrial production continues to be an important metric to watch due to its relationship to domestic shipment volumes. Industrial production data is now up to date through the end of July and is showing an increase of just 3% since last month’s update. The slowing growth is in line with our viewpoint that a continued snapback in production levels across the board is unlikely due to the challenges associated with restarting the economy and the new barriers to global trade. We still believe that industrial production will likely see staggered growth over time as some industries will be able to ramp up production more quickly than others.
According to the JOC, retailers are forecasting that August could be the busiest month of an early and highly unusual trans-Pacific peak season, following a July that saw U.S. imports from Asia to the West Coast grow year-over-year for the first time since September 2019.
In a normal year, trans-Pacific imports remain elevated from August through October before falling off in November. Inventories for the holiday season almost all arrive at U.S. ports by early November. This year, however, imports for the retail peak season began to build in July and are expected to regress to negative year-over-year territory for the remainder of the year following a busy August. According to Global Port Tracker published monthly by the NRF and Hackett Associates, the projected retail imports of 1.81 million TEUs in August would make it the lowest peak month since 2016.
Jonathan Gold, the NRF’s VP of global supply chain and customs policy, provided color on the stance many retail shippers are taking heading into the fourth quarter, “The economy is recovering, but retailers are being careful not to import more than they can sell. Shelves will be stocked, but this is not the year to be left with warehouses full of unsold merchandise.”
The implications of this forecast could mean different trends than what we normally see near the West Coast ports in late Q3 and early Q4. Long haul freight volumes will remain elevated out of southern CA through at least the month of September as the peak of imports make landfall and inventories are shipped to regional distribution centers across the country. The outbound market has gotten so tight in southern CA that Union Pacific Railroad is increasing surcharges on excess contract cargo to $5,000 for small shippers and $1,500 for all other domestic shippers in Los Angeles in an effort to divert all equipment and assets to core customers amid a surge in volume that has overwhelmed the rail network.
The Bank of America (BofA) consumer spending data provides visibility into changing consumer behaviors as a result of the pandemic. There are four main takeaways from this month’s data.
First, total card spending was down -0.7% year-over-year for the week ending August 29. This is in line with recent results and illustrates that total spending has leveled off near flat year-over-year levels in August.
Second, the shift to e-commerce and online shopping continues to be a major trend seen in the retail sector. Growth in online retail spending has been consistently greater than 60% year-over-year, even though year-over-year declines in retail brick and mortar remain minimal.
Third, spending on durable goods has remained high while spending on entertainment, travel and lodging and other related services or activities has remained low. In other words, people are traveling less and spending more on things like furniture, electronics and home improvement. At a sector level, luxury goods, electronics, furniture, home improvement, sporting goods and grocery have all seen year-over-year increases in spending.
These two trends represent a continued shift from freight light spending (entertainment services) to freight heavy spending (durable goods) and helps explain the growth in freight volumes.
Lastly, new research has uncovered a correlation between a reduction in the enhanced unemployment insurance benefit and a reduction in consumer spending. This was particularly true among recipients earning less than $50k, where total spending for those receiving unemployment benefits was down 18% in August compared to an increase in total spending of 2% for those in the same income group that were not receiving unemployment benefits. Reduced spending in August was also apparent at a sector level for those receiving unemployment benefits. The most notable declines in August spending for those receiving unemployment benefits were seen in home improvement and clothing, down -58% and -35%, respectively.
Nearly 60 million new jobless claims have been filed since the start of the pandemic. This past week was the first week since before the pandemic that new claims were less than 1 million people. Continuing claims have declined by 3 million over the past month to 13.3 million.
Similar to our stance from last month, we still feel the improved unemployment numbers are highly concerning despite the continued improvements seen from week to week. It is unclear to whom and when any further enhanced unemployment benefits will be distributed. The $7.9 billion in weekly stimulus money that would have gone to the 13.25 million unemployed Americans on continuing claims is on hold.
The trends seen in consumer spending show just how devastating the loss of this benefit has been, especially among those in the lowest income class. If no additional stimulus is issued in the coming months, the impact could lead to a sharp reduction in consumer spending and eventually a reduction in truckload demand, particularly on durable goods. A reduction in truckload demand would help ease the growing pressure on truck costs, but could spell disaster for the economy.