Monthly Market Update

July 2021

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 Research, Bank of America Internal Data, Journal of Commerce, Stephens Research, National Retail Federation 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.

Table of Contents

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Executive Summary

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Transportation and consumer spending trends are following familiar cycles allowing a higher level of accuracy in forecasting. As consumer spending reverts back to pre-pandemic behavior and shifts toward services and travel, transportation demand is becoming more predictable. Surges in demand will likely cause increased rate volatility and constrained capacity throughout the remainder of the year.

• Spot volumes picked up late in June as demand surged and tender rejections increased due to the summer peak season.

• Tender rejections have been declining following the Fourth of July, indicating softening market conditions in line with seasonal expectations.

• Weekly DAT load to truck ratios for flatbed equipment have been on the decline for four weeks, indicating rapidly softening conditions. As opportunities dry up in the flatbed market, we expect some capacity to shift to the dry van and reefer markets.

• National average dry van and reefer spot rates were flat month-over-month at $2.69 and $3.10 per mile, respectively, in June.

• The national average dry van contract rate per mile has also hit a new record high after its fourteenth straight increase, coming in at $2.77 per mile.

• The biggest obstacles for truckload supply recovery continue to be semiconductor shortages, causing delays in new truck production and ongoing driver availability issues.

• Over the last three months, the gain in services spending has more than offset the negative growth from durable goods by 300%. It is clear that Americans are returning to normal activities such as travel and entertainment.

• Recent market trends indicate that we can now more confidently rely on historical seasonality to forecast spot market activity and rate movements.

Truckload Demand

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Demand in June 2021 was largely dependent on the equipment type in question. For van and reefer equipment types, freight volumes were in line with normal seasonal patterns, increasing toward the end of the month and quarter. In the flatbed sector, falling demand translated to lower volumes and easing market conditions.

FreightWaves SONAR Outbound Tender Volume Index (OTVI), which measures contract freight volumes across all modes, was up by 25% year-over-year at the end of June. It is important to note that OTVI includes both accepted and rejected load tenders, so we must discount the index by the corresponding Outbound Tender Rejection Index (OTRI) to uncover the true measure of accepted tender volumes. If we were to apply this method to the year-over-year OTVI values, the increase in volume drops to 10%. Last month, the tender volume growth was up 53% year-over-year, and 20% when considering rejections. The decrease in year-over-year comparisons is not a result of a month-over-month decline, but is a result of rapidly increasing volumes last year at this time.

When drilling down to specific equipment types, we found the dry van and reefer tender volume indices were 21% and 26% year-over-year at the end of the month, which equated to a 7% increase and a 2% decrease in actual volumes for the two modes, respectively.

DAT reported that dry van spot load posts fell 6% month-over-month in June, but remained up by 101.5% year-over-year. Week-over-week spot volume growth shows a 9.7% decline, but this is, in part, due to there being one less business day than usual due to Independence Day.

FTR and Truckstop’s Total All Mode Spot Volume Index does the best job at isolating the impact from different equipment types due to the increased allocation of flatbed freight in the data. In the most recent week, total load postings were down more than 9% despite increases in load postings for both dry van and reefer equipment types. Flatbed load postings falling by 15.6% more than offset the gains of 0.3% for dry van and 2.1% for reefer. Despite the recent declines, the total all mode index is still indicating load postings are up 112% year-over-year.

FTR’s Truck Loadings Index was up by more than 11% year-over-year in June after rising by 0.6% month-over-month from May. The pandemic lockdowns of 2020 are contributing to the favorable year-over-year comparisons, but the month-over-month growth indicates total all-mode volumes have been relatively consistent as of late. We are continuing to pay more attention to two-year growth trends in place of year-over-year comparisons due to the pandemic effect in 2020. June 2021 truck loadings were up 3.9% from June 2019 truck loadings, a slight decrease from 4.3% in the two-year period beginning May 2019.

 

 

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Truckload Supply

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Softer than expected conditions in early June gave way to more normal seasonal patterns late in the month. The end of month & quarter push and the run-up to the Fourth of July saw increasing tightness as increasing demand stretched capacity networks.

Sonar Outbound Tender Reject Index (OTRI) measures the rate at which carriers are rejecting the freight they are contractually required to take. When supply is sufficient to meet demand, it would be reasonable to see an OTRI reading of 3%-8%. The index is currently at 24.45%, indicating that supply remains insufficient. 

Contract tender rejections continued to ebb and flow in line with contract tender volumes in June. Increasing volumes throughout the month put additional strain on carrier networks and led to increasing tender rejections. In a typical year, tender rejections tend to moderate following Independence Day as the summer peak season winds down. It is still early, but this year appears to be following this normal seasonal pattern. Tender rejections have begun to fall in the week following the holiday.

OTRI increased in mid to late June before trending down to 24.45% in early July. Dry van and reefer tender rejections have both followed a similar trend to the all-mode OTRI and currently sit at 26.02% and 33.79%, respectively.

The DAT Load to Truck Ratio measures the total number of loads compared to the total number of trucks posted on their load board. In June, the Dry Van Load to Truck Ratio decreased to 5.56, down 9.2% month-over-month, but up 57.8% year-over-year. The Reefer Load to Truck Ratio fell to 11.59, down 10.6% month-over-month, but up 112% year-over-year.

The weekly load to truck ratios show that conditions tightened throughout June and peaked in the week leading up to the Fourth of July for dry van and reefer equipment types. Flatbed market conditions, however, have been rapidly softening, falling 32% over the past four weeks. If normal seasonal trends were to hold, we should expect load to truck ratios to fall as July progresses. This would result in softer market conditions and downward pressure on spot rates.

The Morgan Stanley Dry Van Freight Index is another measure of relative supply. The higher the index, the tighter the market conditions. According to the index, conditions have tightened as of late. This trend is in line with what we have seen across the other measures of relative supply. Looking forward, normal seasonality would indicate softening conditions between now and mid-August. Morgan Stanley’s straight-line forecast suggests conditions will reverse their recent trend and begin to settle throughout the back half of the year.

Truckload Rates

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National average dry van and reefer spot rates were flat month-over-month at $2.69 and $3.10 per mile, respectively, in June. Both equipment types have seen a slight uptick in early July, but that is to be expected due to the shortened holiday week. Despite rapidly softening conditions, flatbed rates increased to an all-time high of $3.15 per mile in June, a record high for any equipment type. In July, however, flatbed rates are already trending lower than June, a sign that rates are finally catching up with the easing market conditions for that mode.

June marks one year since the spot rates took off due to pandemic-related surges in demand. Since then, Dry van spot rates, excluding fuel, have climbed $0.74 per mile, a growth rate of 46% year-over-year. Contract rates are up significantly as well and now sit at $2.39 per mile excluding fuel, $0.04 higher than the current spot rate.

The Contract-Spot Van Rate Spread has increased to $0.04 per mile in June as contract rates set a new all-time record and spot rates pulled back slightly.

Contract rates have now increased for thirteen straight months. Trends in July should be very telling of what to expect for the remainder of the year. A forecast based on normal seasonal trends would indicate that we have passed the peak for spot rates and should start to see rates decline in the back half of the month. If this plays out, we believe that we are finally back to being able to rely on seasonal rate pressures in the way we did prior to the pandemic. If rates continue to increase, we expect the spot rates to peak in the fourth quarter.

As with any forecast, there are forces outside our control that introduce risk in both directions, but given current conditions, we believe the upside risk for spot rates is greater. If another significant capacity event were to occur, such as a major hurricane making landfall, a large disruption could reignite the inflationary cycle and push rates even higher, just as we saw with the winter storms in mid-February. Shippers should have contingency plans in place to manage constrained capacity in the event a widespread disruption occurs.

Capacity Outlook

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The sentiment among carriers is unanimous; hiring professional drivers is an incredibly difficult task right now. The latest stats from the Bureau of Labor Statistics (BLS) indicate that trucking employment is on the rise, having added more than 24,000 jobs in June. Unfortunately, the data is not indicating that the job growth is coming in the over-the-road sector, but instead is indicating that the largest gains have been seen in the local freight delivery category.

Morgan Stanley Sentiment Survey data indicates a steady 80% point spread between respondents who stated capacity was tight and those that indicated capacity was abundant.

Carriers that are able to find drivers are still experiencing challenges with delivery delays on new truck orders. New truck lead time improved slightly to 10.3 months in May, down from 11.7 in April. The biggest factor in these delays is the continued shortages OEMs are experiencing with sourcing semiconductors.

FTR’s forecast for truck utilization, the share of seated trucks actively engaged in freight hauling, is slightly stronger in the near term due to adjustments in the assumptions for driver capacity and productivity. The updated forecast now shows active truck utilization maxing out at 100% in the second quarter, remaining there throughout Q3 and only pulling back slightly to 99% in Q4. FTR noted that the one risk to this forecast is that if unemployment benefits are sharply reduced, higher rates of labor participation could mean capacity will return more quickly than expected.

FTR reports that new truck orders picked back up slightly in June, with preliminary results indicating 26,700 new Class 8 trucks were ordered in the month — a 24.5% increase from 21,454 in May, and a 77% increase from 15,104 in June 2020. This is now the tenth straight month with new orders above the 20,000 units required to sustain current levels of capacity. FTR noted they expect a surge of orders when manufacturers start booking orders for 2022 as soon as this month.

Volume Outlook

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The outlook for truckload demand remains relatively positive. The overall economy is going strong despite labor and material shortages that have limited production output. As these shortages ease, we expect to see further surges in industrial production and manufacturing.

FTR’s latest truck loadings forecast shows a slightly weaker outlook, with bulk/dump loadings being the only segment seeing a higher forecast for 2021 when compared to last month. Within this sector, most commodity groups came in weaker except building materials, which came in significantly stronger in the latest forecast. In the dry van sector, the forecast shows a decrease in monthly truck loadings resulting in a total increase of 8.3% for the full year, down from 10.4% a month ago. Refrigerated and flatbed loadings are expected to see 4.0% and 4.9% increases in truck loadings in 2021. Both of these values are lower than 5.5% and 7.0% for the two modes last month.

There are several indicators that the economy will maintain its strength over the next several months as the country continues to reopen. Although rising prices may limit growth going forward, housing activity remains up more than 50% year-over-year. Additionally, industrial production and manufacturing are both up month-over-month and year-over-year, driven by an almost 10% increase in auto output.

There is a strong relationship between the volume of Chinese imports to the U.S. and over-the-road freight volumes. Last month, a Covid outbreak at the Port of Yantian in China resulted in a partial shut down of operations at the port. The port, which is part of the third busiest gateway in the world, was operating at 30% capacity. The chart below shows the impact to inbound freight volumes from the Port of Yantian, a clear dropoff in early June. If this were to persist, it would certainly have been detrimental to truckload demand here in the states. Fortunately, the breakout was contained relatively quickly and operations have resumed at 100% capacity.

Economic Indicators and Consumer Sentiment

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The Bank of America (BofA) consumer spending data provides visibility into changing consumer behaviors and spending patterns. Total card spending is up 19.4% year-over-year and 23.2% compared to 2019, for the 7-day period ending July 7th. These results indicate that consumer spending is still significantly elevated at the midway point here in 2021.

When looking at monthly card spending by major category, airlines and lodging increased the most sequentially in consumer spending month-over-month in June (Exhibit 5). Airline spending continues to grow but remains down when considering the growth over the prior two years (Exhibit 6). Lodging spending has finally turned positive, up 3.8% from 2019.

This increase in spending on services is consistent with a larger trend we have seen play out sequentially over the past three months. The chart below illustrates the impact to total card spending from gains/losses on durable goods vs. services. Over the last three months, the impact to total spending from durable goods has been negative, meaning spending is slowing on the representative categories. On services, the impact has been positive every month this year, meaning spending on services is increasing. Over the last three months, the gain in services spending has more than offset the negative growth from durable goods by 300%. It is clear that Americans are returning to normal activities such as travel and entertainment. This shift in consumer behavior and spending could help lead to a decrease in truckload demand if sustained. It is unlikely that a downshift in demand would be enough to bring about an equilibrium market, but it could certainly help ease the burden on carriers looking to add capacity.

The unemployment trends have continued their gradual improvement in June. Initial claims in the most recent week came in at 373,000, down just 3,000 from last month, and continued claims are relatively flat at 3.3 million on a weekly basis. Total payroll employment continues to rise, up 559,000 in May after increases of 770,000 in March and 266,000 in April. The largest gains were again seen in the leisure and hospitality sector, which added 292,000 jobs in May, following increases of 331,000 in April and 206,000 in March.

Conclusion

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In a typical year, we would expect June spot rates to peak above May levels. While that wasn’t the case this year, we did see rates follow a normal seasonal pattern leading up to the Fourth of July. Softening conditions in early June were caused by a combination of easing demand and elevated contract rates, and resulted in higher levels of tender acceptance and less freight making its way to the spot market. The rapid tightening late in the month is a reminder that capacity is still insufficient and surges in demand are still resulting in increasing rejections and upward pressure on rates.

In early July, conditions have continued to follow normal seasonality as tender rejections have begun to fall following the holiday. Although we expect this trend to continue through mid-August, we still believe that seasonal surges associated with retail peak season will keep rates aloft in the back half of the year. The challenges that carriers are facing with driver and truck availability will continue to limit availability of capacity to support pickups in demand.

There continues to be too much uncertainty to place a stake in the ground just yet as to when to expect true deflationary market conditions, but the recent market trends indicate that we can now more confidently rely on historical seasonality to forecast spot market activity and rate movements. Softening conditions throughout July would further support this forecast.