Monthly Market Update

June 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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Although the balance between supply and demand remains fragile, elevated contract rates have resulted in more reliable routing guide performance for shippers, and a reduction in freight on the open spot market in early June. If this trend continues, we expect to see spot rates fall in correlation to the reduction in carriers’ opportunities in the spot market. The forecast for the back half of the year depends on whether or not shifts in demand trends or other major capacity events can lead to disruption of the improving balance that is starting to take hold as of late.

• Spot volumes were on the decline after peaking in early May, a sign of decreasing opportunity for carriers in the spot market.

• Tender rejections have been on the decline in early June, indicating softening market conditions at a time when we have historically always seen conditions tighten.

• Weekly DAT load to truck ratios show that conditions in the spot market were tighter earlier in May, but have moderated into early June across all three equipment types.

• Dry van spot rates have climbed to an all-time high of $2.70 per mile. Reefer and Flatbed rates are also currently at all-time highs of $3.12 and $3.13, respectively.

• The national average dry van contract rate per mile has also hit a new record high after its thirteenth straight increase, coming in at $2.75 per mile, $0.04 higher than the current spot rate 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.

• Elevated contract rates may result in a shift of volume from spot to contract, but the freight isn’t going anywhere. Retail inventories are still depleted, which is leading to record-setting import levels. The automotive sector, which accounts for more than 20% of dry van loadings, has seen an improved outlook. Normal seasonal trends should result in increasing demand as the summer peak season picks up steam.

Truckload Demand

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Freight market conditions over the past year have been driven by strong demand trends, and we saw more of the same in May 2021. FreightWaves SONAR Outbound Tender Volume Index (OTVI), which measures contract freight volumes across all modes, was up by 53% year-over-year heading into Memorial Day. 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 20%, which is still an impressive number. The dry van and reefer tender volume indices were both up more than 49% year-over-year at the end of the month, which equated to a 16% increase and a 4% decrease in actual volumes for the two modes respectively.

DAT reported that dry van spot load posts grew modestly in May, increasing by 3.4% month-over-month, but are up by 290% year-over-year when comparing volumes to the period of pandemic-related shutdowns in 2020. Week-over-week spot volume growth shows a decline of 18.5%, but this is due to there being one less business day than usual due to Memorial Day.

FTR and Truckstop’s Total All Mode Spot Volume Index is down 15.3% from the peak seen earlier in the month, indicating that overall spot activity has been on the decline in recent weeks. This trend has taken hold simultaneous to rising contract volumes, a reversal of the consistently increasing spot volumes we have seen throughout the year. Despite the recent declines, the index is up 245% year-over-year.

The Dry Van Spot Volume Index is down 16.6% from the high in early May and 170% year-over-year, while the Reefer Spot Volume Index is down 13.5% and up 226% over the same time periods.

FTR’s Truck Loadings Index was up by more than 17% year-over-year in May after rising by 0.7% month-over-month from April. The pandemic lockdowns of 2020 are still resulting in favorable year-over-year comparisons, but the 0.7% month-over-month growth aligns with the other indices showing an increase in truckload demand in May. We are paying more attention to two-year growth trends in place of year-over-year comparisons due to the pandemic effect in 2020. May 2021 truck loadings were up 4.3% from May 2019 truck loadings, an increase from 3.8% in the two-year period beginning April 2019.

 

 

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Truckload Supply

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Over the past year, truckload supply has been challenged to keep up with surging demand. Although there are some signs that the availability of truckload capacity has improved as of late, conditions remain largely unchanged. 

Sonar Outbound Tender Reject Index (OTRI) measures the rate at which carriers are rejecting the freight that 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 22.5%, indicating that supply remains insufficient.

Contract tender rejections picked up slightly in mid to late May leading up to Memorial Day. Typically, tender rejections continue to climb as the summer peak season commences in early June, but this year we see an abnormal trend. Spot volumes fell throughout the month while contract volumes increased, and tender rejections have fallen by 9% over the past week.

OTRI increased in mid to late May before declining quickly to 22.54% in early June. Dry van and reefer tender rejections have both followed a similar trend to the all-mode OTRI and currently sit at 23.05% and 36.99%, 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 May, the Dry Van Load to Truck Ratio increased to 6.12, up 27.8% month-over-month and 220% year-over-year. The Reefer Load to Truck Ratio increased to 12.96, up 30.7% month-over-month and 324% year-over-year.

The weekly load to truck ratios show that conditions in the spot market were tighter earlier in the month but have moderated into early June across all three equipment types. The softening load to truck ratio aligns with the decline in contract tender rejections and the decline in spot volumes as the month progressed. We will be watching this trend closely, because it is a deviation from what we would expect at this time of year, especially given the current trends for both supply and demand.

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 recently softened. This is unusual, as all other years in the chart indicate conditions have always tightened at this time of year. Morgan Stanley’s straight-line forecast suggests conditions will reverse their recent trend and tighten as we approach Independence Day before settling in the back half of the year.

Truckload Rates

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Dry van spot rates bounced back, reaching a new all-time high of $2.68 per mile in May. Early June results show rates have continued to increase,currently at $2.70 per mile. Reefer spot rates also reached a new record high in May at $3.10 per mile, and are showing slight improvements in early June, reaching as high as $3.12 per mile so far month to date. Flatbed rates have continued to rise, currently sitting at $3.13 per mile, up $0.02 per mile from $3.11 in May. Dry van spot rates, excluding fuel, finished the month up $0.96 per mile in May 2021 compared to $1.40 in May 2020. This is an increase of 68.5% year-over-year. Contract rates are up significantly as well and now sit at $2.41 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 both spot and contract rates continue to push to new all-time records.

Contract rates have now increased for thirteen straight months. There is evidence that elevated contract rates are finally starting to provide some security for shippers with rates now at levels where carriers are willing to lock in to provide consistent contracted coverage. The recent trends are only a few weeks in the making, but increasing contract volumes and decreasing tender rejections are leading to lower overall spot volumes and a decreasing load to truck ratio. This is occurring at a time of year where we are used to seeing spot market activity pick up due to tighter capacity conditions. If this trend were to continue through Independence Day, it would be clear evidence that we will have passed the peak for rates associated with this inflationary cycle. Consistent, contracted capacity should be more readily available to shippers as carriers will look to lock in rates at current levels. 

The one caveat to this forecast is that 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. The balance between supply and demand may be improving, but weak capacity conditions will leave shippers exposed to potential routing guide failure if these major disruptive events were to take place.

Insights on Produce Season

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This section was provided by Arrive Fresh; an Arrive team that sources quality fresh capacity and works alongside those carriers to provide asset-like service to solve the unique challenges of moving produce, meat, seafood, dairy and nursery freight.

This month we wanted to illustrate the week over week changes in some of our highest volume produce regions. Though the majority of our customers are not specific to produce, the capacity constraints affect everyone in the area.

Information interpreted from ProducePay Freight Report and USDA Truck Rate Report:

Capacity Outlook

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Healthy contract rates can do wonders to improve tender acceptance on contract freight, but it does little to improve the overall situation for truckload supply. Capacity has been strained for more than a year as volatile demand trends, and challenges with truck and driver shortages have limited carriers’ ability to flex up as needed. The outlook for demand remains strong and should continue to stress carrier networks for the foreseeable future.

As the summer peak season commences, Class 8 truck production and driver availability remain the biggest obstacles to a recovery in truckload supply. Until these issues are resolved, demand volatility will continue to result in highly unstable market conditions.

The chart above illustrates the growing imbalance between demand and supply. Truck loadings are up 4%, and driver availability is down 3% year-over-year, illustrating how volumes have continued to grow while driver supply falls. 

The chart below shows FTR’s forecast for truck driver pressure peaking in Q2-2021 and remaining elevated through 2022. This supports the outlook that capacity constraints will drive unpredictable rate environments as demand ebbs and flows. Despite contract rate increases, we are still advising shippers to secure dedicated capacity on their consistent, high-volume lanes to ensure capacity is available in the coming year.

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 drivers returning to the market at a slower rate than expected. The updated forecast now shows active truck utilization maxing out at 100% in the second quarter, easing to only 99% in Q3 and 97% in Q4. FTR noted that the one risk to this forecast is that in the event that 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 pulled back in May, with preliminary results indicating 22,900 new Class 8 trucks were ordered in the month — a 28.5% decrease from 32,033 in April, but a 267% increase from 6,241 in May 2020. This is now the eighth straight month with new orders above the 20,000 units required to sustain current levels of capacity. The report indicated that the reduction in orders most likely occurred because backlogs for orders for the remainder of 2021 have already been filled, and carriers who are looking to order new equipment have most likely already done so.

Supply chain bottlenecks associated with new truck production are expected to limit production. The average time from order to delivery jumped back to 11.7 months in April from 8.3 months in March as the shortage of semiconductors, and other components fell further behind.

Volume Outlook

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All indicators point towards continued strength in truckload demand. Elevated contract rates may result in a shift of volume from spot to contract, but the freight isn’t going anywhere. Retail inventories are still depleted, which is leading to record-setting import levels. The automotive sector, which accounts for more than 20% of dry van loadings, has seen an improved outlook. Normal seasonal trends should result in increasing demand as the summer peak season picks up steam.

FTR’s latest truck loadings forecast shows a slightly weaker outlook, with dry van forecasts strengthening offset by weaker growth in other sectors. In the dry van sector, the forecast shows an increase in monthly truck loadings resulting in a total increase of 10.4% for the full year, up from 10.2% a month ago. Refrigerated and flatbed loadings are still expected to see 5.5% and 7.0% increases in truck loadings in 2021, but those values were lower than 5.9% and 7.8% last month.

There are several indicators that the economy will maintain its strength over the next several months as the country continues to reopen. Housing activity remains up more than 67% year-over-year, industrial production and manufacturing are both up month-over-month and year-over-year, and retail sales are flat month-over-month and up 51% year-over-year.

The chart below plots the total inbound ocean TEU volume on the lane from China to the U.S. (IOTI.CHNUSA) in blue, against the total outbound tender volume index for the U.S. (OTVI.USA) in green. The correlation between the volume of Chinese imports and corresponding domestic, over-the-road freight volumes is striking and supports the conclusion that as long as imports continue to flow in at the pace they are, total truckload demand should remain elevated. With retail inventories near an all-time low, we should expect to see inventory restocking drive strong freight volumes in the months ahead.

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. We must note that beginning in March, the two-year change is more representative of the underlying trend due to the impact of the pandemic lockdowns a year ago. For example, total card spending is up 25.8% year-over-year but just 18.4% compared to 2019, for the 7-day period ending June 5th.

When looking at monthly card spending by major category, airlines and lodging increased the most sequentially in consumer spending month-over-month in May (Exhibit 6), but both remain down when considering the growth over the prior two years (Exhibit 5). This is evidence that as states continue to reopen, we should expect to see pent-up demand for travel and entertainment drive spending growth in new areas. This shift in consumer behavior and spending should impact truckload demand in such a way that requires capacity networks to adjust to new demand pressures, potentially causing an extension in the current market disruption.

The unemployment trends appear to be improving slightly but still remain well above pre-pandemic levels. Initial claims in the most recent week came in at 376,000, down from more than 550,000 last month, and continued claims are relatively flat at 3.5 million on a weekly basis. Total payroll employment is on the rise, up 770,000 in March and 266,000 in April. The largest gains were seen in the leisure and hospitality sector, which added 331,000 new jobs in April, following 206,000 in March.