Contract rate increases grow large enough to suppress spot rates

The last two years have proven to be unusually volatile, even for the roller-coaster-ready logistics industry. While the need for essentials soared, demand was depressed across most sectors during the height of the pandemic. As states reopened and vaccines became available, consumers ventured out more and widespread economic recovery bloomed across the nation.

This continuing economic resurgence – combined with the ongoing driver shortage, equipment shortage and long lead times on new truck orders – has led to sky-high rates and capacity constraints across the trucking industry. Don Ake, VP of Commercial Vehicles at FTR, recently shared his learnings with Arrive Insights™, Arrive’s Market Intelligence group.

“There are labor and parts shortages at OEM’s and at their suppliers,” said Ake.

He also noted trailer manufacturing can consist of as many as 25 unique parts, all of which OEM’s are seeing shortages of. In a volatile, high-pressure market like this one, it is important to develop trusted sources for regular market updates.

Arrive Logistics provides monthly market updates to its customers. These updates feature up-to-date data from several reliable industry sources – including FreightWaves SONAR – alongside expert analysis from the Arrive team. Arrive Insights provides guidance that can be used to support short and long-term decision making, while also serving as a barometer to other market updates.

Spot rates sat at an all-time high in July, with dry van rates soaring to $2.73 per mile. Reefer and flatbed rates also climbed, cracking $3.10 per mile and $3.19 per mile, respectively. According to Arrive market experts, there is some evidence to suggest spot rates may have finally found their ceiling with these peaks.

Contract rates have been increasing steadily over the past 14 months. These rates appear to be high enough now that carriers are willing to commit, reducing the number of loads that will make their way to the spot market in the coming months.

“Elevated contract rates are finally starting to result in increased tender acceptance, but capacity in the spot market is still stretched too thin for it to have made an impact. Recent trends indicate rates are not likely to see deflationary pressures in the near term,” according to Arrive’s recent August market update release.

Strengthening contract rates may put a cap on spot market growth, but demand remains strong in the truckload space. Supply remains constrained, as carriers continue to go through near-herculean efforts to attract new drivers to their fleets. This generalized strength is expected to continue into the foreseeable future as pent-up consumers get out to stretch their legs and spend their money.

“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,” according to Arrive Insights. “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.”

Consumers are returning to their pre-pandemic spending habits across the nation, with demand rising steadily in the travel and entertainment sectors. These shifts in spending habits will require flexibility that many truckload carriers do not have right now, potentially leading to more stress in the market.

Bank of America consumer spending data validates this trend. While card spending related to both airline and lodging was still down in May, compared to the same time two years ago, these categories saw the biggest sequential increases month-over-month.

“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,” according to Arrive Insights.

Some pandemic-era trends are expected to stick around long after consumers become comfortable resuming their pre-pandemic ways. This is especially true of online spending, a habit that had been on a gradual upswing for years before booming in 2020. This rapid acceleration will undoubtedly change how the transportation industry operates in a recovering world.

Online shopping aside, a return to more normal spending conditions should still mean an eventual return to more normal freight trends. The process of getting there, however, has been anything but normal. Through the volatility, Arrive continues to carefully examine the market as it inches toward normalcy, providing shipping partners in-depth reports and insights each month.

A leading chemical company shared, “Having easy access to a variety of data and insights in Arrive’s market update really helps us stay ahead of the game. Especially when outside logistics pressure start to arise, having Arrive’s detailed report readily available helps keep our sales teams calm.”

To stay up to date on the latest market trends and conditions, including impact of consumer spend on transportation, visit arrivelogistics.com/arriveinsights.

Photo Credit: Jim Allen/FreightWaves, original article published here.

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