Carriers Gaining Momentum, But Shippers Still Hold Slight Edge In The FreightWaves Pricing Power Index

Last Week's Pricing Power Index: 35 (Shippers)

The trucking industry operates on a market based on real-time demand and supply. When demand is higher than capacity, carriers have the negotiating power for rates. When supply is higher than demand,  shippers have the negotiating power for rates.  

FreightWaves' Pricing Power Index uses the analytics and data contained in SONAR to analyze the market and estimate the negotiating power for rates between shippers and carriers. 

The Pricing Power Index is based on the following indicators: 

Load Volumes: Momentum and Trend Positive for Carriers. 

The Outbound Tender Volume Index is currently at 10,838.01, which is 5.44 percent higher than this time last year. OTVI.USA has been above tough 2018 comparables since mid July and our analysis indicates it will stay there. OTVI.USA has been trending upwards and is now up 6.89 percent above its 60-day moving average and up 4.53 percent over the past month.  

SONAR: OTVI.USA

Spot Rates: Momentum and Trend Positive for Carriers. Absolute levels are positive for Shippers.

DAT Longhaul Van Freight Rate is currently $1.44, up from $1.38 last week. DATVF.VNU is now pp 15.2 percent off the $1.25 low in mid-April. Despite the uptick in the past two weeks, spot rates have been at extremely low levels for most of 2019. There is a natural floor with trucking line-haul rates as operating costs-per-mile are from $1.30 to $1.45 per mile, excluding driver costs. As spot rates remain at depressed levels, capacity will leave the market, whether it is willingly or unwillingly (through trucking failures). 

2018 Avg: $1.721

2019 Avg: $1.412 (down 18 percent year-over-year)

SONAR: DATVF.VNU

Contract "Paper" Rates: Momentum and Trend Positive for Shippers.

Paper rates appear to be slightly in favor of shippers. While, on the one hand, paper rates have just recently inflected negative on a year-over-year basis, it is normal for paper rates to lag spot rates in a down cycle for trucking. On the other hand, spot rates appear to have bottomed (at least in the near term), which is supportive of future paper rates.

We also believe there is a divergence developing, with small-to-midsize carriers likely negotiating their paper rates at low-single-digit negative year-over-year levels, whereas larger carriers have communicated their expectations for renewals at flat to slightly up levels on a year-over-year basis. Given smaller carrier's account for a larger mix of the freight market, this means overall paper rates are likely to trend flat to slightly negative over the coming months.

Truck Capacity:

Tender Rejections: Trend and Absolute Levels Positive for Shippers, Momentum Positive for Carriers.

OTRI.USA is currently at 4.76 percent, which is down from 4.83 percent this time last week but up 25 percent off the 3.78 percent trough experienced mid-August. Despite the uptick in the past two weeks, outbound tender rejections are near historical lows. Year-over-year comparables are difficult because of OTRI.USA did not fall below double-digits in 2018. That said, tender rejections are down 75 percent from this time last year. Both qualitative and quantitative data on trucking failures and insurance renewals indicate rejections will continue trending upwards through the peak retail season, but we do not believe rejection rates will trend anywhere near 2018 levels. 

SONAR: OTRI.USA

Failures: Trend and Momentum Positive for Carriers.

There have been 640 carrier failures year-to-date in 2019 through the first half of the year, which is more than triple the 175 in the first half of 2018. If the first half 2019 number is annualized, the 1,280 carrier failures in 2019 could remove approximately 1.6 percent of capacity from the trucking market (assuming an average carrier failure fleet size of 20 trucks). This is meaningful enough to favor carriers in our view.

In addition, Class 8 truck orders continue to track in the down 80 percent-plus range year-over-year, which is again supportive of carriers in our view, given orders have been deeply negative for a sustained length of time.

VIDEO: Q2 Trucking Company Failures Update

Insurance Renewals: Trend and Momentum Positive for Carriers.

The latest FreightWaves survey of insurance companies indicates a net contraction of trucks for fleets based on policy renewal activity in August. The previous survey measuring year-to-date activity showed a net expansion of trucks for fleets. If this trend holds, it suggests capacity is beginning to leave the freight markets in earnest now. 

VIDEO: August Insurance Renewals Show a Net Contraction in Fleet Size

Critical Events: Potential Positive for Carriers, likely Neutral Currently.

There's a very good chance over the next few days that a disturbance near the southeastern Bahamas may become a tropical depression or the next named tropical storm. It could move across southern Florida and then into the Gulf of Mexico, but the forecast path is uncertain at this time.

SONAR: Critical Events

Trucking Regulations: Trend Positive for Shippers.

The three-week moving average for fleets still using AOBRDs remains in the high single-digit range at nine percent. Most of the fleets that have not converted to ELDs are primarily regional fleets with a normal length of haul under 500 miles. We do not expect any capacity issues during the final months leading into the December 2019 deadline. 

Economic Policy: Positive Momentum for Carriers.

Current economic policy is very "dovish" (i.e. stimulative) and favors carriers. In the midst of a slowdown in global growth, nearly all developed world central banks are in aggressive easing mode and some have even restarted quantitative easing. When interest rate policy is effective, it generally boosts the economy with a two to three-quarter lag and, in the meantime, we think a strong consumer in the U.S. is enough to support rates into the holiday season.

Furthermore, trade tensions have eased substantially in the last few weeks with China agreeing to buy some American agriculture products and meet in Washington in October to discuss a deal. Both sides have delayed and/or reduced previously announced tariff implementations. On balance, the Trade War is a currently a positive for carriers because the outlook for near-to-medium term global growth is improving and the Trade War is primarily a drag on manufacturing and industry, which favors continued rising volumes (OTVI.USA) and rates as the industrial and goods side of the economy bottoms and improves.

Economic Stats: Positive Momentum for Carriers.

A few publicly-traded carriers at the Morgan Stanley 7th Annual Laguna Conference this week have pointed to promising "green shoots" in the trucking market over the past two months and gave cautiously optimistic outlooks for paper rate negotiations in the back half of 2019 and heading into 2020.

This past week, the capital markets saw a major back-up in bond yields (off of very depressed levels) as well as a historic rotation to value stocks from growth stocks. Both of these factors suggest the financial markets are anticipating a bottoming of economic growth and inflation, as well as incorporating a brighter outlook for cyclical industries like trucking that perform better in a strengthening economy. The latter would also be beneficial to shippers, but the sensitivity and operating leverage of carriers to a modestly improving backdrop favors them.

Three Month Pricing Power Index Outlook: 55 (Carriers)

The full Pricing Power Index Report is live on SONAR in the Market Insight and Research tab. 

For more information on the FreightWaves Freight Intel Group, please contact Kevin Hill at khill@freightwaves.com, Seth Holm at sholm@freightwaves.com, or Andrew Cox at acox@freightwaves.com.

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