Due to its calculation and presentation as a seven-day moving average, OTVI remains distorted by the New Year’s holiday. However, even in its trough, we can compare year-over-year (y/y) growth. On an adjusted basis after removing the influence of higher year-over-year tender rejections, contracted tenders are up 13% y/y — a solid start to the beginning of the traditional slow season.
This year is unlikely to see the typically slow season. In fact, with the likely passage of a $2 trillion stimulus package and the slow rollout of the nation’s vaccine program, the beginning of 2021 is unlikely to see momentum decelerate anytime soon. The consumer backdrop remains strong thanks to stimulus and a savings rate double the five-year average, and, moreover, the industrial recovery is beginning to ramp up as global PMIs accelerate.
Amit Mehrotra, managing director and head of transportation and shipping research at Deutsche Bank, said his 2021 transportation outlook is the most bullish he’s written in his 20-plus years covering the space. He believes both the industrial and consumer economies will be “firing on all cylinders this year.” Mehrotra notes that a sharp rebound in auto and aerospace production as well as demand growth for refined oil products leave the industrial segment poised for growth this year.
There is also the inventory restocking thesis that will continue to play out during the first half of the year as inventories have still not caught up with demand. The inventory-to-sales ratio is at its lowest point since 2014, and the restocking of inventories that were just depleted and often not restocked due to supply chain disruptions will serve as an incremental demand driver moving forward.
With the consumer still stuck at home for the foreseeable future, discretionary income up from currently arriving stimulus and a slowly recovering labor market, Q1 should be one of the stronger first quarters in recent history from a consumer and freight volume standpoint.
On a positive note, eleven of the 15 major freight markets that we monitor as a broad, representative benchmark were positive on a week-over-week basis. This ratio maintained the stronger levels it has become accustomed to in recent months as the freight market rallies. The markets with the largest gains this week in OTVI.USA were Laredo, Texas (22.81%), Houston (21.34%) and Fresno, California (20.11%). The markets with the largest declines were Seattle (-27.01%), Savannah, Georgia (-1.68%), and Los Angeles (-0.66%).
Tender rejections slipping but still elevated
The holiday break is over and done, and drivers have reentered the market. This is evidenced by declining rejection rates. Tender rejections are following a seasonal pattern downward after the holidays, albeit at a much higher level. Currently, the Outbound Tender Reject Index sits at 23.02%, its lowest level since mid-August just before the last leg up in volumes. OTRI has fallen steadily since the Christmas holiday when it peaked at 28.5%. We suspected OTRI might take a run at previous all-time highs and possibly reach 30%, but it never quite made it.
Although relative capacity has been loosening through the first week of the year, securing trucks is still historically difficult. Carriers are rejecting nearly one in four tenders at contracted rates.
From a geographic perspective, the Midwest and Plains regions are experiencing the tightest capacity for both dry van and reefer markets. The West Coast, which has been and continues to be flooded with imports, is at its loosest relative capacity level since August, with Los Angeles and Ontario, California, both hovering around 18.5% rejection rates.
Reefer capacity remains the most difficult to secure, with a national tender rejection rate of 42%. Similar to dry van and exacerbated by the cold weather, the Midwest and Plains are posting the highest reefer rejection rates, with most markets north of 55%.
Tender lead times were the longest in all of 2020 on Dec. 27 as OTLT.USA reached 3.52 days. As capacity has been added back to the system since then, shippers have begun showing signs of confidence and lowering lead times. In the 11 days since the peak, lead times have declined by more than 15%. That said, OTLT.USA is still 7% above last year’s average.
Over the course of the next few weeks, tender rejections could remain stable or fall slightly as new contract rates are revised upward closer to current spot rates of $3.20 per mile on a national basis (inclusive of fuel). Due to the lasting effects of various supply constraints such as the Drug and Alcohol Clearinghouse, the lack of CDL issuances in 2020, and the continuing supply constraints at driver training schools, capacity should remain tight compared to previous years. Unless consumer spending falters or the industrial economy slows significantly, which appears unlikely, there should be plenty of demand to keep tender rejections above typical Q1 levels.
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