FWF Market Insights: Quarter 3 2021 Update

Share on linkedin
Share on facebook
Share on twitter

Why FWF Market Insights?

Stay up-to-date on industry trends with FWF’s market analysis. The Logistics and Transportation Industry is constantly moving. Understanding the fundamentals of how rates are affected and staying relevant to trends, begins with understanding supply and demand and how it is vital for your business planning and market knowledge.

If you want to learn more, check out FWF’s Basic Breakdown of Supply and Demand.

Overview

Spot and contract rates continued their year-long uptrend, with incredibly high shipment volume leading the way. The majority of COVID-19 restrictions have been lifted in the U.S., which is positive for the logistics market and economy. However, inflation is high, which is likely to continue rising in the coming months for both producers and consumers 

Truckload Rates 

Using spot and contract data from DAT, FWF aggregated the monthly rate-per-mile for Reefers, Flatbeds, and Dry Vans to determine the average rate-per-mile for the three trailer types combined each month and quarter.  

 

Quarterly Contract RPM Including Fuel    Quarterly Spot RPM Including Fuel 
Quarter Average  RPM  % Change    Quarter Average  RPM  % Change 
Q3 2020 Average  $2.35      Q3 2020 Average  $2.31   
Q4 2020 Average  $2.49  +5.84%    Q4 2020 Average  $2.52  +8.20% 
Q1 2021 Average  $2.65  +5.88%    Q1 2021 Average  $2.62  +3.69% 
Q2 2021 Average  $2.86  +7.35%    Q2 2021 Average  $2.93  +10.63% 

Typically, contract rates lag behind spot rates by a few months. This is because contracts are given at the beginning of each quarter or each year, and as a result, carriers and shippers look to the spot market has to determine fair contract rates.   

You can find the most up-to-date RPM data by trailer type on DAT.

This chart was created by FWF using aggregated RPM data from DAT. 

Q2 contract rate-per-mile increased by 7.4% from Q1, while Q2 spot rate-per-mile increased by 10.6% from Q1. While there is still a shortage of drivers relative to pre-pandemic levels, the driving factor in the Q2 rate increase shows record shipment volumes, creating higher demand than available capacity. Large surges happened in e-commerce demand due to COVID-19 coupled with companies replenishing their inventories as the economy reopened. These driving factors have caused shipment volumes to rise, resulting in ports being congested.   

In June, contract rates were up 22.6% Y/Y and spot rates were up 26.8% Y/Y. 

In June, contract rates were up 1.7% M/M and spot rates were up 1.6% M/M.  

The market has been volatile and unpredictable, making it hard to say when a trend reversal in rates will occur. As of now, it is likely that the uptrend in rates will continue short-term if demand continues to outpace capacity at this rate. 

Current Driving Factors Contributing to Demand 

1. E-commerce 

During the start of the pandemic, consumers turned to online ordering to avoid in-person shopping. Since then, e-commerce has continued to boom as a large portion of these consumers changed their buying behavior. E-commerce reached an older age demographic that did not previously order online as avoiding in-person shopping became common, contributing to the high shipping volume.  

According to the U.S. Department of Commerce, “Ecommerce reached $196.66 billion in Q1, up 39.0% year-over-year from $141.52 billion in the same quarter of 2020. Nearly $1 in every $5 spent on retail purchases came from digital orders, suggesting the pandemic-related boost to online shopping has not tapered off yet.” 

2. Inventory Replenishment 

When countless businesses shut down last year, total inventory sharply declined between March 2020 through July 2020, putting a halt on shipment volume. After July 2020, a sharp increase in inventory was seen as businesses were able to re-open and companies needed to re-stock to prepare for consumer spending. This strong demand for inventory replenishment created an influx of shipment volume as the U.S. ports were, and still are, flooded with imports.  

3. Imports 

The boom of e-commerce and inventory replenishment levels have caused the U.S. ports to be extremely congested, especially the ports of Los Angeles and Long Beach. During the first months of the year, those two ports have handled 3.1m TEUs, an increase of nearly 50% compared to the same period of 2020. Tightened railcar capacity and truck shortages are causing vessels to be heavily delayed before getting unloaded as the consumer-driven import boom is expected to continue throughout the summer.  

Driving Factors Contributing to Carrier Supply 

Diesel Prices 

Diesel prices are correlated with driver supply. If gas prices rise faster than rates, carriers may suffer profit losses which can drive capacity out of business. Last month, diesel prices averaged $3.29 per gallon, up $0.07 from May’s reading of $3.22. Gas prices have been steadily climbing since October 2020 with fuel prices up 36.5% year-over-year in June.  

This chart was created by FWF using diesel price data from DAT.

Class 8 Truck Orders 

Class 8 truck orders include all tractor-trailers and are the leading indicator of future carrier capacity. Class 8 trucks typically take 6-to-8 months to deliver. When rates are high, carriers will often invest that extra profit into upgrading or adding trucks to their fleet as demonstrated in Q4 of 2020 and Q1 of 2021. Trucking employment is returning, but the return is slower than anticipated due to: 

1) Supply chain bottlenecks, namely chip shortages, causing delays in the delivery of trucks. 

2) COVID-19 protocols restricting the driver training class size, restraining the number of drivers that could enter.  

3) Significant number of drivers switching and entering the short-haul, small parcel sector in order to be closer to home.  

  • Class 8 truck orders increased by 3,100 from May to June. 
  • Q2 2021 truck orders saw a steep decline from Q1 2021. 
  • High levels of truck orders in the 2nd half of 2020, resulting in the possibility of trucks being delivered by the end of this year or early 2022. 

You can view the most up-to-date Class 8 truck order data on Freight Intel.

General Supply and Demand Indicators 

ISM Purchasing Manager’s Index 

The Purchasing Manager’s Index (PMI) is a measure of the direction of economic trends in manufacturing. Covering 19 industries, including both upstream and downstream activity, this is a leading indicator of overall economic activity. In the U.S., a PMI reading over 50 means the manufacturing economy is generally expanding, while a reading under 50 means this industry is generally contracting. When the PMI indicates an expansionary manufacturing economy, volume increases due to increased output.  

Currently, in June, the PMI reads 60.6, which indicates an expanding manufacturing economy. This shows how shipment volume could continue increasing. While June’s reading was down by 0.60 from May’s reading, this was still a strong number as Q2’s average is very similar to the average in Q1.  

You can view the most up-to-date PMI on Trading Economics.

Load-to-Truck Ratio 

The load-to-truck ratio is the rawest measure of supply and demand in the logistics market. Displayed here is the number of loads available there are compared to the number of trucks that are available on a comparative percentage basis. The higher the ratio, the more loads there are to be moved than available truck capacity. A higher ratio indicates increasing rates as a result of tight capacity. When the load-to-truck ratio is lower, rates should decrease. 

Currently, June saw a month-over-month decrease in load-to-truck ratios, meaning some rates could decrease in the near future. June’s year-over-year ratios saw an increase of over 100% for Flatbed and Reefer, along with an increase of 58.0% for Dry Van.  

Spot load posts and spot truck posts give a supply and demand snapshot; as spot load posts increase, volume and demand increase. Furthermore, increases in spot truck posts indicate that capacity is increasing. Last month, June saw a 6.0% decrease in spot load posts and a 13.2% increase in spot truck posts, signaling that capacity is returning relative to demand.  

You can find the most up-to-date load-to-truck data at DAT.

Consumer Spending 

Consumer spending, or personal consumption expenditures (PCE), is a solid indicator of shipping volume. As consumer spending increases, shipment volume also rises as producers must provide more products for the consumer. In May, consumer spending reached $15.659 billion. Consumer spending has been above pre-pandemic levels since January 2021, making May the fifth consecutive month. These personal consumption levels are a direct contributor to the record-high demand.    

You can find the most up-to-date data on consumer spending at the Federal Reserve Bank of St. Louis.

Conclusion 

Living in a highly volatile freight market makes future predictions a challenge. Driver supply is returning, but not at a normal freight cycle rate. Driver recruitment challenges and supply chain bottlenecks remain in place, while volume and consumer spending continue to soar. Advice would be to buckle up and expect rates to continue rising in Q3. Rates will not begin to decrease until supply begins to outpace demand. The overall prediction is that this might not occur until the end of Q1 2022 as the trucks from the Class 8 order surge are delivered and the holiday season ends, slowing demand.  

FWF continues to provide customers and carriers with reliable and new information to navigate the freight market with in-depth knowledge and data. Check out FWF’s resource center and website for other information that can improve your insights.  

 

More Industry Insights