Redwood Report: Market Intel Week of July 29, 2024

This Week’s Big Story: Is This the Calm Before the Storm?

As we transition from July to August, let’s take a look at the state of the US freight market. July is well known for being a month that comes in like a lion, as end-of-Q2 pressures roll into the July Fourth holiday. It’s also known for going out like a lamb. In the last 10 years, DAT dry van spot rates for July have risen over June only three times — in 2016, 2020 and 2021 — and two of those years were during the COVID-19 pandemic.

This year appears no different, as the early pressure of July — combined with Hurricane Beryl — gave way to a calming market. This trend usually holds all the way through the first half of August before market volume pressure builds, lifting August spot rates higher in the second half of the month.

Last year, we saw the Outbound Tender Rejection Index (OTRI) at 3.3% to begin August. But it began rising in the middle of the month, eclipsing 4% by August 23 — the highest the OTRI had risen at that point since mid-January 2023. This same pattern held true in the pre-pandemic market of 2019 as well.

Traditionally, the Midwest and Northeast markets tighten as their produce seasons begin. In addition, continued growth in industrial production —currently up +0.5% month-over-month (MoM) and +1.6% year-over-year (YoY) — has been adding to overall Midwest freight volumes. As we’ve seen in previous years, the tightened capacity in these markets will likely have service providers scrambling. Service providers are particularly vulnerable this year, with contract freight priced at the bottom of the market. This region has become overly reliant on the well-supplied Chicago carrier market, which runs nationally as well as regionally, supplying extremely valuable swing capacity. Combine this capacity crunch with the continued growth of inbound goods into Southern California, and we could be looking at the Midwest, Northeast and Southern California markets all tightening at the same time — with the Labor Day holiday adding additional pressure.

We’ve described the expected rate environment as one that will “take the stairs, not the elevator.” We continue to stand by this prediction, as rates have taken two steps forward and a half a step back since the leadup to CVSA’s Roadcheck in May. This is still a slow and steady freight market recovery, driven largely by supply reduction. Less capacity, combined with modest demand growth, has equaled — as predicted — increased rates.

If a demand surge were to occur, then “slow and steady” may not hold. But it remains difficult to see a major demand lever on the horizon, with manufacturing still in contraction, the housing market depressed, and inventory levels in four consecutive months of balance (1.37 to 1). Even without a critical demand trigger, this turn we’ve seen over the last two and a half months is not expected to reverse course during peak season or the holidays. And a recovery of the market doesn’t pull capacity instantly back into the market, as capacity entrance trails the market recovery by roughly six months every cycle — and capacity exits trail any market deterioration the same way.

As we move into August, expect a market grind from all sides as shippers, carriers and brokers all feel different kinds of pain from this market. Typically, violent up-and-down swings of the freight market prohibit mutually beneficial partnerships. But a slow transition out of the current depressed freight market sets up all players for longer-term and more durable strategies.

Read on for a closer look at Demand, Capacity, Rates, Economic Trends and Markets. And take a few minutes to gain expert insights from EVP of Procurement Christopher Thornycroft in this week’s Redwood Rundown video update: 

Demand Trends for this Week 

The Outbound Tender Volume Index (OTVI) has fallen to 11,787 after an early June peak, but it remains strong relative to last year. The Contract Load Accepted Volume (CLAV) metric stands at 14,849, which indicates we continue to see volume tick up from the market lows of 2023. The Inbound Ocean TEU Index (IOTI) is at 1,679, but down from its mid-July peak of 1,754. Shippers are ordering more imported goods ahead of the 2024 US presidential election, due to concerns about a hefty increase in tariffs.

The Outbound Tender Rejection Index (OTRI) stands at 4.54%, down from its high of 6.56% on July 4. But it shows signs of being susceptible to real volatility. Sonar’s ORAIL metric (which measures loaded railcars) hit 33,013 earlier this week, which is the strongest index reading for loaded railcars since January 2021. This indicates that rail volumes continue to strengthen considerably YoY, while they’re still not reaching the numbers of 2020. This is likely siphoning off volume from the dry van truckload mode.

Capacity Trends for this Week 

The DAT Dry Van Load to Truck ratio climbed back above 4:1 last week, currently standing at 4.02 to 1. The number of total trucking authorities has dropped to 347,018, which is down just 327 carriers from the end of June. We believe carrier shutdowns are impacting all fleet sizes, from owner-operators to mid-sized and larger carriers. However, carrier authorities are being held as long as possible, as brokerages utilize authority data when vetting carriers for risk. This is causing carriers to keep authorities in good standing, and even reselling these authorities, rather than letting them lapse.

The November 18 deadline is looming for drivers in prohibited status due to a failed drug test captured by the Drug and Alcohol Clearinghouse. On this date, state licensing agencies are required to remove CDL driving privileges from drivers. Will 168K drivers allow their licenses to expire? And what will this do to the driver population? These are unknowns at this point. Look for the infographic below for more insights.

An Update on Rates 

We’ve referenced rate trends above, but let’s take a closer look.

The SONAR National Truckload Index Linehaul-Only (NTIL) stands at $1.72, and it’s averaged $1.75 for July. The Sonar NTIL was at $1.58 per mile prior to CVSA’s Roadcheck, and it ended June at $1.73 per mile. Rates have taken two steps forward and a half step back, but remain higher than any point since February 9 of this year.

DAT is reporting a +$.01 increase in dry van contract rates for July, as well as a +$.01 increase in dry van spot rates. July should end up showing the first YoY increase in dry van spot rates since March 2022.

Economic Trends for This Week

The Q2 US Gross Domestic Product (GDP) figure was released last week, and it indicates a strong economy. Although economic growth doesn’t instantly translate into freight market growth, the news is fueling renewed faith that we may see the “soft landing” that once seemed unlikely.

The Consumer Price Index climbed at a moderate pace in June compared to a year earlier, and it even fell on a month-over-month basis.

After 12 months of the Fed keeping rates as they are, the Central Bank meets this week to decide its next moves. Expectations are for rates to remain flat, with bets on the first rate cut coming after the September meeting.

Regional Market Trends for this Week

Produce markets continue their climb north, as Atlanta is well past peak season and the Carolinas are beginning to open up again. Watch for rates to steadily rise from the north, moving toward the Southeast, for the foreseeable future — as outbound Southeast capacity begins its seasonal race to the bottom to secure freight.

After an early hurricane hit the Houston market, the region has bounced back with a surplus of outbound freight. This serves as an important reminder that hurricane season is upon us, in a low-capacity environment.

The Texas and Mexico border markets are in a seasonal trough, with excess capacity looking to move north.

The Northeast continues to see volumes trend up, from New Jersey to Maryland, as imports hit the region and Northeast produce markets take hold.

The Midwest has had pockets of tightness in what should be a seasonal low point for the region. Look for Kentucky, Ohio, Indiana, Michigan and the Chicago market to heat up as we get closer to Labor Day weekend.

The Southwest continues to see a strong Los Angeles market, but that’s likely to cool off for the next couple of weeks, before Southern California heats back up in the second half of August.

The Pacific Northwest has already picked up volume with a strong cherry season, and imports into Seattle are accelerating as well. We anticipate a routing guide breakdown out of this market by the end of September.

Top 3 Charts for the Week

Modest Rate Increase Continue

As predicted, low capacity is combining with demand growth to push up rates, including the NTIL.

Rail Emerges As Factor

The ORAIL metric, which tracks loaded railcars, sustained record highs this summer.

Will 168k Drivers Be at Risk?

The market could face a significant capacity crunch in November, as 168,000 drivers could lose their CDL licenses for failing a drug test.

Get Up to Speed with Weekly Market Intel

What’s going on this week in the US logistics market? Follow the Redwood LinkedIn page to watch Christopher Thornycroft’s insightful Redwood Rundown video every week. You can also read our insights blog to learn about industry trends and gain intel, including the weekly Redwood Report!