Redwood Report: Market Intel Week of June 03, 2024

This Week’s Big Story: Rising Volumes Meet Decreasing Capacity

The challenges of CVSA’s Roadcheck and the Memorial Day holiday are behind us, but the market has not resettled back to the where it was prior to those events. Trucking capacity appears to be exiting at a meaningful pace — 624 net carrier authorities were lost last week — just as seasonal demand is lifting overall freight volumes, with the Outbound Tender Volume Index (OTVI) reaching 12,223. This represents the highest tender volumes we’ve seen since September 2022.

As we’ve stated previously, declining capacity meeting increased demand —even if that demand growth is modest or seasonal — will lead to higher carrier costs. So far through the first week of June, we’ve seen these carrier costs rise and, according to market indicators (DAT $2.05/NTIL $1.71), the rest of the industry is seeing rising carrier costs as well. Most notably, the early June reports on DAT contract and spot rates show the contract-to-spot spread shrinking to $.38 — a contraction of -$.04 from May. This is the lowest contract-to-spot spread since the polar vortex of January and, excluding January, this is the lowest spread we’ve seen since March 2022.

It’s impossible to know if this spread will continue to tighten in the short term, because that largely depends on the demand environment. But tightening spreads will put immediate pressure on broker-providers with already stressed margins — many of which are operating under current market costs, and are depending on rates either falling or holding steady. If those providers can no longer honor contract rates, even more freight will be sent to the spot market, which is far more price-sensitive and less durable than the contract market, which has had an incredibly strong run.

Now let’s look at the calendar for “known events” that shippers should plan for and approach with caution. First up, we have the Eid al-Adha holiday, a Muslim celebration of remembrance, which takes place on Sunday, June 16. It’s traditionally celebrated for three days, so we expect drivers to be back on the road on Wednesday, June 19. This will have an impact on the markets of Detroit, Minneapolis, Cleveland, New Jersey, Bowling Green and Dallas/Houston. But it’s difficult to determine the magnitude of the impact of the holiday, particularly when it begins on Sunday rather than in the middle of the week. Next up is the July 4th holiday, which takes place on a Thursday this year. This will send drivers home by Wednesday at the latest, with the loss of capacity being felt Friday, July 5, through Sunday, July 7. Then shippers and brokers will face repositioning issues on the following Monday and Tuesday.

In our final notes on demand, we need to call attention to the falling PMI (Purchasing Managers Index) for May. At 48.7, this index indicates manufacturing contraction. This contraction impacts the already depressed less-than-truckload (LTL) market, as well as the truckload market — which currently is moving a large segment of typical LTL shipments. A sustained demand recovery is unlikely without a return to expansion in domestic manufacturing.

On the other hand, the Inbound Ocean TEU Volume Index (IOTI) continues to show early strength. The typical inflow of imports escalates from this point, leading to a Q3 peak season. While manufacturing may have a larger impact on the overall freight economy, more remains more — and an increase of imports contributes to that “more.”

Overall, we’re looking at our first non-holiday market with true uncertainty in quite some time. The movement of current pressure would suggest that rates have taken the first step up a large set of stairs. A market that’s seeing more spot volume is a market that’s increasingly exposed to the price sensitivity created by spot-rate volatility. And this sensitivity will only increase with the continued exit of capacity.

For a closer look at Demand, Capacity and Markets — as well as the potential labor strike at the US-Canadian border — read on. You can also watch the weekly Redwood Rundown, where EVP of Procurement Christopher Thornycroft provides his expert insights in a video format: 

Demand Trends for this Week 

As noted above, the OTVI has risen to 12,223 as seasonality lifts freight volumes and the spot market expands. The Contract Load Accepted Volume (CLAV) metric stands at 15,210, which is +12% year-over-year (YoY). The IOTI is at 1543 — and has been above 1500 for nine of 10 business days — suggesting a strong number of imports due near the end of Q2.

The Outbound Tender Rejection Index (OTRI) is at 4.46% without a holiday market or disruption to lift tender rejections, indicating upward pressure on rates. The Intermodal OTRI is at 1.80%, almost double last year, and Los Angeles IMLOTRI (Intermodal Outbound Tender Rejections) stands at 5.42% — the highest IMOTRI from Los Angeles that we have seen since March 2022. We believe this is a sign of an early peak season as shippers look to avoid potential additional tariffs being implemented post-election.

Capacity Trends for this Week 

The number of total trucking authorities has dropped again this week to 348,627, with last week seeing a drop of -624 carriers. This is roughly 3x the weekly pace of exits that we saw in April and May. Brokerage authorities are down -12.3% from January 2023.

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.

Regional Market Trends for this Week 

Produce has spread north almost completely out of Florida, where inbound rates are rising and outbound rates are falling again. Many of the drivers who were taking advantage of Florida’s market strength are now positioning themselves to take freight out of Georgia — which, although cooling from last week, is still posting roughly 8,000 spot loads per day. Watch for the Carolinas to catch the produce wave next.

Los Angeles remains extremely hot and, as Southern California goes, so does the market. As noted previously, tender rejections in Los Angeles are the highest they’ve been since March 2022, and more imports are due to arrive.

Houston is red hot, and we’re seeing over 9,000 loads posted on the DAT daily out of this market, where the Van Outbound Tender Rejection Index has risen to almost 8%. Texas is poised to cool by mid-July, but imports to the Gulf Cost and cross-border traffic could change this.

Looking to July, we expect to see the Midwest begin to heat up, and it looks like there will be a booming produce season there.

The vast majority of markets are seeing tender rejections significantly increase over last month (see below) as the market searches for more favorable rates.

Will a Strike at the Canadian Border Affect Your Operations?

This week, we’re also watching how a potential labor strike plays out at the US-Canadian border. If a deal is not reached with the government, 9,500 Canadian border agents are prepared to strike on Friday.

A strike would not fully shut the border down, since 90% of Canadian border agents are essential workers and are prohibited from striking. But we would see huge delays in processing customs paperwork at the Canadian border if the strike occurs. Delays will be particularly long at high-volume crossing points such as the Detroit-Windsor crossing. We expect crossing times to slow dramatically, forcing drivers to wait five or six hours — or even more —to cross.

If the strike happens, we expect to see declining volumes, coupled with rising prices. If the issue persists, shippers may want to shift modes from truckload to rail to avoid customs crossings. We’ll continue to monitor and report on this situation.

Top 3 Charts for the Week

Rates Are Rising Along with Demand

Rising seasonal demand and exiting capacity are combining to push national rates higher.

Will 168k Drivers Be at Risk?

The market could face a significant capacity crunch this fall, as 168,000 CDL holders face downgrades from State Licensing Agencies on November 18th. 

A Look at Regional Hot Spots

Tender rejections are up in a majority of US markets, with some notable hot spots seeing significant growth.

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!