Freight market becoming more balanced despite lackluster volume
This week’s SONAR Pricing Power Index (PPI): 40 – The market slightly favors shippers, in general. That is unchanged from last week.
Three-month SONAR Pricing Power Index Outlook: 50 – It appears the market may approach equilibrium in three months. The increase of 5 points from the prior week primarily reflects tender rejection rates that stabilized, rather than contracted, following Memorial Day and International Roadcheck, two events that often leave only temporary impacts on freight markets.
Spot rates decline seasonally while tender rejection rates hold up
The typical seasonal expectation for truckload data this past week is that spot rates and tender rejection rates would both fall following a temporary increase in both measures driven by the combination of International Roadcheck and Memorial Day. That happened for spot rates (first chart below), but not tender rejection rates (second chart below). However, one could use either high-level chart to build a bullish case that truckload supply and demand is approaching equilibrium and on its way to becoming a carrier’s market.
Average spot rates, which are adjusted in the first chart below to exclude the impact of fuel, reached a high of $1.79 a mile during International Roadcheck, 10 cents higher than the year-ago period and roughly in line with last year’s Fourth of July peak. Drivers often take time off for the Fourth, which also comes close to overlapping with shippers rushing to move goods right at the end of the second quarter, which makes it a strong seasonal period.
(Chart: SONAR)
Meanwhile, the average tender rejection rate (below), which assesses the contract market, also rose in May and has held up well above year-ago levels. The current national tender rejection rate of 6.6% exceeds the rate this time the past two years of 5.3% and 3.7% in 2024 and 2023, respectively. Looking at tender rejection rates for only long-haul loads (greater than 800 miles), a dataset that includes lanes where carriers are often more selective, the current tender rejection rate is 8.5% versus 5.5% and 2.8% at this time in 2024 and 2023, respectively.
(Chart: SONAR)
Therefore, the freight market is closer to flipping to become a carrier’s market in the coming months. The past couple weeks in this report, I noted that rejection rates were widely varied by market. That is starting to become less true than it was in recent weeks. One example is Los Angeles, where tender rejection rates are no longer depressed. The LA long-haul tender rejection rate has risen sharply from lows near 2.5% this year to a current rate of 7.3%.
Improving freight market appears more supply-driven than demand-driven
The increase in trucking authorities in recent months confused many analysts. One theory is that deportations were less likely for employees dispersed on highways than at concentrated locations. Perhaps due to enforceable English proficiency requirements, capacity is again coming out of the market. (Chart: SONAR)
The loose freight market of the past three years has largely been a result of overcapacity following a capacity increase during the early days of the pandemic. Truck market looseness since early 2022 has encouraged capacity to leave the market, but other factors kept carriers in business. Carrier balance sheets that were built up during the pandemic, and the proliferation of freight brokers, which fed carriers a steady stream of loads, helped many carriers stay in business longer than what would have been possible.
Now, there are foreseeable catalysts that might cause capacity to decline en masse. In light of the Trump administration’s new guidance to enforce stricter labor, CDL and English proficiency standards for truck drivers, there is greater potential for a crunch in blue-collar labor. That, in turn, could lead to a shortage of available capacity. In addition, the FMCSA is cracking down on fraud by making changes to identity verification processes. Data from CarrierOK suggests that the new requirements are reducing the number of newly minted operating authorities by roughly half.
Freight volume remains under pressure
(Chart: SONAR)
Unlike spot and tender rejection rates, which are both above year-ago levels, the volume of truckload tenders, a measure of the frequency of shippers requesting that carriers pick up loads, remains well below year-ago levels. In fact, the latest reading for the Outbound Tender Volume Index is 15% below 2024 and 7% below 2023 levels. That likely reflects a lack of consumer confidence and spending power after the inflation of the past few years as well as degradation in interest rate-sensitive sectors of the economy.
Intermodal and ocean volume holding up better than trucking
Ocean booking volume on containers in China-to-U.S. routings recovered following the 90-day delay on tariffs on Chinese imports, which should translate to an increase in surface transportation demand in the coming weeks. (Chart: SONAR Container Atlas)
If I only looked at SONAR truckload tender volume as an economic measure, I would think we are in at least a major freight recession and likely an overall macro-recession. However, truckload volume appears to be held back to a certain extent by a lower degree of time sensitivity of some shipments, which allowed intermodal to take share from the highway. Given the current availability of containers following investments by the domestic intermodal carriers, that trend is likely to continue provided that goods do not get behind schedule and rail service levels hold up.
Compared to last year, containerized intermodal volume (white line, inclusive of both international and domestic containers) held up much better than long-haul (greater than 800 miles) highway tenders (yellow line), suggesting that rail intermodal took market share from highway carriers. (Chart: SONAR)
About the SONAR PPI: The SONAR Pricing Power Index is a qualitative assessment of the balance of negotiating power between shippers and carriers on a scale of 0 to 100 using SONAR data and anecdotes from discussions with SONAR clients. The higher the number, the tighter the freight market and the more that pricing power favors carriers. A 50 represents a balanced market. While the SONAR PPI primarily pertains to the truckload sector given its size, dynamics in other sectors, such as intermodal and ocean, are also considered.
