Spot and rejection rates have become more sensitive to seasonal events
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 – The market may approach equilibrium in three months. That rating is unchanged from last week.
This week saw a decline in spot rate and tender rejection rates, but that was expected
(Chart: SONAR)
Using a method that excludes the impact of fuel, the average spot rate pulled back $0.03 from last week’s report to $1.71/mile. As shown in the chart above, that puts the fuel-neutral rate only $0.02 ahead of this time last year. That year-over-year change is pretty insignificant, but the main point is that recent months have shown that the average spot rate is more sensitive to events that temporarily remove capacity from the market, such as holidays or International Roadcheck. That suggests the market is closer to equilibrium than it has been in years past.
The next test will be the last week of June and the first week of July, which is normally a strong seasonal period as shippers rush to move goods to book revenue by the end of the second quarter, and many drivers take an extended break for the 4th of July. This year, that seasonally strong time is aligned with an expected surge in imports hitting US shores. Class I railroad BNSF and intermodal chassis provider Trac Intermodal have made comments to that effect and, in preparation, are relocating equipment to port cities.
Ocean Booking Volume Index for containers originating in China and terminating in the U.S. Booking surged 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)
The average tender rejection rate (below) showed a similar pattern in the past week, declining from 6.6% to 5.8%. The current national tender rejection rate exceeds the rate this time the past two years of 4.9% and 3.0% in 2024 and 2023, respectively. The current 5.8% overall tender rejection rate breaks down to a 5.8% tender rejection rate for dry van, the largest segment, 11.5% for reefer, 12.1% for flatbed, and a 1.1% rejection rate for intermodal, a segment where rejections are uncommon. Citing the same trends I am seeing in SONAR, at a Wall Street conference in the past week, representatives from multimodal carrier Schneider said that the TL market is getting closer to equilibrium.
(Chart: SONAR)
Freight market held back by weak volume
(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, down 14% year over year, in the latest data point. If I were to look at tender volume alone, I would conclude that we are in a severe recession. But, tender volume is being held back by more than just a lack of consumer confidence and degradation in the interest rate-sensitive sectors of the economy. In addition, some shippers have started using private and dedicated fleets more heavily in the past year. And, rail intermodal has taken share in long-haul lanes that are compatible with rail intermodal networks.
Compared to this time 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)
English language requirements could disqualify large numbers of drivers
The change in net trucking authorities has been surprisingly positive, on average, in recent weeks. Stricter CDL requirements could change that. (Chart: SONAR)
The loose freight market of the past three years has largely been a result of overcapacity following the massive capacity increase during the pandemic. But, the persistent lack of carrier pricing power no longer appears to be an overcapacity issue, but rather an issue of lack of demand, as described above.
While overcapacity is arguably no longer the biggest issue, there are now foreseeable catalysts that are likely to cause a decline in capacity in excess of what would be expected if driven only by market forces. 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 as tractors become harder to seat. One sell-side financial analyst believes that 5%-15% of drivers could not pass the English language proficiency requirements, although enforcement may vary widely by state. In addition, the FMCSA is attempting to crack down on fraud by requiring a more comprehensive identity verification process for registering new trucking authorities. Data from CarrierOK suggests that the new requirements are reducing the number of newly minted operating authorities by roughly half.
For details on changes to CDL requirements, see CDL-tagged articles on FreightWaves.com.
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.
