The industry’s eyes are shut.

The Pricing Power Index for this week is based on the following indicators:

Tender volumes are worryingly out of season.

When comparing volume trends from prior years, it is obvious that freight demand is decreasing in an unseasonably rapid manner. While the market may have had a break during the normally quiet month of July, historical trends show that the Outbound Tender Volume Index (OTVI) picks up momentum in mid-July and continues to grow throughout August.

For comparison, these August improvements were recorded in 2021, when freight demand was at an all-time high; in 2020, when the industry was recovering from early pandemic shocks; and even in 2019, the preceding year of the trucking market’s collapse. This diversity of comparisons highlights the freight market’s weakness in the third quarter of 2022.

On a week-over-week (w/w) basis, OTVI rose 1.1% as high inventory levels negated the need for shippers to move much freight. OTVI is down 20.1% year on year (y/y), albeit y/y comparisons can be skewed by major movements in tender rejections. An increase in the Outbound Tender Reject Index might artificially raise OTVI, which includes both accepted and rejected offers (OTRI).

The Contract Load Accepted Volume (CLAV) index tracks accepted load volumes moving under contractual agreements. In a nutshell, it is comparable to OTVI but does not include the rejected tenders. Accepted tender quantities increased by 1.6% year on year, but fell by 5.8% year on year. This year-over-year disparity demonstrates that actual gaps in freight demand, not just OTRI’s year-over-year reduction, are driving OTVI lower.

Despite falling tender volume on the roads, the shipping industry’s maritime side continues to report steady import levels. Given y/y growth in trans-Pacific volumes during the first half of 2022, the CEO of a major container shipping line recently revealed his assessment that the “U.S. consumer appears to be holding up quite well.” Meanwhile, the company’s CFO downplayed fears about “demand going off a cliff” in the United States.

“Music is the space between the notes,” remarked French musician Claude Debussy famously. As a result, I am convinced that there is an art to reading between the lines on earnings calls like these. Consider the following remarks made by Shelley Simpson, the recently appointed president of J.B. Hunt, on the company’s most recent earnings call: When asked about a similar decline in freight demand in 2022, she stated that “we have seen a more seasonal July.”

This statement, I feel, is a very nice way of saying that July volumes were low. It is not unexpected that J.B. Hunt had not received reports of a reduction in freight demand from its customers. Shippers would be giving up leverage in future rate discussions if they indicated that they expect their volumes to shrink in the second half of 2022.

So, when considering the aforementioned CFO’s words, keep a few cautions in mind. One is that the data, to which the executive alluded, pointed to a decline in import volumes that would not manifest until July (assuming a 29-day transit time from China to the West Coast). The CFO, on the other hand, was reviewing results in the second quarter, which ends in June.

As it turned out, there was a large decline in TEUs cleared by US Customs and Border Protection 29 days after the trend was discovered on June 7, when it was noticed. Over the course of 29 days, these maritime TEUs plummeted by 35.25%. Nonetheless, several of the busiest container ports in the United States will continue to be supplied by a large backlog.

But I digress: the original query concerned current import demand rather than port congestion. According to the liner CEO, “there is a rather considerable easing of demand.” This softening is demonstrated by a quarterly “down of 27%” in ocean spot rates, a trend that is likely to “continue in the balance of the year.”

What does all of this sea talk imply for trucks? Obviously, imports account for a sizable share of products transported by road. While import demand in the United States has deteriorated, with no prospects of a speedy recovery, port congestion will ensure that freight remains available until backlogs are cleared. However, while changes in the maritime industry take time, shippers’ conduct indicates that they are shifting their freight away from the Ports of Los Angeles and Long Beach.

For example, the Georgia Ports Authority recorded strong import volumes in July, rebounding from a dip in June. The Georgia Ports Authority’s fiscal year begins in July, and the executive director noted that it was the “quickest start ever” to a fiscal year. In July, volumes at the Port of Savannah increased 18% year on year. Savannah’s local OTVI is currently up 2.4% year on year, far from the highest growth, but still surpassing the national OTVI.

70 of the total 135 markets showed weekly increases in tender volume. The Motor City’s freight demand is definitely heating up, with volumes up 17% year on year. Because of the city’s industrial sector, this tendency benefits flatbed and less-than-truckload carriers. However, even Detroit was outperformed by the mid-level outbound market of Austin, Texas, where volumes increased 33.4% year on year.

By mode: Reefer and dry van volumes are both up slightly this week, showing that flatbeds are doing the most of the heavy lifting. The Reefer Outbound Tender Volume Index (ROTVI) is up only 0.64% year on year and down 27% year on year compared to an inflated ROTVI last year. The Van Outbound Tender Volume Index is doing marginally better, up 0.85% year on year but down 22.5% year on year.

For the first time since June 2020, rejection rates fell below 6%.

During 2019, which was undeniably a down year for the transportation sector, OTRI averaged 6.19%. OTRI’s most recent reading is much below the national average. To put the current figure in context, remember that OTRI began in 2022 at 22.5%, whereas 2019 began with OTRI at 14%.

Over the last week, OTRI, which gauges market relative capacity, declined to 5.82%, a reduction of 56 basis points (bps) from the previous week. OTRI is now 1,529 basis points lower than a year ago.

Further progress has been achieved in the ongoing legal efforts to distinguish independent but leased owner-operators from workers. Eric Brant sued the big carrier Schneider National in July 2020, saying that the terms of his contract essentially made him an employee — or “company driver” — rather than a leased owner-operator. The 7th U.S. Circuit Court of Appeals recently dismissed Schneider’s protests, concluding that the contract’s stipulations were overtaken by “the economic realities of the working relationship.”

While many carriers are understandably concerned about the impact of AB5 — California’s newly enacted independent contractor statute — I would argue that this case should be treated separately from that issue. Brant’s allegations, in my nonlegal opinion, are obvious, and the appeal court’s rationale is sound. Consider Brant’s claims that he couldn’t refuse loads from Schneider and that Schneider might effectively prevent him from hauling loads under a different carrier (by demanding an exorbitant “security deposit”).

Taken together, these two charges call into question the basic definition of the leased, independent owner-operator, who is free to refuse any offered loads for any reason and is free to haul cargoes for other carriers if the lease does not include an exclusivity clause (as in Schneider’s case). While carriers may be concerned about the possible precedent that the court’s ruling may set for AB5-related situations, I argue that this case should be considered exclusively as the correction of an incorrect contract — which is not to say that legal precedent cannot be abused.

As a way to prioritize rejection rate changes, the map above depicts the Weighted Rejection Index (WRI), which is the product of the Outbound Tender Reject Index — Weekly Change and Outbound Tender Market Share. Only Baltimore was a blue market this week, while blue markets are the ones to focus on, as capacity is generally finding freight.

52 of the 135 markets reported increased rejection rates in the previous week, though 35 of those reported increases of 100 or fewer basis points.

Baltimore’s local OTRI increased 406 basis points year on year to just shy of 12%, making the region one of the bigger markets with the highest rejection rates. In terms of larger markets, the two heavyweights of Ontario, California, and Atlanta fell this week. Atlanta, which experienced a drop in tender rejections in July, saw its local OTRI fall by 25 basis points. Meanwhile, Ontario experienced a higher decline of 130 basis points.

Despite the fact that the total OTRI fell below 6% this week, rejection rates in the three key modes — dry van, flatbed, and reefer — are all above 6%. To be true, declining tender rejections in all three modes boosted this week’s OTRI reduction, but the secret driver was intermodal.

The Van Outbound Tender Reject Index declined 57 basis points year on year and is now hovering at 6.06%. Reefer rejection rates fell more slowly, with the Reefer Outbound Tender Reject Index falling only 43 basis points w/w to 6.4%. Flatbeds, on the other hand, are bleak, which bodes ill for the home industrial sector. The Flatbed Outbound Tender Reject Index declined 210 basis points year on year to 15.68%, the lowest level since February 2021.

Contract rates fall at the rate of a tortoise.

At this point, I’m not sure if I’ve grown accustomed to (and hence anticipate) freight numbers to collapse. When I made my calls for Q3 contract rates, I expected them to follow a pattern similar to the National Truckload Index’s (NTI) performance in March, the OTRI performance in March, and the OTVI performance in — you guessed it — March. Although I was cautious to emphasize that contract rates would not catch up to spot rates until at least Q1 2023, I was quietly bracing myself for a significant shockwave on the contract side.

We are not witnessing a shockwave, but rather a gradual decline as contract rates weaken. To be completely honest, I would rather be proven wrong in a dramatic fashion than witness this drawn-out collapse, as the former would be more intriguing. Contract rates instead decreased by a boring cent per mile w/w to $2.87, recouping another boring cent from the previous day’s low of $2.86 per mile.

Despite the slow pace of activity, the low of $2.86 a mile is the lowest contract rate since April, when contract rates slid 15 cents per mile in a week and bottomed out at $2.81. With contract rates gradually dropping, it would not be remarkable if rates stabilized at that level before September ended.

Spot rates, while not dull, are sad in every way. Reporting on the NTI appears to be an act of bullying since it has dropped 6 cents per mile w/w to $2.73. While falling diesel fuel prices contributed to some of the drops in spot rates, the base linehaul NTI (NTIL) also declined 4 cents per mile to $1.93. As shown in the graphic above, the disparity between the NTIL and dry van contract rates has increased to negative 92 cents.

The FreightWaves TRAC spot rate from Los Angeles to Dallas, probably one of the country’s busiest freight corridors, appears to have little room to fall further yet is doing so anyway. The TRAC rate has dropped 3 cents per mile in the last week to $2.61. Rates from Los Angeles to Dallas are cheaper than the national average when compared to the NTID, or National Truckload Index — Daily, but this was not the case at the start of the year.

When carriers inundated Southern California in January, spot rates fell dramatically. However, depending on how AB5 affects capacity, rates may rise in the near future.

Rates on the East Coast, particularly out of Atlanta, have fallen more precipitously but continue to outperform the daily NTI. This week, the FreightWaves TRAC rate from Atlanta to Philadelphia dropped 11 cents per mile to $3.11. This week’s decline adds to the prior week’s drop of 15 cents per mile. Carriers are less hesitant to move north out of the weakening (but still substantial) Atlanta market now that diesel costs in the Northeast have stabilized and Philadelphia is seeing more volume.