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Looking at the Tender Rejection Index, as indicated by the green line (Figure 1.1), the current rate of 20 percent looks very favorable to what it was at the end of last year. 20 percent is still elevated compared to the single-digit rejection rates we saw in 2019, but it’s about 30 percent less than what it was in late November, early December of 2020. So that must mean that rates particularly on the spot market are down as well, right? Unfortunately, this correlation doesn’t hold true. Keep in mind that the tender rejection index is based on contracted rates, and we’ve seen carriers renegotiate their contracted rates with shippers recently, meaning they have more financial incentive to accept those freight tenders that would have slipped down the routing guide or to the spot market in recent months.
Even as carriers are more accepting of contracted freight, the spot market continues to be very active. It’s simply a product of supply and demand – with freight volumes slightly higher than what we saw in 2020 and expected to ramp up over the next six weeks. The demand for consumer goods for the holidays, a continued expansion on the industrial side, and an untangling of the import shipment web at U.S. ports will cause us to see the end of this year’s peak outpace 2020 volumes. If anything, the upward right movement in spot rates (Figure 1.2) we have seen since May will continue into the new year.
While overall freight volume has been elevated, it’s interesting to note that not all regions of the U.S. are experiencing year-over-year (YOY) growth (Figure 1.3). The West region, being heavily influenced by import activity, has shown the greatest YOY change, up 17 percent. On the opposite end, the Midwest region has seen a decline in volume YOY, down five percent as the Midwest is influenced by the auto industry which has been hampered with supply chain issues in receiving parts.
As we move into the last few months of 2021 and look ahead to 2022, capacity on the supply side will continue to be a focus, specifically, the two factors that affect capacity – equipment and drivers. While orders for new equipment (Class 8 truck orders) are increasing, there continues to be constraints on production as semiconductors are in short supply. In speaking with a carrier recently, they indicated 9-12 months for new orders to be filled, and that was optimistic. When carriers are forced to look at purchasing used equipment to augment their fleet, this then drives the cost of used trucks up, making the barrier for new operators and small fleets to enter the market. For anyone that has looked at buying a new or used car, you are very familiar with the sticker shock this can cause.
There are several headwinds that could further dampen the driver pool. The vaccine mandate and legislation aimed at independent contractors, combined with an aging driver population will make the challenge of filling truck seats a priority of carriers as we head into 2022. Combining the need for increased driver recruiting, options to improve driver retention, and increased costs to operate, the outlook for both contract and spot rates to ensure carriers can operate in a profitable environment points to an increase.
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