It's cyclical, stupid!
The transportation sector is a reflection of the goods-based economy in the US. Demand has been blistering across all modes of transportation. Freight shipment volume (not pricing… we’ll get to pricing in a moment) by truck, rail, air, and barge, according to the Cass Freight Index jumped 10.6% in July compared to a year earlier. This pushed the index, which is not seasonally adjusted, to its highest level for July since 2007.
The dynamics in the transportation sector are “clearly signaling that the US economy, at least for now, is ignoring all of the angst coming out of Washington D.C. about the trade wars,” the report by Cass said.
The Cass Shipments Index does not include shipments of bulk commodities, such as grains or chemicals. But shipments of commodities were strong too, according to the Association of American Railroads. Excluding the carload category of coal, which is facing a structural decline in the US, carloads rose by 6.7% year-over-year, including grain, up 14.7%; petroleum & petroleum products, up 27%; and chemicals, up 4.6%. Of the 20 commodity carload categories, only five showed declines, including nonmetallic minerals, metallic ores, and the biggie, coal.
And intermodal traffic – shipments of containers and trailers via a combination of rail and truck – surged 6.9% in July compared to July last year, the AAR reported.
The pop in the Cass Shipments Index of 10.6% was the sixth double-digit increase so far this year. Only June had come in with a single-digit increase (7.2%):
Capacity in trucking is very tight. Some of the squeeze, especially among small trucking companies, earlier this year was triggered by the newly required Electronic Logging Devices (ELDs) that record drive times by truckers and thus help enforce the legal hourly limits truckers can drive. This hurt capacity and utilization earlier this year. But Cass points out:
[M]any of the truckers most adversely affected are now beginning to get some of the loss in utilization back, especially in the dry van and reefer (temperature control) marketplaces. The flatbed segment of trucking, however, is continuing to struggle with productivity after the adoption of ELDs.
Under pressure from this demand from shippers, tight capacity, and rising costs of diesel, pricing has been surging across the board.
The Cass Truckload Linehaul Index, which tracks per-mile full-truckload pricing but does not include fuel or fuel surcharges and is therefore not impacted by diesel price increases, jumped 10.2% in July, the largest year-over-year increase in the data going back to 2005:
One of the factors in creating pricing pressures is diesel. The US average retail price of diesel rose 24% at the end of July ($3.23) from a year ago, according to EIA data, but remains substantially below the range of the years before the Oil Bust:
The Cass Intermodal Price Index, which includes fuel prices, jumped 12.0% in June compared to a year ago, the 22nd month in a row of year-over-year increases, and the sharpest year-over-year increase since July 2011.
In aggregate, across all modes of transportation, the amount companies spent on shipping soared by 17.9% in July compared to July last year, according to the Cass Freight Expenditures index. This surge is a function of higher prices and fuel surcharges, as well as higher shipment volumes at those higher prices:
Retail sales – particularly e-commerce sales – have been strong all year. In July, retail sales jumped 6.4% from a year ago. That explains part of the surge in transportation demand. But industrial demand is hot too.
The Census Bureau reported yesterday that the combined value of distributive trade sales and manufacturers’ shipments for June – so lagging a month behind, but that’s as close as we can get – jumped 8.2% year-over year.
Some of this surge in shipments went into business inventories, which rose 4.2% year-over-year to a record $1.94 trillion. This number is important in the cyclicality of the goods-based economy. At some point, when sales growth tapers off, these record inventories are perceived as too high, and the inventory reduction mode sets in across industries, which causes orders to drop and then shipments to drop. This was one of the factors leading to the last transportation recession. And the way inventories are going now, it will be one of the factors leading to the next transportation recession.
But for now, there is a capacity squeeze, so everyone speeds up orders to get their stuff in time, which tightens the squeeze, increases inventories, pushes up demand for transportation, and inflates pricing.
Demand from the industrial sector shows up in demand for flatbed trailers that haul equipment and supplies for the revived oil-and-gas drilling boom, construction, manufacturing, etc. Demand surged just as capacity tightened, and suddenly the DAT Flatbed Weekly Barometer, cited by Cass, spiked. The spike, as the chart below shows, was historic and blistering, but there is no infinite spike or endless exponential increase, as the recent plunge toward the mean shows. In this barometer, values above 50 (blue line) indicate demand exceeds capacity (click to enlarge):
As the above charts show, transportation is an notoriously cyclical industry that experienced a “transportation recession” from 2015 through much of 2016, just as a lot of capacity had been added, while business inventories were suddenly deemed too high and orders slowed in the goods-based sector, which caused demand for transportation to drop and pricing to collapse. Suddenly there was no more talk about a shortage of drivers.
Cass points out that the capacity squeeze and price increases are unlikely to become permanent: “We are confident that the increased spending on equipment, technology, and people will eventually result in increased capacity in most transportation modes.”
“Increased spending” may be an understatement. Trucking companies are responding to the capacity squeeze: In July, their orders for Class 8 trucks soared 187% from a year ago, to 52,250 units, the highest number of monthly orders ever. Truck manufacturers, which had been laying off people during the transportation recession, now have their own capacity squeeze that goes all the up the supply chain. “It is a bizarre occurrence and it will not be resolved soon,” FTR Transportation Intelligence explained. Read… Cyclical Heavy-Truck Industry Soars to Cloud 9