Refrigerated capacity is tight

Morgan Stanley’s refrigerated freight index indicates that refrigerated capacity remains tighter than normal for this time of year. While the market is not as capacity constrained as during Q1, capacity did show the normal seasonal tightening through the end of Q2 and now is tightening again as we approach September. The index is nearly as high as at any point during 2013. The refrigerated index rose to historic levels throughout the first quarter as severe winter weather caused thousands of trucks to sit idle. The lack of excess reefer capacity significantly magnified the winter capacity crunch. Refrigerated rates will likely continue to rise faster than the broader truckload market as no significant capacity is entering the industry despite steadily rising demand. Demand for refrigerated transportation is less correlated to economic fluctuations than dry van or flatbed freight, so the future robustness of economic growth will not necessarily determine demand in this market. The index measures incremental demand for refrigerated truckload services compared to incremental supply. The higher the index the tighter is capacity relative to demand when compared to a prior period.

 

MS reefer 8-26-14

Graph reproduced with permission from Morgan Stanley. For more information contact: Adam Longson at Adam.Longson@morganstanley.com or Bill Greene at William.Greene@morganstanley.com

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Dry van capacity-demand balance favors the carriers

Morgan Stanley’s dry van truckload index indicates that van capacity remains tighter than its recent historical average. Steadily rising demand, coupled with regulatory-driven truck productivity hits have prevented the dry van market from fully normalizing after the winter weather spike from the first quarter. Carriers are still adjusting to the 3%-5% effective capacity reduction under the new Hours-of-Service rules that reached their first anniversary on July 1. The economic decline in the first quarter produced lackluster freight volumes but second quarter economic growth was strong and with the fall pre-holiday shipping season upon us, it is likely that van capacity will remain tight for the remainder of the year. The index measures incremental demand for dry-van truckload services compared to incremental supply. The higher the index the tighter is capacity relative to demand when compared to a prior period.

MS van 8-26-14

Graph reproduced with permission from Morgan Stanley. For more information contact: Adam Longson at Adam.Longson@morganstanley.com or Bill Greene at William.Greene@morganstanley.com

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Flatbed capacity much tighter than normal

Morgan Stanley’s flatbed freight index has risen in recent weeks and is far above normal levels for this time of year, indicating a very tight capacity market for flatbed equipment. The index is higher than in all recent years. Typically, earlier than this time of year flatbed capacity tightness starts to ease and that appeared to be the case in mid-July, but since then capacity has again tightened.  After mirroring its recent historical average at the beginning of this year, flatbed capacity began to tighten more than normal at the end of May. That upward move came later than was the case in 2008, 2010 and 2011. Clearly, capacity-demand balance favors the carriers over the shippers much more so this year than in the previous two years. Flatbed capacity was readily available throughout 2013 despite increased oilfield production and the uptick in housing starts. The flatbed market was particularly hard hit by the recessionary decrease in housing starts, but gained ground in 2010 and 2011 with the resurgence of the American manufacturing sector. The index measures incremental demand for flatbed truckload services compared to incremental supply. The higher the index the tighter is capacity relative to demand when compared to a prior period.

MS Flat 8-26-14

Graph reproduced with permission from Morgan Stanley. For more information contact: Adam Longson at Adam.Longson@morganstanley.com or Bill Greene at William.Greene@morganstanley.com

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Auto assemblies rev up in July

Annualized U.S. assemblies of autos and light trucks increased sharply to 12.85 million units in July (seasonally adjusted), 13% above June’s pace of 11.36 million units and the highest level recorded since May of 2000. Year-over-year growth in July was 27.3%. Our graph is a three-month moving average of seasonally adjusted annualized assemblies. Using this moving average, year-over-year growth was 12.1% in July, a highpoint for 2104. The full year 2014 was anticipated to be robust for auto manufacturers, and after a disappointing start to the year, the July increase is an indication that those expectations could be met. The auto industry has come a long way since assemblies bottomed at a 3.6 million-unit annual pace (seasonally adjusted) in January 2009. Average monthly seasonally adjusted assemblies were 11.4 million from January of 2001 through December of 2007, 5.3% above the average assembly rate for all of 2013 but well below July assembly volumes.

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Retail sales flat in July

Seasonally adjusted real retail sales were down slightly at $184.9 billion in July, still approximately equal to the all-time high. (Note that actual sales are deflated using CPI 1982 – 1984 = 100). July’s sales were 1.6% higher than the prior-year period. Nominal (unadjusted for inflation) retail sales totaled $439.8 billion in July (second graph), representing virtually no change from June and a 3.7% year-over-year improvement. The minimal increase in July was below consensus expectations of a 0.2% increase, but most economists have not turned pessimistic based on July’s data. We focus primarily on real retail sales because they are a better indicator of freight volumes than the inflated figures.

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New home inventories continue to climb

New home inventories rose to 205k (seasonally adjusted) in July. Inventory levels have been slowly increasing throughout the first half of 2014. July’s new home inventory was well above the prior-year level of 171k, and inventories are at their highest level since August 2010, but new home inventories still remain low by historical standards. Inventories rose from 149k at the beginning of 2013 to 187k by December, following a year of remarkable stability in 2012 where the absolute inventory of new homes remained within a consistent range of 142k – 150k. Seasonally adjusted new home inventories rose to 6.0 months of supply in July, the highest level since October 2011. Prior to July 2013, the months of supply figure had remained below 5 months since February 2012. The average months of supply over the last 50 years is 6.1, so current new home inventory is at “normal” levels. For the 9-year period of 1997 through 2005, the inventory level averaged 4.1 months with relatively little volatility, despite the dot-com boom and subsequent recession, and we are well above that level today. Growth in the rate of sales had driven down the months of supply even at higher absolute inventory levels, but that no longer seems to be the case. One silver lining is that inventories are broken into 3 categories - Not Started, Under Construction, and Completed. Inventories remain low for the Completed and total of Completed and Under Construction categories. The vertical bars in the graphs represent recessions.

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Housing starts soar in July

Housing starts exceeded estimates and increased by 15.7% in July to 1,093k (seasonally adjusted annual rate – SAAR) from a total of 945k in June (Note that June starts were revised upward significantly). July’s year-over-year growth was also strong at 21.7%. Single family starts totaled 656k, an increase of 8.2% from June and 10.1% from prior year. July housing starts were the highest since November of last year and the second highest since housing starts collapsed during the recession.  Coming into this year, many economists had anticipated that a surging housing sector would propel broader economic growth, but the sector has not fully lived up to these expectations up to this point. There were 585 thousand total housing starts during the first seven months of 2014 (not seasonally adjusted), up 9.1% from the 563 thousand during the same period of 2013. Severe winter weather was a notable headwind that plagued the housing industry and the broader economy during the first quarter. The Census Department reported total 2013 housing starts at 925k, a robust 18.5% above the 781k housing starts recorded in 2012. There remains a lot of ground for the housing sector to recover from the recession. Housing starts are still far below the average of just over 1.5 million per year over the last 40+ years, and even farther below the 2.2 million peak of the most recent housing boom. Since 1968, the U.S. population has grown from 200 million to over 300 million. Total starts reached a low point of 478k (SAAR) in April of 2009, while single unit starts bottomed out at 353k in March of 2009. A low housing starts figure not only impacts transportation demand for building products but also for appliances, furniture, and other related items, so continued improvement in the housing sector should lead to rising freight volumes. One analyst estimates that each housing start generates 8 truckloads of freight. The vertical bars represent recessions.

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Diesel prices fall for eighth straight week

Weekly retail on-highway U.S. diesel prices fell 1.4 cents to $3.821 per gallon on August 25th,  the eighth straight weekly decline. Diesel is now at its lowest price level since July 2013 despite the ongoing violence in the Middle East. Although surging domestic energy production has made the United States less dependent on foreign oil imports, the market price for crude oil is still deeply impacted by OPEC supply. Diesel is now 2.4% below its prior-year level. Diesel experienced a high but narrow pricing environment throughout 2013, fluctuating between the low of $3.817 on July 1 and the high of $4.159 on February 25. Diesel prices have remained within these 2013 limits so far this year, but are very near the lower end of that range (4 tenths of a cent above 2013 low point) . The $4 price level remains highly symbolic. In 2012, diesel exceeded $4 per gallon for a total of 26 weeks but only reached that level for 8 weeks during 2013, and only 3 weeks so far this year. The recessionary low price point for diesel was $2.023 in March 2009. A view of weekly prices over the last 6 years indicates fairly stable prices since Q2 2011 (min of $3.65 and max of $4.16), after rising in previous years. Diesel prices peaked at $4.771 per gallon in July 2008.

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Auto sales down slightly in July

Annualized seasonally adjusted U.S. sales of domestic and foreign autos and light trucks were 16.4 million in July, declining from 16.9 million in June and short of the 16.7 million consensus forecast. The sales pace is now equivalent to the early decade average (2001 – 2007) that has served as our primary barometer of the auto industry’s recovery. Auto sales remain well below their all-time high, indicating there is still room for the industry to grow. Year-over-year growth for our three month moving average was 6.4%, in line with the last couple of months. The full-year sales total for 2013 was 15.6 million, a 7.3% improvement over 2012 and 6.6% below the early decade average (16.7 million). The recessionary low point for auto sales occurred during the first six months of 2009, when annualized sales averaged only 9.6 million units. Auto purchases represent a large portion of the typical household budget, and improving auto sales is directly correlated to rising confidence among American consumers. Our graph shows a 3-month moving average of seasonally adjusted annual rates to smooth out some of the month-to-month volatility.

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Worldwide oil consumption increased by 1.6% in 2013

BP's Statistical Review of World Energy is an annual publication with a treasure trove of information about energy production and consumption across the globe and over time. Contrary to popular belief, worldwide consumption of oil is not increasing at a rapid pace. In 2013, worldwide oil consumption grew by 1.56%, from 89.9 to 91.3 million barrels per day. The pace of growth increased from last year when consumption grew by 1.12%. Over the period from 2000 to 2013, global consumption grew 1.33% annually, and from 1965 to 2013 consumption grew 2.29% annually.

Regional consumption patterns vary based largely on a region’s level of economic development. Developed regions have historically experienced slower growth in oil consumption than is the case for developing countries that rely heavily on fossil fuels to meet rapidly growing energy demand. In 2013, consumption grew fastest in Africa, the Middle East, Central and South America, rising 3.13%. This region also experienced the highest Compound Annual Growth Rate (CAGR) of 3.23% from 2000 to 2013 and consumption has grown at a 3.86% annual rate from 1965 to 2013. Asia Pacific had the fastest growth rate from 1965 to 2013 at 4.77%, but that slowed to 2.80% from 2000 to 2013, and consumption increased by only 1.58% in 2013.

In contrast, the Europe and Eurasia region has experienced the slowest longer term growth in oil consumption. Consumption grew by 0.05% in 2013 after falling by 1.96% in the prior year. Consumption decreased at a 0.30% annual rate from 2000 to 2013 and increased by only 1.00% annually over the 1965 – 2013 period. North America experienced a larger increase in 2013, coming in at 1.50% (nearly matching Asia) after falling by 1.63% in the prior year. This is being attributed to the growth in manufacturing in the U.S., which is energy intensive. This region saw a 0.14% annual decline from 2000 to 2013 and a 1.23% annual growth rate over the 1965 – 2013 period. Note that Mexico’s (-2.6%) and Canada (-0.5%) both saw oil consumption decline in 2013 so the 2013 growth is all in the U.S. In fact, the U.S. was the country with the largest overall growth in consumption worldwide in 2013.

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The long period of slow growth in oil consumption in North America and Europe has dramatically shifted global oil consumption market share. Whereas those two regions previously consumed the vast majority of the world's oil (79.5% in 1965), in 2009 the most developed regions dropped below 50% of worldwide consumption for the first time. Asia-Pacific eclipsed North American consumption in 2006 and has widened the gap since then, now accounting for 33.4% of world demand. The Africa, Middle East, Central and South America surpassed Europe & Eurasia in terms of total oil consumption for the first time in 2013.

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Certainly, we need to do everything reasonable to reduce the consumption of oil without sacrificing economic growth. The North American shale oil and gas boom represents a promising source of domestic supply that will significantly diminish, if not completely eliminate, our dependence on foreign oil. It is imperative that we take full advantage of these resources because we still have a long way to go to achieve energy independence. The BP data shows that the U.S. is already a net exporter of refined oil products exporting 3.158 million barrels per day while importing 2.074 million barrels. Crude is another matter. We import 7.7 million barrels per day while exporting 112 thousand.

There is no need to wring our hands about runaway growth in domestic and worldwide oil consumption because, quite simply, that is not the case.

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