East-Coast ocean spot rates remain very high

The major shipping lines continue to have greater pricing power to east coast ports than west coast ports. Spot rates to the east coast have moderated from the recent peak, but the spread from west-coast ports remains large. The Shanghai Containerized Freight Index (SCFI) for west coast ports was $2,109 per FEU and to east coast ports was $4,119 on October 24. Prior-year comparisons highlight the pricing disparity between the west coast and east coast ports as west-coast rates are up $378 (22%) over 2013 and east-coast rates are up $1,006 (32%). The disparity between the coasts had been fairly consistent over the past year, but spot prices to the east coast have spiked as volumes have risen due to both peak-season shipping and diversions from west coast ports. The SCFI reflects spot market rates for the Shanghai export container transportation market.

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Same store sales data is mixed for leading retailers

Same store sales results among the nation’s largest retailers are mixed but generally positive. The median  gain of 2.5% is equal to the median gain from last year. Only McDonald’s experienced declining same-store sales, but industry leader Wal-Mart/Sams had flat year-over-year sales. Five of the retailers we track experienced better than or equal comparables relative to the prior-year’s same quarter while six saw comps deteriorate year-over-year. Sales gains at The Home Depot and Lowe’s remain strong as consumers continue to work through their backlog of demand for home improvement projects, but growth rates have moderated from the levels they achieved during 2013. Persistent weakness at Wal-Mart & Sam’s perpetuates concerns about the financial strength of value shoppers but Costco showed the second best results. Target showed a small gain but is still plagued by decreased traffic caused by their credit card data breach. Now that so many other firms have been hit with similar issues, perhaps that will turn around for Target. The retail segment drives a tremendous amount of freight transportation and the slow, but continued improvement indicates that demand for freight transportation is growing.

Stores.org 2013 Rank Retailer Reporting Date Reporting Frequency 2014 2013
1 Wal-Mart Aug-14 Quarterly 0.0% -0.3%
1 Sam's  Aug-14 Quarterly 0.0% 1.7%
2 Kroger Sep-14 Quarterly 4.8% 3.3%
3 Costco Oct-14 Monthly 6.0% 5.0%
4 Target Aug-14 Quarterly 0.7% 2.4%
5 The Home Depot Aug-14 Quarterly 6.4% 11.4%
6 Walgreen Oct-14 Monthly 1.7% 2.9%
7 CVS Caremark Jun-14 Quarterly 3.3% 0.5%
8 Lowe's Aug-14 Quarterly 4.4% 9.6%
9 Safeway Jun-14 Quarterly 2.5% 1.4%
10 McDonald's Sep-14 Quarterly -2.8% 0.2%

 

Source: individual retailer web sites, www.stores.org, Transplace analysis

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New home inventories continue to rise

New home inventories rose to 207k (seasonally adjusted) in September. Inventory levels have been slowly increasing throughout 2014. September’s new home inventory was well above the prior-year level of 183k, and inventories are at their highest level since July 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. Most of the growth in inventories in the last year represents homes under construction, not completed homes waiting to be sold. Seasonally adjusted new home inventories were flat at 5.3 months of supply in September. Sales were flat at 467k in September, compared to last month’s revised level of 466k (original estimate was of 504k). 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 below “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 above that level today.  The vertical bars in the graphs represent recessions.

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Retail sales fall in September after strong August results

Seasonally adjusted real retail sales fell to $186.3 billion in September, from last month’s all-time high. (Note that actual sales are deflated using CPI 1982 – 1984 = 100). September’s sales were 2.6% higher than the prior-year period. Nominal (unadjusted for inflation) retail sales totaled $442.7 billion in September (second graph), representing a 4.3% year-over-year improvement, but down 0.3% from August’s results. The results were worse than expected for September. We focus primarily on real retail sales because they are a better indicator of freight volumes than the inflated figures.

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Reefer capacity-demand balance close to ‘12 and ‘13 levels

Morgan Stanley’s refrigerated freight index indicates that refrigerated capacity remains tighter than normal for this time of year. but is closer to the long-term trend than it has been for most of the 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 through September. 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.

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

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Dry van capacity remains tighter than normal for Fall season

Morgan Stanley’s dry van truckload index indicates that van capacity still remains somewhat tighter than normal for this time of year, but more readily available than it has been for most of 2014. 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 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.

 

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

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Flatbed capacity tightness starts to ease

Morgan Stanley’s flatbed freight index has fallen off in recent weeks but flatbed capacity remains somewhat tighter than normal for this time of year. Typically, earlier than this time of year flatbed capacity tightness starts to ease and that appeared to be the case in mid-July. Then capacity tightened again but now seems to be heading back to more normal seasonal patterns.  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. Capacity-demand balance favors the carriers over the shippers 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.

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

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Housing starts again top 1 million unit annual pace

Housing starts rebounded 6.3% to 1,017k in September (seasonally adjusted annual rate – SAAR) after a disappointing August total of 957k.  September's year-over-year growth was very strong at 17.8%. Single family starts totaled 646k, roughly equal to the prior two months and up 11.0% from prior year. April, July, and September starts have all been over 1 million units annualized, but other months have been weaker. 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 779 thousand total housing starts during the first nine months of 2014 (not seasonally adjusted), up 5.7% from the 737 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. The ATA estimates that each housing start generates 8 truckloads of freight.

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Auto assemblies drop again in September

Annualized U.S. assemblies of autos and light trucks fell slightly to 11.25 million units in September (seasonally adjusted), but were 1.2% higher than one year ago. Our graph is a three-month moving average of seasonally adjusted annualized assemblies. Using this moving average, year-over-year growth was 10.6% in September. The full year 2014 was anticipated to be robust for auto manufacturers, and after a disappointing start to the year, the July increase was an indication that those expectations could be met, but now August and September have come in at the lowest levels of the year since April, raising some questions about the full year. 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 and just higher than September assembly volumes.

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Diesel prices continue to fall

Weekly retail on-highway U.S. diesel prices fell 4.2 cents to $3.656 per gallon on October 20th,  the lowest level since July 2012. Diesel has declined or remained constant in every week since July 7 of this year. Diesel is now 5.9% 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 had remained within the 2013 range until early September. The $4 price level is no longer in sight. 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 4 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. We are now at the low end of that range, and it appears prices will continue to drop. Diesel is now below the price level in each of the last three years for late October. Diesel prices peaked at $4.771 per gallon in July 2008.

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