Refrigerated capacity is very tight

Morgan Stanley’s refrigerated freight index indicates that refrigerated capacity begins 2015 the same way it ended 2014, significantly tighter than normal. While the market is not nearly as capacity constrained as during Q1 of 2014, it is tighter than other years in Q1 and also tighter than most of 2014 which was a very challenging year for securing refrigerated capacity. Refrigerated rates will likely continue to rise faster than the broader truckload market as little 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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Auto assembly growth slows

Annualized U.S. assemblies of autos and light trucks decreased slightly to 11.6 million units in December (seasonally adjusted), 2.2% 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 only 1.8% in December, the second worst performance of the year, trailing only November, and mainly reflecting October’s dismal performance. The full year 2014 was anticipated to be robust for auto manufacturers, and after a disappointing start to the year, assemblies picked up hitting a 12.9 million unit pace in July, but cooled off after that point.

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 about equal to the 2014 average.

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Flatbed capacity-demand balance continues at normal seasonal levels

Morgan Stanley’s flatbed freight index continues the pattern seen at the end of ‘14 with flatbed capacity-demand balance in line with the historical average for this time of year. Flatbed capacity tightened a little later than normal in 2014 but then remained tight longer than normal. Flatbed capacity-demand balance favored the carriers over the shippers more so in 20014 than in the previous two years, but capacity never became as tight last year as in 2010 and 2011. It is always hard to predict in January when the curve will ramp up and how tight capacity will become as we move towards Q2. We can say with virtual certainty that flatbed capacity will become much tighter than it is today. 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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TL van capacity begins ‘15 more readily available than through most of ‘14

Morgan Stanley’s dry van truckload index indicates that van capacity is much more readily available than last year at this time but still remains tighter than normal by historical January standards. There has been a lot of public commentary about weakness in the TL spot market pricing arena, and the graph shows the capacity-demand balance line near the low point of 2014. It is too early to say whether the additional availability is driven by weaker freight, hours-of-service rollback, or actual capacity additions. However, it is hard to imagine that we will not see significant tightening of van capacity as we move through Q1. 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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Diesel price nears a 5-year low

Weekly retail on-highway U.S. diesel prices fell 6.7 cents to $2.866 per gallon on January 26th,  the lowest price since March 2010. Diesel declined or remained constant every week between June 30 and November 3 of 2014, and after a one-week uptick resumed its fall in every week since then. Diesel is now 27% 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. In 2014, diesel prices remained within the 2013 range until early September, but have been in a steep decline since then. The Energy Information Administration (EIA) was predicting $3 diesel for the Spring of 2015, but we already passed through that point and they now predict a $2.85 per gallon average for 2015. 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 in 2014. The recessionary low price point for diesel was $2.023 in March 2009. A view of weekly prices over the last 6 years (second chart) indicates fairly stable prices between Q2 2011 and the start of the recent slide (min of $3.65 and max of $4.16). We are now well below that range, and it appears prices will continue to drop. Diesel is now below the price level in each of the last four years for January and right at the 2010 pricing levels. Diesel prices peaked at $4.771 per gallon in July 2008.

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Single-family housing starts at post-recession high

Housing starts totaled 1,089k in December (seasonally adjusted annual rate – SAAR) the fourth straight month above a million unit pace, and a 4.4% increase from November’s revised starts. December starts exceeded expectations (1,040) and were 5.3% above prior year starts. Single family starts totaled 728k (SAAR), the highest level of the year, and a post-recession high mark. Six months of 2014 saw starts above the one million unit pace (April & July plus the last 4 months), and excluding January all other months have been above 900k annualized. Coming into 2014, many economists had anticipated that a surging housing sector would propel broader economic growth, but the sector did not fully lived up to those expectations.

For the full year, there were 1.006 million total housing starts, up 8.8% from the 925 thousand during 2013. Single family starts were up 4.9% and multifamily starts were up 16.4%. Total 2013 housing starts were up a robust 18.5% from the 781k housing starts recorded in 2012 and in 2012 starts were up 28.2%. 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. Some economists believe that slower population growth and household formation in the U.S. mean that housing starts will not recover to 1.5 million units for a long time.

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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Very strong December auto sales

Annualized seasonally adjusted U.S. sales of domestic and foreign autos and light trucks fell to 16.8 million in December, just under the consensus forecast. However, buoyed by low gas prices and low interest rates, the results are the best for December since 2004. Sales were  8.8% above December 2013 sales but fell back from November’s 17 million unit pace. The unit sales pace is roughly equivalent with the early decade average (2001 – 2007) that has served as our primary barometer of the auto industry’s recovery. Auto sales remain below their all-time high (21.7 million), indicating there is still room for the industry to grow. Year-over-year growth for our three month moving average was 7.1%, roughly in line with growth rates over the last 8 months. The full-year sales total for 2014 was 16.5 million up 6% from 15.6 million in 2013 and right in line with 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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December retail sales down more than expected

Seasonally adjusted real retail sales fell to $187.6 billion in December, a 0.6% decrease from November. (Note that actual sales are deflated using CPI 1982 – 1984 = 100). November’s sales were 2.4% higher than the prior-year period, in line with average performance since March of 2014. Nominal (unadjusted for inflation) retail sales totaled $442.9 billion in December (second graph), representing a 3.2% year-over-year improvement, and 0.9% decrease from November’s results. The results were worse than the consensus expectation of a 0.1% decline for December and, in addition, October and November were revised down. The report was weak even excluding the impact of lower gas prices. We focus primarily on real retail sales because they are a better indicator of freight volumes than the inflated figures.

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Manufacturing index declines in December

The Institute of Supply Management (ISM) reported that the Purchasing Managers’ Index dropped to 55.5 in December, falling below expectations (57.5). December PMI was the lowest month since June, but was the nineteenth consecutive month of expansion. The New Order Index fell to 57.3, down 8.7 points from November. The Production Index also fell to 58.8 from 64.4. Of 18 manufacturing industries, 11 reported monthly expansion. After hovering between 54.9 and 57.0 during the second half of 2013, the PMI fell considerably during January and February of 2014 as winter weather forced plant shutdowns and hampered new orders. Although the economy contracted significantly during the first quarter, the manufacturing sector continued to grow as the cost of operating domestic factories is becoming more competitive with Asia. An index over 50 indicates growth while a PMI under 50 represents contraction in the manufacturing sector of the economy. The index reached a low of 32.5 in December 2008 but then recovered more quickly than other areas of the economy. The vertical bars in the graph represent recessions.

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Refrigerated capacity is very tight heading into 2015

Morgan Stanley’s refrigerated freight index indicates that refrigerated capacity finished 2014 significantly 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 through September, and then eased somewhat through October before tightening again in the last two months. The refrigerated index rose to historic levels throughout the first quarter as severe winter weather caused thousands of trucks to sit idle. 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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