Diesel prices continue to slide

Weekly retail on-highway U.S. diesel prices fell 2.3 cents to $3.755 per gallon on September 29th,  the lowest level since July 2012. Diesel has declined or remained constant in every week since July 7 of this year. Diesel is now 4.2% 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 remains highly symbolic, but at this point 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. Diesel is now below the price level in each of the last three years for late September. Diesel prices peaked at $4.771 per gallon in July 2008.

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MX cross-border trucking stalls

The number of US-Mexico border crossings by Mexican-domiciled carriers remains limited to only a few small carriers and the growth rate seems to have stalled. As of today, according to FMCSA’s web site, there are still only 13 carriers with Operating Authority, 9 permanent and 4 provisional. One additional carrier is in a pending status. The approved carriers have completed 26,706 border crossings, but the vast majority of those have been made by two carriers as shown in the following table.

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In the U.S., to qualify to haul hazardous materials, among other criteria, a carrier must score in the top 70% of all carriers on Vehicle Out-of-Service rate (<33.3%) and Driver Out-of-Service rate (<9.7%). Clearly the participating carriers are scoring much better than what would be required of hazardous materials haulers in the U.S. Eleven carriers had Compliance Reviews in 2013 and 10 of those received Satisfactory ratings while 1 carrier received a Conditional rating. The carrier with the conditional rating had their Operating Authority revoked. While growing at a slow pace, it is great to see the strong safety performance scores for carriers participating in the program.

In order for the program to be considered viable, FMCSA has stated the program needs a sample of 46 carriers and 4,100 safety inspections. The safety inspection criteria has been met, but the number of participating carriers is far below goal. FMCSA granted provisional authority to the first Mexican-domiciled carrier on October 14, 2011, formally initiating the pilot program. Legislation required that the pilot program be completed in three years, by October 2014. It will be interesting to see how the FMCSA handles this over the next month.

During the week of 9/15-9/21 there were 362 crossings by 55 vehicles. That would annualize to about 19,000 crossings per year. When I last reviewed this data in April there were 453 weekly crossings. Each of the 7 weekly reports before the current report showed crossings  in the 400’s so the latest report may be an anomaly. Still, it is very disappointing to see a lack of growth in the last six months.

About three-quarters of all crossings to date have been at Otay Mesa, CA. This is interesting since, in total, the number of trucks crossing the MX-Texas border is 3 times as many as cross the MX-California border.

Otay Mesa

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Retail sales show strong growth in August

Seasonally adjusted real retail sales rose to $187.2 billion in August, an all-time high. (Note that actual sales are deflated using CPI 1982 – 1984 = 100). August’s sales were 3.2% higher than the prior-year period. Nominal (unadjusted for inflation) retail sales totaled $444.4 billion in August (second graph), representing a 5.0% year-over-year improvement, the highest such gain of 2014, and a very strong 0.6% growth from July. The advance was broad-based with 11 of 13 categories improving. July sales figures were revised upward, indicating better growth than first reported for the prior month.  We focus primarily on real retail sales because they are a better indicator of freight volumes than the inflated figures.

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Spike in new home sales drives down months of supply

New home inventories rose to 203k (seasonally adjusted) in August. Inventory levels have been slowly increasing throughout the first half of 2014. August’s new home inventory was well above the prior-year level of 175k, 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. 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 fell to 4.8 months of supply in August, the lowest level since June 2013. Growth in the rate of sales drove down the months of supply as new home sales totaled 504k (seasonally adjusted annual rate), up 18% from July and 33% from prior year. 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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Dry van capacity-demand balance still favors the carriers

Morgan Stanley’s dry van truckload index indicates that van capacity remains 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: Adam Longson at Adam.Longson@morganstanley.com or Bill Greene at William.Greene@morganstanley.com

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Refrigerated capacity remains scarce

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 through September. The index is nearly as high as at any point during 2013 or 2102. 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: Adam Longson at Adam.Longson@morganstanley.com or Bill Greene at William.Greene@morganstanley.com

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Flatbed capacity remains far tighter than normal for this time of year

Morgan Stanley’s flatbed freight index has fallen off in recent weeks but flatbed capacity remains far 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, 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.

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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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Housing starts plummet from strong July performance

Housing starts fell short of estimates, decreasing by 14% in August to 956k (seasonally adjusted annual rate – SAAR) from a very strong total of 1,117k in July (Note that July starts were revised upward). August's year-over-year growth was fairly strong at 8%. Single family starts totaled 643k, down slightly from July and up 4.2% from prior year. July housing starts were the highest since housing starts collapsed during the recession, and not much should be read into a one month double-digit decline.  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 670 thousand total housing starts during the first eight months of 2014 (not seasonally adjusted), up 8.6% from the 617 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 sales top 17 million unit annual pace

Annualized seasonally adjusted U.S. sales of domestic and foreign autos and light trucks rose to 17.4 million in August, the highest level since January 2006, and 9.9% above August 2013 sales. 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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Auto assemblies drop from robust July volume

Annualized U.S. assemblies of autos and light trucks fell to 11.36 million units in August (seasonally adjusted), 12% below July’s pace of 12.91 million units, but still 4.3% 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 11.8% in August, just below the 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 was an indication that those expectations could be met, but now August comes in at the lowest level 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 right at August assembly volumes.

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