Retail sales grow and exceed expectations in October

Seasonally adjusted real retail sales rose to $187.0 billion in October, after falling in September. (Note that actual sales are deflated using CPI 1982 – 1984 = 100). September’s sales were 2.5% higher than the prior-year period. Nominal (unadjusted for inflation) retail sales totaled $444.5 billion in October (second graph), representing a 4.1% year-over-year improvement, and 0.3% increase from September’s results. The results were slightly better than expected for October. We focus primarily on real retail sales because they are a better indicator of freight volumes than the inflated figures.

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Declining diesel prices resume after early November jump

Weekly retail on-highway U.S. diesel prices fell 3.3 cents to $3.628 per gallon on November 24th,  after increasing two weeks ago and dropping slightly last week. A 16.4 cent per gallon spike in the Midwest market on 11/10 attributed to low regional inventories caused the jump earlier this month. Most other regions experienced modest increases or decreases that week. Diesel declined or remained constant in every week between June 30 and November 3 of this year. Diesel is now 5.6% 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 $3.62 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 Q4. Diesel prices peaked at $4.771 per gallon in July 2008.

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Truck safety group calls for CSA/SMS scores to be removed from FMCSA web site

The Commercial Vehicle Safety Alliance (CVSA) (a partnership between industry and enforcement groups) has requested in writing that the Federal Motor Carrier Safety Administration (FMCSA) remove from public view the scores from its Compliance, Safety, Accountability program’s Safety Measurement System.

The November 14th letter acknowledges the importance of safety and CSA’s success in leading carriers to increase their focus on safety initiatives. It also points out the shortcomings, including differences in enforcement practices from one jurisdiction to the next and the lack of relationship between some violations and crash risks. The letter sites the GAO study finding  that CSA SMS scores are “unreliable predictors of individual fleet crash propensity.”

The letter sums up the essence of the problem very well. “Since the collective crash rates of fleets with SMS scores above thresholds are higher than those below, the SMS is useful as an enforcement prioritization tool. In short, enforcement agencies can focus on these fleets to conduct further investigations and determine which of them are truly risky. On the other hand, since the SMS scores are a poor indicator of an individual fleet’s propensity to be involved in a future crash, their utility in providing the public with information about fleets’ safety performance is limited.”

The letter concludes “… CVSA echoes stakeholders’ call to remove SMS scores from public view.”

Congressman Lou Barletta (R-Pa.) introduced legislation Sept. 18 to require the FMCSA to remove from public view the carrier rankings and scores. It was referred to the House’s Transportation and Infrastructure Committee.

Ten industry trade associates collaborated on a letter to DOT Secretary Foxx on August 22, 2104 also requesting the FMCSA remove SMS scores from their website. That letter concluded, “Given the many identified data sufficiency and reliability issues outlined by the Government Accountability Office, we urge you to direct FMCSA to remove carrier’s SMS scores from public view. Doing so will not only spare motor carriers harm from erroneous scores, but will also reduce the possibility that the marketplace will drive business to potentially risky carriers that are erroneously being painted as more safe.” The trade associations included the American Trucking Associations, the Truckload Carriers Association, The Owner Operator Independent Drivers Association, The National Private Truck Council, and the National Tank Truck Carriers.

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Auto sales hold below 17-million unit pace

Annualized seasonally adjusted U.S. sales of domestic and foreign autos and light trucks were unchanged at 16.3 million in October. Sales were  7.0% above October 2013 sales. 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, but most of the post-recession gains have already been achieved. Seven years may seem like a long time to recover from a pre-recession peak, but a look at a couple of previous recessions by Automotive News shows this recovery is similar. Year-over-year growth for our three month moving average was 7.8%, stronger than growth rates over 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 sales recoveries

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Refrigerated capacity remains tight

Morgan Stanley’s refrigerated freight index indicates that refrigerated capacity remains somewhat 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, and then eased somewhat through October. The index has risen in the last few weeks, parallel to 2013, but we do not expect capacity to be as tight in December as was the case last year. 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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Dry van capacity remains tighter than normal

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. The economic decline in the first quarter produced lackluster freight volumes but second quarter economic growth was strong and as we work our way through the fall pre-holiday shipping season, van capacity has remained tighter than normal. We are now at the time of last year’s December tightening but a repeat is not expected. 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 demand balance finally back to normal levels

Morgan Stanley’s flatbed freight index has fallen off in the last two months and flatbed capacity is now in line with normal balance for this time of year. Flatbed capacity tightened a little later than normal this year but then remained tight longer than normal. Flatbed capacity-demand balance has favored 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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TL rates surge 4.8% in Q3

Stephens Inc. released their Q3-2014 update on publicly traded TL carriers reporting that rates per loaded mile excluding fuel surcharge increased by 2.1% sequentially from Q2-2014 and rose 4.8% over the same period last year. Last quarter marked the eighteenth consecutive quarter of year-over-year rate increases.  Stephens expects 2014 rates to be up 5%, higher than their earlier estimates. Quarterly data (second chart) shows larger rate increases in the last three quarters than had been the case in 2013, but similar to 2011 increases. The difference being that 2011 increases followed decreases in ‘09 & early ‘10. The data and projections do not necessarily represent the entire TL industry as the publicly traded carriers tend to be larger and more successful in general, so are also more likely to successfully raise rates. Average length of haul reversed trend, increasing to 631 miles (third chart) after experiencing a steady decline since 2002. This is significant because shorter hauls not only increase revenue per mile without necessarily indicating price increases, but also lead to lower equipment utilization that can be detrimental to driver wages and carrier financial performance. Revenue per tractor per week continued to increase, but this is unadjusted for inflation. Miles per tractor per week also increased, but remain well below historical averages.  The Stephens’ revised prediction of 5% increases in 2014 seems a little high to us, but not by much.

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Stephens tl q3 14

Step loh q3 14

Rev per tract q3 14

mls per trac q3 14

Graphs reproduced with permission from Stephens Inc. For more information contact: Jack Waldo at jwaldo@stephens.com or Brad Delco at brad.delco@stephens.com.

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LTL rates show strong growth in Q3

Stephens Inc. reported that LTL yields (revenue per hundredweight) increased by 3.0% from Q3 2013 to Q3 2014, and were up 2.9% from Q2 2014. LTL yields had been increasing since early 2012, but dropped in Q4 of last year and Q1 of this year. Weight per shipment was higher year-over-year in Q3, which is usually associated with lower revenue per hundredweight, but shipment weights are down slightly from the 2013 average. The LTL index is now at its high point indicative of some tightness in LTL capacity. Stephens estimates that LTL rates will increase by 4-5% for the full year 2014, higher than their previous estimates. Tonnage was up 7.7% year-over-year for the group of carriers reported on by Stephens.

From their previous Q4-2007 peak level, LTL rates dropped 11.2% to their trough in 2010 and have only recently regained their all-time high. Despite the improving trends, the challenges facing LTL carriers remain apparent as the current pricing levels are equivalent to 2008 prices despite the realization of significant cost increases over that period. Some of the capacity issues that will impact the TL segment, like CSA and the new Hours-of-Service rules, are not as relevant to the LTL segment, but industry concentration and consolidation does provide LTL carriers better pricing power than is the case for TL carriers.

Stephens ltl q3 14

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Stephens weight q3 14

Stephens ltl tons q2 14

Graphs reproduced with permission from Stephens Inc. For more information contact: Jack Waldo at jwaldo@stephens.com or Brad Delco at brad.delco@stephens.com.

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Manufacturing index at 3.5-year high

The Institute of Supply Management (ISM) reported that the Purchasing Managers’ Index increased to 59.0 in October. This exceeded expectations (56.0) and is up from September’s 56.6. October PMI matched the very strong month of August, which also stood at 59 points, and was the highest level reached since March 2011 (59.1). The New Order Index climbed to 65.8, up 5.8 points from 60.0, while the Production Index was up slightly to 64.8 from 64.6. Of 18 manufacturing industries only two, Petroleum & Coal Products reported monthly contraction. 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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