Diesel drop to lowest level since November

Weekly retail on-highway U.S. diesel prices fell 1.1 cents to $3.858 per gallon on July 28,  the fourth straight weekly decline. Diesel is now at its lowest price level since November 2013 despite the outbreak of violence in the Middle East. If the conflicts escalate, measurable increases in both domestic diesel and gasoline prices are likely. 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. U.S. refineries are producing record volumes of oil. Diesel is now 1.5% 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 near the lower end of that range. 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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Housing starts drop 9.3% from May

Housing starts fell to an 893k unit annual pace in June, a disappointing drop from May’s 985k (seasonally adjusted annual rate – SAAR). June’s year-over-year growth was still strong at 7.5%. Single family starts totaled only 575k, the lowest level since November 2012 and a 4.3% decline from prior year. 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. Severe winter weather was a notable headwind that plagued the housing industry and the broader economy during the first quarter, and now wet weather in the South (~30% decline) is blamed for a sluggish second quarter. Higher home prices are also cited as a reason for the current slowdown. 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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Highway funding crisis will be averted for 10 months

As expected, Congress will not allow federal highway taxes and spending to expire this summer. The “solution” is a stop-gap measure that funds highway spending through May 2015 with a variety of gimmicks which do nothing to solve longer term highway funding needs.

The Senate is expected to vote this week on a bill that has already passed the House and has president Obama’s support. The bill will maintain current federal highway spending levels at a little more than $50 billion annually. The federal gas and diesel taxes remain unchanged so taxes will total only about $35 billion annually, leaving a $15+ billion dollar per year gap. The gap is being filled through May 2015 with $10.9 billion of “funding”.

The bulk of the money comes from a tactic known as pension smoothing, which allows companies to temporarily reduce pension contributions. The tactic raises revenue for the government because companies lose out on tax deductions associated with pension contributions. The bill also transfers $1 billion from a fund used to cover cleanup costs from leaking underground storage tanks, and a one-year extension, until 2024, of fees for processing passengers and vehicles through customs.

The longer term fix remains elusive but requires an increase in user fees to offset inflation since gas and diesel tax rates were set in 1993, and the increase in MPG.

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TL van capacity-demand balance favors truckers

Morgan Stanley’s dry van truckload index portrays a market that remains much tighter than its recent historical average after easing in May. Steadily rising demand, coupled with several supply interruptions have prevented the dry van market from fully normalizing after the winter weather spike from the first quarter. Demand has been further bolstered by fears about the potential West Coast port strike, compelling shippers to pull forward some shipments. Furthermore, carriers are still adjusting to the 3%-5% effective capacity reduction under the new Hours-of-Service rules that have reached their first anniversary as of July 1. The economic decline in the first quarter produced lackluster freight volumes and now projections for the full year are starting to soften, which may lead to greater capacity availability in the second half 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 7-16-14

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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Refrigerated capacity remains extremely 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. 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 7-16-14

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 is very tight

Morgan Stanley’s flatbed freight index eased slightly in recent weeks but remains at near record levels indicating a very tight capacity market for flatbed equipment. The index is higher than in all recent years except 2011. Typically, a littler earlier than this time of year flatbed capacity tightness starts to ease and that may be the case now, but it is coming a little later than is usually the case.  After mirroring its recent historical average for most of this year, flatbed capacity began to tighten more than normal at the end of May. The recent upward move also came later than was the case in 2008, 2010 and 2011. Clearly though, 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 7-16-14

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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Retail sales flat in May

Seasonally adjusted real retail sales were unchanged at $184.6 billion in May, approximately equal to the all-time high. (Note that actual sales are deflated using CPI 1982 – 1984 = 100). Most analysts had expected a stronger rebound in retail sales growth following the winter weather that hindered the sector during the first quarter. May’s sales were 2.1% higher than the prior-year period. Nominal (unadjusted for inflation) retail sales totaled $437.6 billion in May (second graph), representing a 0.3% gain over April and a 3.9% year-over-year improvement. We focus primarily on real retail sales because they are a better indicator of freight volumes than the inflated figures.

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Auto assembly growth slows

Annualized U.S. assemblies of autos and light trucks increased slightly to 11.3 million in May (seasonally adjusted), just above April’s pace of 11.2 million units. Year-over-year growth of 4.5% is consistent with earlier months this year but well short of the strong growth seen in 2013. Our graph is a three-month moving average of the seasonally adjusted annualized assemblies. Using this moving average, year-over-year growth was 4.4% in May. The full year 2014 is anticipated to be robust for auto manufacturers, but stronger year-over-year improvements will be required in the coming months for the auto industry to meet this year’s growth expectations. The auto industry has come a long way since assemblies bottomed at a 3.6 million-unit annual pace (not 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 right in line with current volume.

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Auto sales near 17 million unit annual pace

Annualized seasonally adjusted U.S. sales of domestic and foreign autos and light trucks were 16.9 million in June, the highest level since prior to the Great Recession. The sales pace is now equivalent with 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 6.8%, tied with May for the largest gain since August of last year. 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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New home inventory months of supply falls to 4.5

New home inventory remained unchanged at 189k (seasonally adjusted) in May. Inventory levels have been very stable so far in 2014. May’s new home inventory was well above the prior-year level of 162k, but new home inventory still remains lower than almost any period from the last 46 years. 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 fell to 4.5 months of supply in May, the lowest level since June 2013. 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 the housing inventory picture remains positive. 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 very close to that level today. Growth in the rate of sales has driven down the months of supply even at higher absolute inventory levels, and further growth would quickly deplete the low absolute inventory level and lead to a significant increase in housing starts (and freight). Housing starts are positioned to increase through the summer and we anticipate that sales will keep pace with this increased pace of construction, thereby preventing a spike in new home inventory.The vertical bars in the graphs represent recessions.

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