New home inventories were up slightly at 153k in March, the highest level since November 2011. The absolute inventory of new homes (seasonally adjusted) was fairly level throughout 2012 at 143,000 to 151,000. Still, as our first graph shows, we have lower inventory levels than at almost any period in the last 46 years. Inventories were at 145k a year ago. Seasonally adjusted new home inventories total 4.4 months of supply, the same as last month and up just slightly from January which was the lowest point since October 2004. The average months of supply over the last 50 years is 6.2 so by this measure the housing inventory picture has vastly improved. 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. Any recovery in the rate of sales would quickly deplete the low absolute inventory level and lead to a significant increase in housing starts (and freight). New home starts have been on the rise, with inventory leveling off, indicating sales have been keeping pace with the increase in construction. The vertical bars in the graphs represent recessions.
I spoke at the Warehouse Education and Research Council (WERC) meeting in Dallas yesterday on regulatory issues. In advance of that, we decided to update our analysis of the relationship between Compliance Safety Accountability (CSA) scores and carrier accident frequency and found there is no relationship between a carrier’s percentile scores on Unsafe Driving and Hours of Service and their accidents per million miles. These two charts show data for 28,000 carriers for Unsafe Driving and 48,000 carriers for Hours of Service from the March 2013 FMCSA data available on their website.
There have been numerous changes to the CSA program including a redefinition of BASICs, but the outcome remains the same. A carrier’s CSA scores are not a valid predictor of the likelihood of that carrier having an accident and should not be used by shippers and brokers in the carrier selection process.
We also reran the numbers removing all carriers with less than 25 trucks since those carriers have very few inspections and their scores are particularly unreliable. Even excluding the smallest carriers, it is still clear that there is no relationship between CSA scores and accident frequency. There are 9,905 carriers represented on the Unsafe Driving graph and 8,470 carriers on the Hours of Service graph.
The CSA data remains incomplete as well. As of March 2013, there are still only 89,134 carriers with a score on at least one of the five published BASICS out of a universe of at least 500,000 carriers, so less than 20% of carriers are measured. Of those carriers that are measured 55% have at least one BASIC over the intervention threshold. Given the phenomenal track record of the trucking industry in reducing highway accidents and fatalities, it is incredulous to think that 55% of carriers could have some deficiency in their safety programs.
Inspector General and General Accounting Office studies of the CSA program are underway and we are hopeful that these efforts will convince (or force) the FMCSA to use the CSA program as it was originally intended – that is as a mechanism to help the agency allocate its scarce enforcement resources. Many carriers also benefit from the feedback they receive from the inspection process. A federal lawsuit by ASECTT challenging the publication of scores is also heading towards oral arguments early this summer. The fundamental problem with this program is that the data is not valid for credentialing carriers, is not a suitable substitute for the Safety Fitness Determination that the FMCSA is federally obligated to provide, and should not be made available to the shipping public. Small businesses (carriers) are being harmed because they are denied freight that they should rightfully be allowed to haul. Shippers and brokers are needlessly being exposed to meritless liability claims.
Seasonally adjusted real retail sales decreased in March to $180.0 billion, but that is still the second highest level ever recorded. (Note that actual sales are deflated using CPI 1982-84=100.) Year-over-year growth was 1.5%, somewhat below normal for non-recessionary periods. Nominal (unadjusted for inflation) retail sales totaled $418.3 billion in March (second graph), also the second highest level ever recorded, and representing slower growth of 3.0% over 2012. The reason we focus on real retail sales is that the inflation adjusted numbers are a better indicator of freight movement.
IANA, the Intermodal Association of North America, reported nominal year-over-year intermodal growth in domestic equipment and a decline in international equipment loads in March. In comparison to February, domestic equipment volume showed strong growth while international equipment loads declined. While the domestic equipment loads were not much above March 2012, it is interesting to note how close March volumes were to the peak volumes recorded in October of last year. We expect strong intermodal growth in 2013 regardless of overall economic growth, as more truck freight is converted to intermodal east of the Rockies.
Weekly retail on-highway U.S. diesel prices fell for the eighth straight week to $3.887 per gallon on April 22, reaching the lowest point since August 2012. Diesel prices have fallen 27.2 cents in the last eight weeks. Diesel was above $4 for eight straight weeks beginning in February. In 2012, diesel prices exceeded $4 for a total of 26 weeks. The recent low price point for diesel was $2.023 on March 16, 2009. A view of weekly prices over the last 4+ years shows generally higher prices in each year over the preceding year until the last couple of months. At this point diesel is below the same-period price of 2012 and 2011. The price of gold has fallen about 20% since early October while diesel has fallen only 5%. Given the long-term correlation in price movement, it is possible that with our current environment of a stronger dollar and weaker economy we could see substantial further reductions in diesel prices. Diesel prices peaked at $4.771 per gallon in July of 2008 and were above $3 per gallon from September 24, 2007 to November 3, 2008 (13 months). Prices have been back over $3 since October 4, 2010 (30+ months).
Morgan Stanley's dry van truckload freight index had been tracking the longer-term average but is now indicating that capacity is somewhat more readily available than normal for this time of year. In 2011 and 2012 capacity was getting tighter at this time and in 2007 and 2009 there was abundant capacity, but we are currently right at the ‘08 level that is below the longer-term average. This is consistent with our view of the dry van market at this time, which is that capacity is readily available. Given the weak GDP performance in Q4 and the January tax hikes, we expected to see lackluster freight volumes and readily available TL van capacity for the first half of 2013 and that appears to be the case. 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.
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
Morgan Stanley's refrigerated freight index indicates capacity started 2013 tighter than in previous years but has dropped to about a normal level in the last couple of months.This is consistent with our view of the market. Capacity-demand balance ended 2012 similar to the last two years but tighter than in ‘07-‘09. As a buyer of refrigerated trucking services, it is a relief to see the index back in line with the longer-term average because in the last couple of years we had seen significant capacity tightening through March and into Q2. We still expect significant capacity issues through the next few months due to normal seasonal patterns. The pricing environment in this segment favors the carriers. No significant capacity is entering the industry and demand for refrigerated transportation is less correlated to general economic sluggishness. 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.
Despite recent gains, Morgan Stanley's flatbed freight index continues to show significantly greater flatbed capacity availability than normal for this time of year. Since Q2 last year, the flatbed index has fallen and remained low indicating more readily available capacity. In Q1 and into Q2 of of 2013 the market looks more like ‘07 and 09 than the post-recession years. With the uptick in housing starts and oil-field strength, it is surprising that flatbed capacity never did tighten as much in 2012 and into 2013 as it did in 2010 and 2011. This is consistent with what we have seen with our flatbed-centric customers. The flatbed market was particularly hard hit by the fall off in housing starts, but had gained ground with the growth in U. S. manufacturing. 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.
Annualized U.S. assemblies of autos and light trucks increased to 10.8 million (seasonally adjusted) in March, the fifth straight month above a 10 million unit annual pace. Assemblies dropped in the August to October period during 2012, but have since recovered. Our graph is a 3-month moving average of the seasonally adjusted annualized assemblies. Year-over-year percentage growth using the three-month moving average has softened to 6%, as stronger year-ago assemblies challenge the rate of growth. Average monthly seasonally adjusted assemblies were 11.4 million from January of 2001 through December of 2007. Auto assemblies are only 5% below pre-recession levels.
Housing starts increased to 1.036 million in March from a revised 968 thousand in February (seasonally adjusted annual rate). Total starts had been under 1 million (SAAR) for 56 straight months, far longer than in previous housing recessions, averaging only 658k during this stretch.Housing starts totaled 782k in 2012 up from 612k in 2011. Single unit structures totaled 619 thousand in March, down from 650k in February, but the fourth straight month above a 600k annual pace. Total starts reached a low mark of 478k in April of 2009, while single unit starts bottomed out at 353k in March of 2009. Housing starts still remain 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. Low housing starts not only impact transportation demand for building products but also for appliances, furniture, and other related items. One analyst estimates that each housing start generates 8 truckloads of freight. The vertical bars represent recessions.