Annualized seasonally adjusted U.S. sales (SAAR) of domestic and foreign autos and light trucks fell to 16.9 million in August, coming in below the consensus forecast (17.1 million). Sales were 4.6% below prior year sales and were down 5.0% from prior month. Year-over-year sales for our three month moving average was down 1.6%. Imported and domestic light truck sales performed much more strongly than auto sales. Year-to-date sales are up 0.5% over 2015, with light trucks up 8.0% and cars down 8.8%.

Sales set an all time record in 2015 at 17.39 million, narrowly eclipsing 2000 (17.35 million) and 2001 (17.12 million). 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 prerecession 2001-2007 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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The Institute of Supply Management (ISM) reported that the Purchasing Managers’ Index fell to 49.4 in August from 52.6 in July. March broke a streak of 5 consecutive months of contraction in the manufacturing sector of the economy, and and began a streak of 5 consecutive months of expansion. August data shows the manufacturing sector is contracting again.  PMI came in below expectations (52.2). The New Order Index fell 7.8  points to 49.1. The Production Index fell by 5.8 points to 49.6. Of 18 manufacturing industries, only 6 reported monthly growth in August.

After a slow start in January of 2014, PMI recovered, with a range of 54.3 to 58.1 for the balance of 2014. We did not see a reading above 53.9 in 2015, and that high mark was reached in January. This year we have not seen a number above June’s 53.2. 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.

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Single-family new home inventories fell to 233k in July (seasonally adjusted). Inventories had been rising since August 2015 but have leveled off over the last 6 months (low of 233k and high of 244k). July’s new home inventories were 18k (8.4%) above the prior-year level of 215k. New home inventories still remain low by historical standards.

The growth in inventories in the last year (seasonally adjusted) has been driven by homes completed  (+8k) more so than homes under construction (+5K) or homes not yet started (+5k).

Inventory levels slowly increased throughout 2014, peaking at 212k in December. 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 4.3 months of supply in July, from 5.2 months a year ago and 4.9 months in June. This is the lowest level of inventories since June 2013. Sales of single-family houses rose to 654k (seasonally adjusted annual rate), up 12.4% from revised prior month sales and up 31.3% from prior year. Year-to-date absolute sales are up 12.4% at 352k.

Full year 2015 new home sales were up 14.6% to 501k. For the full year 2014, new home sales only grew by 1.9% to 437k units. The months of supply figure remained below 5 months between February 2012 and June 2013, but was 5.0 or more from that point through the end of 2014 with only one exception. In 2015, eight months were at 5.0 or greater months of supply, including each of the last 7 months. The average months of supply over the last 50 years is 6.1, so current new home inventory are well 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 nearly at that level today.  The vertical bars in the graphs represent recessions.

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West coast ocean spot market rates increased $593 (51%) to $1,746 on September 2, while east coast rates increased $757 (45%) to $2,441. The dramatic jump in spot market rates was driven by the August 31 receivership filing of Hanjin Shipping, the South Korean ocean carrier accounting for 8% of eastbound Transpacific trade volume and the 7th largest ocean carrier in terms of total capacity. Spot rates also spiked on July 1, with west coast rates up 61% and east coast rates up 19% in anticipation of August general rate increases. Rates had drifted slightly lower since the July 1 increase until the current spike. With two significant spikes, west coast spot rates are $290 (20%) above prior year levels and at their highest point since May 2015. East coast spot rates remain $231 (9%) lower than prior year despite two significant jumps over the summer.

The spread between east and west-coast ports declined from a peak of $2,937 on 2/27/15 to $682 on 12/25/15, then immediately jumped back up to $1,037, but had since declined to $531 on 8/26 before jumping up to $695 after the Hanjin filing. The premium drops below $1,000 at some times, but typically not for very long. This year has been an exception as the spread has been below $1,000 for most of the year.Carrier’s clearly exercised their market power during the strike as shippers diverted freight to the east coast, but now even after recent increases, spot rates have corrected to levels considerably lower than those preceding the strike.

The SCFI reflects spot market rates for the Shanghai export container transportation market.

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Morgan Stanley’s dry van truckload index indicates that van capacity is more readily available than normal for late summer, and is very similar to last year and to the recession year of 2009. Capacity did start to tighten up a little through July, unlike last year when the index was declining through July.  August reversed that pattern and we end the summer with significant excess van capacity. While there have been and will continue to be seasonal regional shortages of capacity, in general capacity will not be constrained for the balance of the year. Three factors are driving excess capacity: weaker freight (reflecting very weak economic growth), hours-of-service rollback, and actual capacity additions. The spigot has been turned off on capacity additions, but it will take a few quarters to absorb the excess capacity that exists in the market today. We do not expect capacity shortages until mid 2017 unless the economy regains steam. 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. *2006-2014 average trend line excludes financial crisis years of 2008 and 2009. For more information contact: Alex Vecchio at Alexander.Vecchio@morganstanley.com

Morgan Stanley’s refrigerated freight index indicates that refrigerated capacity remains much more readily available than normal for this time of year, and almost exactly the same as last year at this time. The index began 2016 at a low level, especially compared to 2014 and 2015. From that point, capacity became even more readily available. Refrigerated capacity began 2015 the same way it ended 2014, significantly tighter than normal. Throughout Q2 of last year, the market shifted with the result being that capacity was not nearly as constrained as normal. That was even more so the case in Q3 and Q4, as the index dropped to a level lower than in any recent year, including 2009. That trend has continued throughout 2016.

We do not believe that refrigerated rates will increase much in 2016 or early 2017, despite the fact that intermodal is not as strong for refrigerated freight. Refrigerated capacity is just too plentiful at this time to support rate increases. Demand for refrigerated transportation is less correlated to economic fluctuations than dry van or flatbed freight, so the future robustness of GDP growth will not determine demand growth 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. *2006-2014 average trend line excludes financial crisis years of 2008 and 2009. For more information contact: Alex Vecchio at Alexander.Vecchio@morganstanley.com

Morgan Stanley’s flatbed freight index indicates that flatbed capacity is more readily available for this time of year than in any of the previous 7 years, with the index now dropping below the 2009 recessionary level. Flatbed capacity modestly tightened through June of last year, but eased substantially after that. In 2016, flatbed capacity has been more readily available all year than was the case last year. As summer ends, and the traditional seasonal peak for flatbed demand passes, it is clear that 2016 will be a year of remarkable excess capacity in the flatbed market. The last twelve months have seen remarkable stability in the flatbed index considering the historical seasonal volatility of capacity-demand balance.

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 2014 than in the previous two years, but capacity never became as tight in 2014 as in 2010 and 2011. Low oil prices and a falloff in drilling activity meant that capacity never did tighten in 2015. 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. *2006-2014 average trend line excludes financial crisis years of 2008 and 2009. For more information contact: Alex Vecchio at Alexander.Vecchio@morganstanley.com

Single-family new home inventories rose slightly to 244k in June (seasonally adjusted). Inventories had been rising since August 2015 but have leveled off over the last 5 months. June’s new home inventories were 28k (13.0%) above the prior-year level of 216k. New home inventories still remain low by historical standards.

The growth in inventories in the last year (seasonally adjusted) has been driven by homes under construction (+17k) more so than homes not yet started (+5k) or completed homes (+6k).

Inventory levels slowly increased throughout 2014, peaking at 212k in December. 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 4.9 months of supply in June, from 5.5 months a year ago and 5.1 months in May. Sales of single-family houses rose to 592k (seasonally adjusted annual rate), up 3.5% from revised prior month sales and up 25.4% from prior year. Year-to-date absolute sales are up 10.4% at 298k.

Full year 2015 new home sales were up 14.6% to 501k. For the full year 2014, new home sales only grew by 1.9% to 437k units. The months of supply figure remained below 5 months between February 2012 and June 2013, but was 5.0 or more from that point through the end of 2014 with only one exception. In 2015, eight months were at 5.0 or greater months of supply, including each of the last 7 months. The average months of supply over the last 50 years is 6.1, so current new home inventory remains 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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Weekly retail on-highway U.S. diesel prices fell 0.6 cents to $2.310 per gallon on August 15,  the 9nd consecutive flat or small drop in weekly prices. In February, diesel prices had reached their lowest level since January 2005, dropping below the recessionary trough, before rebounding to $2.431 on 6/13. Diesel prices are 30.5 cents or 12% below prior-year levels. Diesel prices had stabilized between August 24 and November 16 last year, with a high of $2.561 and a low of $2.476 during those 13 weeks, but were in steady decline between then and February 2016. On August 9, the Energy Information Administration (EIA) decreased its pricing forecast by 6 cents to a $2.30 per gallon average for 2016 and by 1 cent to 2.70 per gallon for 2017.

A view of weekly prices over the last 6+ years (second chart) indicates fairly stable prices between Q2 2011 and the start of the 2015 slide (min of $3.65 and max of $4.16). We remain well below that range, but are coming closer to 2015 price levels. Diesel is well below the price level in each of the last six years for August.

Diesel experienced a high but narrow pricing environment throughout 2013, fluctuating between a 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 then began a steep decline.  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. Diesel prices peaked at $4.771 per gallon in July 2008.

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The Institute of Supply Management (ISM) reported that the Purchasing Managers’ Index fell to 52.6 in July from 53.2 in June. March had broken a streak of 5 consecutive months of contraction in the manufacturing sector of the economy, and now we have had 5 consecutive months of expansion. July posted the second highest Index so far in 2016. PMI came in below expectations (53.2). The New Order Index fell 0.1  points to 56.9. The Production Index rose by 0.7 points to 55.4. Of 18 manufacturing industries, 11 reported monthly growth in July.

After a slow start in January of 2014, PMI recovered, with a range of 54.3 to 58.1 for the balance of 2014. We did not see a reading above 53.9 in 2015, and that high mark was reached in January. 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.

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