Weekly retail on-highway U.S. diesel prices decreased by 2.5 cents to $2.539 per gallon on March 20. Diesel has ranged between 2.53 and 2.60 per gallon since 12/19, showing remarkably stability over the last 4 months.

In February 2016, diesel prices reached their lowest level ($1.980) since January 2005, dropping below the recessionary trough, before rebounding throughout the rest of the year, finally crossing the $2.50/gallon mark on 12.19. The last year that diesel did not hit $2.50 per gallon all year was 2004. We have been above that level all year to this point.

Diesel prices are 42 cents per gallon higher than one year ago, but are 32.5 cents per gallon lower than two years ago. Diesel prices had stabilized between August 24 and November 16 of 2015, 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 before beginning a steady climb. On March 7, the Energy Information Administration (EIA) updated its pricing forecast to 2.70 per gallon for 2017, anticipating further increased this year.

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 have passed beyond the late 2015 price levels. Diesel is well below the March price level in each of the five years prior to 2016.

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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Annualized U.S. assemblies of autos and light trucks increased 0.8% to 11.67 million units in February (seasonally adjusted), but were down 2.5% from prior year. Seasonally adjusted assemblies have been above an 11-million unit pace since March 2015, but have only been above a 12-million unit pace once in the last 8 months. Our graph is a three-month moving average of seasonally adjusted annualized assemblies. Using this moving average, year-over-year assemblies were down 0.5% and have hovered around or under 0 since May 2016.

The auto industry has come a long way since assemblies bottomed out 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, and have been averaged 11.7 and 11.8 million units in 2015 and 2016 respectively.

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The U.S. Bureau of the Census reported that seasonally adjusted real retail and food service sales were steady -0.04% at $193.4 billion in February. (Note that actual sales are deflated using CPI 1982 – 1984 = 100). February sales were 2.8% higher than the prior-year period.

Nominal (unadjusted for inflation) seasonally-adjusted retail sales totaled $474.0 billion in February (second graph), also flat +0.08% with prior month, and up 5.7% from prior year results. Prior to January, year-over-year sales growth had not exceeded 5% since August 2014, but have now exceeded that level in consecutive months. Total nominal sales were up 3.3% for the full year 2016.

The results were at consensus expectations and January was revised upward; a solid month. Nominal retail and food services sales excluding gasoline were up 4.5% year-over-year. Nonstore retailer sales (e-commerce and mail order) were up 13.0%. Gasoline station sales were up 19.6% year-over-year, a reversal from most of 2016 when full-year sales were down 6.3%. Department stores sales fell by 5.6% year-over-year, while electronics and appliance store sales fell by 6.0%. We focus primarily on real retail sales because they are a better indicator of freight volumes than the inflated figures.

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Annualized seasonally adjusted U.S. sales (SAAR) of domestic and foreign autos and light trucks were flat at 17.5 million in February, coming in below the consensus forecast (17.7 million). Sales were 0.8% below prior year sales and were down 0.1% from prior month. Year-over-year sales for our three month moving average (graphed) was up 0.9%. Imported and domestic light truck sales performed much more strongly than car sales. Total year-to-date sales are down 1.4% over 2016, with light trucks up 6.6% and cars down 12.8%. Light trucks accounted for 64% of all unit sales year-to-date. After several years of rising sales, we seem to have reached a plateau in auto and light truck sales (red line on graph).

Sales set an all time record in 2016 at 17.46 million following 2015’s then-record level of 17.40 million. To put those numbers in perspective though, they narrowly eclipsed 2000 (17.35 million) and 2001 (17.12 million). In 2017, sales are expected to be flat, but with inventories high, production is likely to be down from 2016 levels.

Full-year sales total for 2014 were 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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According to the U.S. Census Bureau and the Department of Housing and Urban Development, single-family new home inventories increased to 265k in January (seasonally adjusted). Inventories are now at the highest level since August 2009. December’s new home inventories were 26k (10.9%) above the prior-year level of 239k. New home inventories still remain somewhat low by historical standards, but are closing in on longer run average inventory levels.

The growth in inventories in the last year (seasonally adjusted) has been driven by homes not yet started (+13k) and homes under construction (+8K), more so than by homes completed (+5k).

New home inventories increased slowly during the first 9 months of 2016, from 239k in January to 242k in September, but then jumped to 256k by December, an increase of 17k from January. In 2015, inventories rose 27k, from 208k in January to 235k in December. Inventory levels increased 23k throughout 2014, peaking at 212k in December, and rose 38k in 2013 to 187k by December. The last year of flat inventories was 2012, when the absolute inventory of new homes remained within a consistent range of 142k – 150k.

Seasonally adjusted new home inventories held steady at 5.7 months of supply in January, up slightly from from 5.5 months a year ago. Sales of new single-family houses increased to 555k (seasonally adjusted annual rate), up 3.7% from revised prior month sales and up 5.5% from prior year. Full-year 2016 sales of 561k were up 12.0% from 501k in 2015.

Full year 2015 new home sales were up 14.6% over 2014. 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 of the year. In 2016, only one month (July) was less than 5.0. The average months of supply over the last 50 years is 6.1, so current new home inventory remain slightly 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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Stephens Inc. released their Q4 2016 update on publicly traded TL carriers reporting that rates per loaded mile excluding fuel surcharge decreased by 1.7% over the same period last year, but increases 4.0% from Q3 of 2016. The most recent three quarters have seen year-over-year price drops, following 24 consecutive quarters of year-over-year TL rate increases.  TL rates fell more than normal between Q4 of 2015 and Q1 of 2016 and have not fully recovered since then.

For the full year 2016, TL rates declined 1.0%, the first full-year decline since 2009. Stephens expects rates to rise 1-2% in 2017, with downward pressure on rates in the first half of the year, followed by rate increases in the second half of the year. Unless freight volumes surge, I am not sure we will see any increases until very late in the year.

Quarterly data shows how weak TL pricing has been for the last 4 quarters (second and third graph). The data does not necessarily represent the entire TL industry as the publicly traded carriers tend to be larger and more successful in general, so smaller carriers may be feeling even greater rate pressure.

Average length of haul fell to 566 miles in Q4 from 594 in Q4 2015. For the full year, LOH fell from 620 miles to 578 miles. This is an interesting trend given how weak the domestic intermodal market was in 2016. It is likely indicative of  more fundamental supply chain network changes (more DCs, closer to customers) than modal shifts from TL to intermodal. Revenue per tractor per week was down from Q4 2015 and for the full year, but remains high by historical standards. Miles per tractor per week were up very slightly year-over-year for Q4 and the full year, which is surprising given the decline in length of haul. Mileage utilization remains well below historical averages due to shorter lengths of haul and tighter hours of service regulations.

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Graphs reproduced with permission from Stephens Inc. For more information contact: Brad Delco at brad.delco@stephens.com or Scott Schoenhaus at scott.schoenhaus@stephens.com

Stephens Inc. reported that LTL yields (revenue per hundredweight) increased by 1.5% from Q4 2015 to Q4 2016, and increased by 0.2% from Q3 2016. The year-over-year percentage increase for Q4 was the lowest Q4 increase since 2009. The LTL rate index hit another new all-time high point (series began in 1996) in Q4, indicative of pricing discipline by the large LTL carriers. For 2017, Stephens is expecting low single-digit LTL rate increases. That seems like a good estimate to me.

For the full year 2016, LTL yields were up 2.4%, compared with 5.9% growth in 2015. LTL yields dropped in Q4 of 2013 and Q1 of 2014, before resuming their post-recession climb, but that climb was interrupted in Q1 of 2016 as rates dropped from Q4 of 2015 (second graph).

Tonnage (graph 3) was up only 0.1% in Q4 ‘16 over Q4 ‘15 for the group of carriers reported on by Stephens. For the full year 2016, tonnage was down 0.5% after falling by 0.4% in 2015, indicative of the softness in the freight market for the last two years. Weight per shipment (graph 4) was down 0.2% year-over-year in Q4, and down 1.4% for the full year, likely due to plentiful TL capacity taking more of the heavier weight LTL shipments. Note that rate per hundredweight is higher at lower shipment weights so the weight drop is responsible for some of the yield increase.

From their previous Q4-2007 peak level, LTL rates dropped 11.2% to their trough in 2010 but have now surged 26.7% from Q2 ‘10 to the current all-time high. Despite the improving trends, the challenges facing LTL carriers remain apparent as the current pricing levels remain only 12.5% over the previous peak in 2007 despite the realization of significant cost increases over that 9-year period. Some of the capacity issues that impact the TL segment, like CSA and Hours-of-Service rules, are not as relevant to the LTL segment. Industry concentration and consolidation does provide LTL carriers better pricing power than is the case for TL carriers.

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Stephens LTL q4 16 qtr

stephens ltl q4 16 tonnage

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Graphs reproduced with permission from Stephens Inc. For more information contact: Brad Delco at brad.delco@stephens.com or Scott Schoenhaus at scott.schoenhaus@stephens.com

The Institute of Supply Management (ISM) reported that the Purchasing Managers’ Index (PMI) rose to 57.7 in February from 56.0 in January. After December posted the highest index level of 2016, January got 2017 off to a great start with the highest manufacturing index since November 2014, and now February has come in even higher. After contracting in August 2016, the manufacturing sector has expanding at a strong pace.  PMI came in above expectations (56.1). The New Order Index rose by 4.7 points to 65.1. The Production Index rose by 1.5 points to 62.9. Of 18 manufacturing industries, 17 reported monthly growth in February.

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. In 2016, the index ranged from 48.2 (Jan) to 54.5 (Dec) but it was not a steady rise, with manufacturing contracting in February and August. 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 most other areas of the economy.

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Weekly retail on-highway U.S. diesel prices increased by 0.5 cents to $2.577 per gallon on February 27. Diesel has ranged between 2.53 and 2.60 per gallon since 12/19, and ranged between 2.42 and 2.49 during the prior 2 months. So there has been a slow but stubborn increase over the last 4+ months.

In February 2016, diesel prices reached their lowest level ($1.980) since January 2005, dropping below the recessionary trough, before rebounding throughout the rest of the year, finally crossing the $2.50/gallon mark on 12.19. The last year that diesel did not hit $2.50 per gallon all year was 2004.

Diesel prices are 59 cents per gallon higher than one year ago, but are 32 cents per gallon lower than two years ago. Diesel prices had stabilized between August 24 and November 16 of 2015, 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 before beginning a steady climb. On February 7, the Energy Information Administration (EIA) updated its pricing forecast to 2.72 per gallon for 2017, anticipating further increased this year.

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 have passed beyond the late 2015 price levels. Diesel is well below the late-February price level in each of the five years prior to 2016.

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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Housing starts totaled 1.246 million in January (seasonally adjusted annual rate – SAAR) down 2.6% from prior month’s revised figures, but up 10.5% from January 2016 results, and were above expected levels. Single family starts totaled 823k (SAAR), up 1.8% from December and up 6.2% year-over-year. Starts of multi-unit structures were 457k (SAAR) down 6.9% from December but up 25.7% over prior year. Total starts exceeded a 1.0 million unit annual pace for the 22th straight month, and January starts were higher than all but 2 months in 2016.

For the full year 2016, total starts were 1.174 million, up 5.6% over 2015. Single unit starts led the way with 9.4% growth, while multi-unit starts declined by 1.2%. In the prior couple of years single-unit starts grew more slowly than multi-unit starts. For the full year 2015, total starts were 1.112 million, up 10.8% over 2014. Single unit starts were up 10.3% in 2015, while 5+ unit starts were up 12.9%. For the full year 2014, there were 1.003 million total housing starts, up 8.8% from the 925 thousand starts during 2013. Single family starts were up 4.9% and multifamily starts were up 16.4%. Total 2013 housing starts were up a robust 18.5% from the 781k housing starts recorded in 2012 and in 2012 starts were up 28.2%.

There remains a lot of ground to cover for the housing sector to fully recover from the recession. Housing starts are still well 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 more than 320 million. Some economists believe that slower population growth and household formation in the U.S. means that housing starts will not recover to 1.5 million units for a long time.

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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