Weekly retail on-highway U.S. diesel prices fell 2.2 cents to $2.421 per gallon on November 21. Diesel has eased in each of the last three weeks but is only down 5.8 cents over that time frame. In February, diesel prices reached their lowest level ($1.980) since January 2005, dropping below the recessionary trough, before rebounding to a year-to-date high of $2.481 on 10/17. The last year that diesel did not hit $2.50 per gallon all year was 2004. Diesel prices are almost identical to their level one year ago; down 2.4 cents or 1.0%. 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 before beginning a steady climb through June of this year. Since then diesel has again fluctuated in a fairly narrow range of 2.310 to 2.481 per gallon. On November 8, the Energy Information Administration (EIA) held its pricing forecast level at 2.69 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 have caught back up to late 2015 price levels. Diesel is well below the price level in each of the last five years prior to 2015 for November.

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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Stephens Inc. released their Q3-2016 update on publicly traded TL carriers reporting that rates per loaded mile excluding fuel surcharge decreased by 2.1% over the same period last year, and were unchanged from Q2 of 2016. The most recent two 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 and Q1 and have not rebounded since then. It seems unlikely that Q4 of 2016 will see the same kind of upward TL pricing movement as was seen in each of the last two years.

Stephens expects continued TL rate pressure as we enter bid season, but does think that rates may start to rise in the second half of 2017. Quarterly data shows how weak TL pricing has been for the last 3 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 are also more likely to successfully raise rates.

Average length of haul fell to 573 miles in Q3 from 609 in Q3 2015. This is an interesting trend given how weak the domestic intermodal market has been 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 Q3 2015 but remains high by historical standards. Miles per tractor per week were up year-over-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.

TL Q3 16 rates TL Q3 16 rates qtr TL Q3 16 rates qtr b TL Q3 16 lohTL Q3 16 rev per tractor TL Q3 16 miles per tractor

 

Stephens Inc. reported that LTL yields (revenue per hundredweight) increased by 1.0% from Q3 2015 to Q3 2016, and increased by 2.0% from Q2 2016. The year-over-year percentage increase for Q3 was the lowest since 2010. The LTL rate index hit a new all-time high point (series began in 1996) in Q3, indicative of pricing discipline by the large LTL carriers. For 2017, Stephens is expecting low single-digit LTL rate increases.

For the full year 2015, LTL yields were up 5.9%, but the average quarterly year-over-year increase in 2016 is only 1.4%. 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 0.7% in Q3 ‘16 over Q3 ‘15 for the group of carriers reported on by Stephens. For the full year 2015, tonnage was down 0.4%, indicative of the softness in the freight market in 2015. Weight per shipment (graph 4) was down 1.6% year-over-year in Q3, 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 24.8% 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 10.8% 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.

LTL Q3 16 yield

LTL Q3 16 yield b

LTL Q3 16 tonnage

LTL Q3 16 wgt per ship

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.

The Institute of Supply Management (ISM) reported that the Purchasing Managers’ Index (PMI) rose to 51.9 in October from 51.5 in September. March broke a streak of 5 consecutive months of contraction in the manufacturing sector of the economy, and began a streak of 5 consecutive months of expansion. After contracting in August, the manufacturing sector has expanding again the last two months.  PMI came in above expectations (51.6). The New Order Index fell by 3 points to 52.1. The Production Index rose by 1.8 points to 54.6. Of 18 manufacturing industries, 10 reported monthly growth in October.

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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According to the U.S. Census Bureau and the Department of Housing and Urban Development, single-family new home inventories held steady at 235k in September (seasonally adjusted). Inventories had been rising since August 2015 but have leveled off over the last 10 months (low of 234k and high of 244k). September’s new home inventories were 14k (6.3%) above the prior-year level of 221k. New home inventories still remain low by historical standards.

The growth in inventories in the last year (seasonally adjusted) has been driven by homes not yet started (+8k) and homes completed  (+7k) more so than homes under construction (-1K).

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 4.8 months of supply in September, from 5.8 months a year ago and 4.9 months in August. This is just slightly (0.3 months) above the lowest level of inventories since June 2013. Sales of single-family houses rose to 593k (seasonally adjusted annual rate), up 3.1% from revised prior month sales and up 29.8% from prior year. Year-to-date absolute sales are up 13.1% at 440k.

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 above that level today.  The vertical bars in the graphs represent recessions.

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The U.S. Bureau of the Census reported that seasonally adjusted real retail and food service sales increased 0.3% to $190.8 billion in September. (Note that actual sales are deflated using CPI 1982 – 1984 = 100). September sales were 1.2% higher than the prior-year period.

Nominal (unadjusted for inflation) seasonally-adjusted retail sales totaled $459.8 billion in September (second graph), up 0.6% from prior month, and up 2.7% from prior year results. Total nominal sales are up 2.9% year-to-date.

The results were at consensus expectations and the prior two months were revised upward. Nominal retail and food services sales excluding gasoline were up 3.3% year-over-year. Nonstore retailers (e-commerce and mail order) were up 10.6% and food services were up 6.1%. Gasoline station sales were down 3.4% year-over-year. We focus primarily on real retail sales because they are a better indicator of freight volumes than the inflated figures.

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Morgan Stanley’s dry van truckload index indicates that van capacity is more readily available than normal for late fall, but is a little tighter than this time last year. Capacity started to tighten up a little through July, unlike last year when the index was declining through July.  August reversed that pattern but since then there has been little volatility in comparison to last year when the index was falling at this time of year. 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 in the freight sector), 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-to-late 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 at almost exactly the same balance 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, and then tightened just a little through the summer and fall. 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. For the last 15 months, the index has been very stable at a level reflecting excess capacity.

We do not believe that refrigerated rates will increase much in 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, although the market is similar to 2015, 2012, and 2019. 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 the year winds down, it is clear that 2016 will be a year of remarkable excess capacity in the flatbed market. The last twelve months have seen unusual 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

Annualized U.S. assemblies of autos and light trucks increased 0.1% to 12.04 million units in September (seasonally adjusted), and were up 1.0% from prior year. Seasonally adjusted assemblies have been above an 11-million unit pace all year and above a 12-million unit pace in 3 of the last 4 months. Our graph is a three-month moving average of seasonally adjusted annualized assemblies. Using this moving average, year-over-year assemblies were down 1.8%, the third consecutive monthly decline.

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 we have been averaging 11.7 and 11.8 million units in 2015 and 2016 respectively.

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