Archive for October, 2013

  • Auto Sales & Assemblies

    Auto assemblies climb to 7-year high

    - by Tom Sanderson

    Annualized U.S. assemblies of autos and light trucks climbed to 11.3 million (seasonally adjusted) in September, the highest level since April 2006. Growth in assemblies took a measurable pause in July but ultimately finished Q3 on an upswing. Domestic auto manufacturers have experienced steady growth so far this year, but the government shutdown may prove to have been a strong headwind for the industry moving into Q4. Our graph is a 3-month moving average of the seasonally adjusted annualized assemblies. Year-over-year percentage growth using the 3-month moving average rebounded to 5.8% on the back of September’s strong data point. 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, just slightly above the current pace.

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  • Morgan Stanley Graphs

    Dry van capacity remains tighter than recent October comparisons

    - by Tom Sanderson

    Morgan Stanley’s dry van truckload freight index indicates that capacity-demand balance is tighter than normal for late October. The dry van market has experienced much tighter periods in recent years, but seasonality is a crucial factor when analyzing the current market conditions. Dry van capacity crossed above its historical average in July and has since remained there. In 2010 and 2012, capacity tightness peaked around the end of Q2, a trend that has repeated so far this year. Recent years have exhibited readily available dry van capacity during the second half of the year, but this trend has not occurred so far in 2013. The perennial July capacity easing was historically small this year, most likely a measurable effect of the Hours-of-Service rules changes that began July 1. The estimated 2% – 3% reduction in effective capacity should remain manageable through the remainder of the year given relatively modest volumes of freight. The tepid pace of the economic recovery through the first half of this year produced lackluster freight volumes as we expected. 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. For more information contact: Adam Longson at Adam.Longson@morganstanley.com or Bill Greene at William.Greene@morganstanley.com

  • Morgan Stanley Graphs

    Refrigerated capacity is tighter than the year-ago period

    - by Tom Sanderson

    Morgan Stanley’s refrigerated freight index depicts a market that has remained slightly tighter than its historical average throughout the month of October. The refrigerated market is now tighter than the year-ago period, but remains well below the tight capacity environment experienced in 2011. Capacity was more abundant through Q2 and early Q3 of 2013 than it was during the same period in 2012. The refrigerated market is currently undergoing the seasonal easing that typically occurs in late October and early November. Given the extreme tightness of refrigerated capacity back in January, it is a relief to see the index has remained close to its historical average for most of the year. The pricing environment in this segment continues to favor the carriers. No significant capacity is entering the industry, and demand for refrigerated transportation is less correlated to weak overall economic activity than dry van or flatbed. 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. For more information contact: Adam Longson at Adam.Longson@morganstanley.com or Bill Greene at William.Greene@morganstanley.com

  • Morgan Stanley Graphs

    Flatbed capacity is even with its historical average

    - by Tom Sanderson

    Morgan Stanley’s flatbed freight index portrays abundant capacity availability during the month of October. Despite experiencing a weak first half of the year, flatbed capacity now mirrors its recent historical average, and is actually somewhat tighter than the year-ago period. Most recent years experienced capacity tightening during Q2, but during 2013 capacity was readily available throughout Q2. During Q1 and Q2 of 2013, the flatbed market paralleled the abundant capacity of 2007 and 2009. With the uptick in housing starts and surging energy production, it is surprising that flatbed capacity never did tighten as much in 2012 and into 2013 as it did in 2010 and 2011. The second half of the year typically experiences a sharp seasonal decline in the flatbed index, but the steady pace of new home construction and a stronger manufacturing sector seem to be preventing a similar decrease this year. The flatbed market was particularly hard hit by the fall off in housing starts, but gained ground in 2010 and 2011 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.

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    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

  • Auto Sales & Assemblies

    Auto sales decline in September

    - by Tom Sanderson

    Annualized seasonally adjusted U.S. sales of domestic and foreign autos and light trucks fell significantly to a 15.2 million-unit annual pace in September, representing a dramatic swing from August’s robust 16.0 million. Using our three-month moving average, sales are still up 8.5% from the prior year. The monthly year-over-year growth rate fell to 3.3%, the lowest level in over two years. The annualized sales rate remains 9% below the early decade (2001 – 2007) average of 16.7 million, and it is unlikely that the auto industry will realize the necessary growth to rise above pre-recession levels before the end of 2014. Sales began their dramatic recessionary slide in 2008. The low point for auto sales occurred during the first six months of 2009, when annualized sales averaged only 9.6 million. 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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  • Diesel Fuel Prices

    Diesel prices are unchanged from last week

    - by Tom Sanderson

    After a brief interruption in the availability of fuel price data from the Department of Energy during the federal government shutdown, weekly retail on-highway U.S. diesel prices were reported as $3.886 per gallon on October 21. This price level represents no change from the previous week, but prices fell during each of the five prior weeks. Diesel has experienced a high but relatively narrow pricing environment so far this year. Diesel inventories are likely to rise through Q4 as refiners switch production  in response to rising inventories of domestic gasoline and surging European demand for diesel. Prices reached their 2013 high of $4.159 on February 25 and reached their 2013 low of $3.817 on July 1. This week’s price represents a 6.6% discount from the February peak and remains 5.9% below the prior-year level. In 2012, diesel prices exceeded $4 for a total of 26 weeks, but have only exceeded that level for 8 weeks so far in 2013. The recessionary low price point for diesel was $2.023 on March 16, 2009. A view of weekly prices over the last 4+ years exhibits generally higher prices in each year over the preceding year until the last few months. Diesel prices peaked at $4.771 per gallon in July 2008 and were above $3 per gallon from September 24, 2007 to November 3, 2008 (13 months). Prices have exceeded $3 since October 4, 2010 (36 months).

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  • Freight Prices

    Largest TL carriers reverse trend, grow faster than others

    - by Tom Sanderson

    In September 2012, we discussed the capacity growth trend for the largest TL carriers during and immediately after the recession. Excellent data from Avondale Partners showed that the largest TL carriers had cut capacity the most during the recession and were the slowest to add capacity back through the tepid recovery. A remarkable trend reversal has occurred this year: the four largest TL carriers (Hunt, Schneider, Swift, and Werner) increased capacity by 4% year-over-year in Q2 2013, whereas the group of 8 second-tier carriers cut capacity by 0.2% during the same period. The four largest TL carriers’ and the second-tier group’s respective average fleet sizes are 11,588 and 2,773.

    The trucking industry is highly fragmented with an estimated 167,000 active for-hire carriers, and these 12 carriers operate less than 10% of the industry’s capacity so it is difficult to draw definitive conclusions about capacity additions going forward. It is also a highly entrepreneurial industry, with a history of small carriers becoming medium-sized and medium carriers becoming large. The biggest carriers behaved more conservatively during the contraction and the slow-growth recovery, but they may become more aggressive if stronger expansion occurs as they have the financial ability to add trucks. The recent trend reversal may indicate a belief among industry executives that freight volumes should continue to steadily grow over the next few years, and a belief that pricing power will return to the carriers.

    The lack of growth among the second-tier carriers is likely a result of the recent stagnation of TL rates and uncertainty over the effects of federal regulations like the new Hours-of-Service rules. The largest carriers are most capable of absorbing regulatory shocks and increased pressure on margins. Despite the recent trend, shippers must continue to develop strong relationships with the second-tier of asset-based carriers because they will grow quickly once the pricing environment tips in their favor. Shippers should also be using one or two large 3PLs/brokers to gain access to the tens of thousands of small carriers that are always seeking to gain market share.

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  • Ocean Freight

    Ocean rates continue to demonstrate pricing weakness

    - by Tom Sanderson

    After recovering slightly during the beginning of September, ocean rates have declined for the fourth straight week. The Shanghai Containerized Freight Index (SCFI) for West Coast ports was $1,773 per FEU and to East Coast ports was $3,205 on October 11. To the West Coast, rates are down $1,009 and to the East Coast down $893 since their August 2012 peak. Rates to the East Coast have continued to experience greater price stability than rates to the West Coast so far this year as shipping lines continue to resist moving any capacity out of the Pacific. Rates to the West Coast are at their lowest point since March 2012, whereas East Coast rates were under $3,000 as recently as June 2013. Prior-year comparisons highlight the significant disparity between the two averages: rates to the West Coast are down $819 (32%) over 2012 and rates to the East Coast are down only $334 (9%). The SCFI reflects spot market rates for the Shanghai export container transportation market.

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    Source: Shanghai Containerized Freight Index – Shanghai Shipping Exchange, The Journal of Commerce, Transplace analysis

  • Housing Starts, Sales, and Inventory

    New home inventory rises, months of supply falls in August

    - by Tom Sanderson

    New home inventory continued its steady upward move in August, rising to 175k (seasonally adjusted). As our first graph shows, we still have lower inventory levels than at almost any period in the last 46 years. The absolute inventory of new homes remained within a fairly level range of 142k – 150k throughout 2012, and inventories stood at 143k in the year-ago period. Seasonally adjusted new home inventories fell slightly to 5.0 months of supply in August. Prior to July, the months of supply figure had been below 5 months since February 2012. The average months of supply over the last 50 years is 6.2, so the housing inventory picture remains positive by this measure. 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, which causes some concern at this point. Still, any significant growth in the rate of sales will quickly deplete the low absolute inventory level and lead to a significant increase in housing starts (and freight). New home starts are substantially higher than last year, with inventory rising only modestly, indicating sales have been keeping pace with the increase in construction. The vertical bars in the graphs represent recessions.

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  • ISM Manufacturing Index

    Manufacturing sector finishes Q3 on strong note

    - by Tom Sanderson

    The Institute of Supply Management reported that the Purchasing Managers’ Index (PMI) rose to 56.2 in September, a slight uptick from August’s 55.7. September’s reading represents three months of consistently strong growth for the manufacturing sector. The index declined from February through May, but the improved index values that began in July serve as evidence that manufacturing will support economic growth for the second half of 2013. A PMI over 50 indicates growth while a PMI under 50 represents contraction in the manufacturing sector of the economy. The improvement during Q3 has justifiably renewed optimism about the broader economy, but uncertainty about global growth and demand for American exports persists. The continued expansion of the sector through Q3 means manufacturing will most likely not experience a repeat of its lackluster 2012 performance.  The index reached a low of 32.5 in December 2008 but then recovered more quickly than other areas of the economy. The vertical bars in the graph represent recessions.

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