Archive for March, 2014

  • Housing Starts, Sales, and Inventory

    Housing starts remain under 1,000k annual pace

    - by Tom Sanderson

    Housing starts remained essentially unchanged in February at an annual pace of 907k (seasonally adjusted annual rate – SAAR). February’s figure came in just slightly below January’s 909k but remained well off the post-recession peak of 1,101k that was reached in November.  The year-over-year change for total starts entered negative territory for the first time since August 2011, falling 6.4% from February 2013. The estimate from the Census Department pegged total 2013 housing starts at 923k, a robust 18.3% above the 781k housing starts recorded in 2012. It is highly likely that housing starts faced headwinds related to severe winter weather like most other economic indicators in January and February; therefore, much importance is attached to the upcoming results from March. There is still a lot of ground for the housing sector to recover. 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. 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. One analyst estimates that each housing start generates 8 truckloads of freight. The vertical bars represent recessions.

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  • Morgan Stanley Graphs

    Refrigerated freight index falls slightly from record high

    - by Tom Sanderson

    Morgan Stanley’s refrigerated freight index has fallen slightly from its record high over the last two weeks. The lack of reefer capacity magnified the capacity crunch that was caused by extreme winter weather as thousands of trucks sat idle. Refrigerated capacity closely mirrored its historical average throughout most of 2013, so it will be interesting to see if this market returns to these levels once the recent backlog has been entirely worked through. Refrigerated rates will likely continue to rise faster than the broader truckload market as no significant capacity is entering the industry despite steadily rising demand. Demand for refrigerated transportation is less correlated to economic fluctuations than dry van or flatbed freight, so the future robustness of economic growth will not necessarily determine demand 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. For more information contact: Adam Longson at Adam.Longson@morganstanley.com or Bill Greene at William.Greene@morganstanley.com

  • Morgan Stanley Graphs

    Flatbed market’s seasonal tightening outpaces historical average

    - by Tom Sanderson

    Morgan Stanley’s flatbed freight index shows the beginning of the normal spring tightening but is somewhat ahead of the recent historical average. Although this market is tighter than usual, the flatbed capacity strain is not at historic highs as is the case in the dry van and refrigerated segments. Given the recent trend and the arrival of warmer weather patterns, it is unlikely that the flatbed index will rise to record levels in the near future. Flatbed capacity was readily available throughout 2013 despite the increased oilfield production and uptick in housing starts. The flatbed market was particularly hard hit by the recessionary decrease in housing starts, but gained ground in 2010 and 2011 with the resurgence of the American manufacturing sector. 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

  • Morgan Stanley Graphs

    Dry van capacity index rise takes a pause

    - by Tom Sanderson

    Morgan Stanley’s dry van truckload freight index portrays a market that has slightly eased from historic tightness over the last two weeks. The improving weather conditions across the country have allowed carriers to work through backlogs, thereby moderating demand. The prolonged bout of extreme winter weather across many regions resulted in capacity tightness that is unprecedented in recent memory. An extreme shortage of intermodal capacity has significantly exacerbated the shortage of highway capacity. The tightening of the dry van and refrigerated markets was undoubtedly aggravated by the lingering effects of the new Hours-of-Service rules. The stricter regulations have driven truck utilization down 3-5% and have caused a measurable reduction in capacity to significantly strain the industry. The tepid pace of the economic recovery through the first half of 2013 produced lackluster freight volumes as we expected, but the recent upswing may not completely fade if the economic landscape continues to improve through the beginning of the second quarter. 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

  • Compliance, Safety, Accountability

    Could Einstein fix CSA?

    - by Tom Sanderson

    CCJ Digital has published a number of very informative pieces on the problems of CSA. The latest post by Kevin Jones is terrific and highly recommended.

    Einstein

  • Retail & Same Store Sales

    Retail sales results improve slightly despite winter weather

    - by Tom Sanderson

    Seasonally adjusted real retail sales increased slightly to $181.7 billion in February, rising slightly from January’s sales figure. (Note that actual sales are deflated using CPI 1982 – 1984 = 100). Last month’s sales came in just 0.4% above the prior-year period. Despite the disappointing year-over-year gain, February’s results renewed optimism about the strength of the American consumer as sales came in above consensus expectations despite prolonged bouts of winter weather at the beginning of the month. Rising home values and moderately improved employment figures have driven increases in consumer confidence which is strongly correlated with growth in retail sales. Nominal (unadjusted for inflation) retail sales totaled $427.2 billion in February (second graph), representing a 0.3% gain over January and a 1.8% year-over-year improvement. We focus primarily on real retail sales because they are a better indicator of freight volumes than the inflation-adjusted figures.

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  • Auto Sales & Assemblies

    Auto assemblies recover in February

    - by Tom Sanderson

    Annualized U.S. assemblies of autos and light trucks rose to 11.1 million in February (seasonally adjusted), a significant improvement from January’s pace of 10.4 million. Last month’s rebound proves that January’s weak figure was an outlier associated with plant shutdowns caused by extreme winter weather. Moreover, February’s improvement bolsters the claim that 2014 should be a robust year for the auto industry. Our graph is a three-month moving average of the seasonally adjusted annualized assemblies. Using this moving average, year-over-year growth decreased to 4.7%, significantly below the double-digit gains we saw in October and November of last year. 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, 5.3% above the average assembly rate for all of 2013 and 2.6% above February 2014 assemblies.

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  • Diesel Fuel Prices

    Diesel prices fall from their 2014 high

    - by Tom Sanderson

    Weekly retail on-highway U.S. diesel prices fell 1.8 cents to $4.003 per gallon on March 17, easing off their 2014 highs. Diesel prices had steadily risen to last week’s peak from the 2014 low of $3.873 on January 21. Despite the modest rise in prices, diesel is now 1.1% below the prior-year level as prices rose sharply during Q1-2013. Diesel experienced a high but narrow pricing environment throughout 2013, fluctuating between the low of $3.817 on July 1 and the high of $4.159 on February 25. Although surging domestic energy production has prevented measurable price increases over the last few years, surging international demand for fossil fuels will eventually put upward pressure on diesel prices. The $4 per gallon level remains highly symbolic: if diesel remains below this level, fuel costs will mirror their 2013 levels. If prices rise above $4 the broader economy will be forced to absorb increased transportation costs. In 2012, diesel exceeded $4 per gallon for a total of 26 weeks but only exceeded that level for 8 weeks during 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 2013. 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 (41 months).

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  • Carrier Rate Graphs

    LTL rates increase 0.6% in Q4

    - by Tom Sanderson

    Stephens Inc. recently reported that Q4 LTL rates increased 0.6% from 2012 to 2013 in the fourth quarter, but decreased sequentially from Q3-2013 by 0.4%. Last quarter saw a deceleration in LTL rate increases. Despite the slowing growth trend, the Q4 index level of 126.5 still represents the second highest reading since Q1-2008. Stephens maintained that the average contractual rate increase will remain in the 2.5% – 3.0% range. LTL rates remain 0.9% shy of their all-time high. Weight per shipment continued its upward move as lower weight shipments shift to parcel carriers and TL carriers avoid multi-stop shipments. Generally, the higher the weight per shipment the lower the cost per hundredweight, so real prices for equivalent shipments may be rising at a faster pace than the Stephens index indicates. Tonnage growth accelerated during the fourth quarter as this metric rose 5.2% compared to prior-year period. Despite the improving trends, the challenges facing LTL carriers remain apparent as the current pricing levels are equivalent to 2006 despite the realization of significant cost increases over that period. Some of the capacity issues that will impact the TL segment, like CSA and the stricter Hours-of-Service rules, are not as relevant to the LTL segment, but industry consolidation affords LTL carriers better pricing power than is the case for TL carriers.

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    Graphs reproduced with permission from Stephens Inc. For more information contact: Jack Waldo at jwaldo@stephens.com or Chris Glancy at chris.glancy@stephens.com.

  • Highway Funding

    Highway Funding Rhetoric Heats Up

    - by Tom Sanderson

    With MAP-21 scheduled to expire on September 30 this year and mid-term elections looming, the rhetoric is starting to heat up on infrastructure “spending” or “investment” depending on your perspective. While you would be hard pressed to find anyone who does not believe our nation’s highways and bridges are in terrible shape, that is where the agreement ends. How much to spend, how to fund the expenditures, what to spend the money on, and the role of the federal government versus the states are all major points of disagreement.

    President Obama’s budget calls for $73.61 billion in surface transportation spending for fiscal 2015, a 1.7 percent increase over 2014 funding, and requests $302.3 billion in spending in a new 4-year highway bill.  Since current federal highway user fees (primarily fuel taxes) generate only $38 billion per year that leaves a significant shortfall in revenue (taxes). The administration proposes to use an imagined $150 billion in extra revenue from corporate tax reform to plug the gap. That is not the kind of corporate tax reform most business leaders have in mind.

    Meanwhile the American Trucking Associations (ATA) was not impressed with the Obama proposal as its president Bill Graves commented, “Today’s proposed budget misses the mark when it comes to the transportation needs of the U.S. economy. It provides no real funding solutions for the long-term health of our infrastructure and proposes massive new subsidies for a mode that moves a small proportion of America’s freight and passengers,” a reference to rail transportation. The ATA has formed a team under the leadership of Dan England to consider alternatives to raising the federal fuel tax, which has not been increased since 1993.

    House Transportation Committee chairman, Rep. Bill Shuster (R-Pa.), said he opposes an increase in the fuel tax, which funds highways and helps subsidize public transit. The U. S. Chamber of Commerce, the American Automobile Association, and the ATA all want Congress to increase the gas tax. In the House, Rep. Earl Blumenauer (D-Ore.) announced the proposal (H.R. 3636) in December to increase federal fuel taxes by 15 cents over the next three years. Whether he can convince his fellow democrat and committee chair remains to be seen.

    Public opinion polls come out fairly strongly against fuel tax hikes, not because people believe the roads are in good shape, but because they don’t trust the government to spend the extra money wisely. As Robert Poole of the Reason Foundation points out, “That isn’t surprising, considering the federal Highway Trust Fund has been tapped in the past to pay for things like "bridges to nowhere," mass transit, recreational trails and museums, in addition to highway construction and repair.”

    Gallop reports that a record high percentage of Americans believe that Big Government is a greater threat to the future of the country than Big Business or Big Labor. Several groups, including Cato, believe that the federal government has outlived its usefulness in highway funding. Gabriel Roth of The Independent Institute summed it up pretty well, “The purpose of federal financing — completion of the Interstate Highway System — has been virtually achieved, and it is difficult to identify other advantages from federal financing. The disadvantages of federal financing — increased costs and intrusive regulation — are evident and substantial.”

    The alternative of more tolling or a vehicle miles travelled (VMT) tax are also problematic. In theory, with greater fuel economy, fewer miles driven per capita, and more hybrid and electric vehicles, the federal fuel tax may not be the best long-term solution to highway funding, and electric vehicles are getting a free ride today. But that long term is a long way off and highway funding is needed now. The trucking industry is already required to track and report miles driven by state and thus is not terribly concerned about a VMT. But for passenger vehicles, the cost, complexity, and opportunity for fraud and abuse in requiring every U.S. motorist to report miles driven and pay a tax on those miles is mind boggling.

    So what is likely to happen? Keep in mind that the prior highway bill SAFETEA-LU was originally set to expire September 30, 2009 but was extended 10 times for a total of 3 years before the 2-year MAP-21 bill was passed. In an election year, I think it is highly likely that MAP-21 will be extended, fuel taxes will not be increased, and we will transfer more money from the General Fund to the Federal Highway Trust Fund to keep it solvent. Everyone wins, except those concerned about $17 trillion dollars in federal debt that continues to rise and those who believe that the fuel tax user-fee system that built our fantastic Interstate Highway system can surely be modified in a manner that keeps it well maintained.

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