Q2 Logistics Review
By: Tom Sanderson, CEO, Transplace
In the second quarter of 2015 there were some interesting activities across different economic sectors worth highlighting. In last quarter’s recap blog, I shared thoughts on capacity and fuel prices. Topics highlighted below are based on economic data driving freight demand, as well as legislative and regulatory issues affecting freight transportation. Finally, see what I’m anticipating for Q3. Now, let’s get on to recapping this quarter.
Capacity Remains Steady, Fuel Rebounds
As stated in my last recap, we normally see capacity start to tighten up in Q2 as freight volumes grow, but that’s not been the case this year. According to Morgan Stanley’s flatbed freight index, flatbed capacity is much more readily available for this time of year and actually remains very similar to capacity-demand balance in 2013. Refrigerated capacity is also more available even though in the beginning of 2015 it was significantly tighter than normal. Throughout Q2, that tightness eased up especially compared to 2014 levels.
It’s much the same for dry van capacity. In fact, we see van capacity much more readily available when compared to last year, and we haven’t seen easy capacity levels like this since Q2 of 2009. Why the available capacity? There are three key factors: sluggish freight growth in a sluggish economy, the hours-of-service (HOS) restart rollback and actual capacity additions by carriers. We anticipate only modest tightening of van capacity as we move into peak fall shipping and don’t expect significant shortfalls until 2016.
This quarter also saw diesel continue to fall with only a few weeks of price increases during the quarter. In early April, diesel hit a five-year low, but started rebounding and by May prices had increased for five straight weeks before resuming their fall. Diesel prices are near 2010 levels and 26% below prior-year levels. The Energy Information Administration (EIA) predicts a $2.86 per gallon average for this year and $3.06 for 2016, but that seems high to us.
Retail Sales Flat While Housing Starts, Auto Sales and Manufacturing Growth Shows Promise
Q2 retail sales were disappointing following Q1 numbers. Sluggish retail sales were especially disappointing given lower gas prices – consumers weren’t spending their gas savings on other items. For the second quarter sales grew at only 1.7% from 2014 Q2.
Housing starts bounced back this quarter. April saw housing starts at a post-recession high of 1,135k, the first month above the 1.1 million unit pace since November 2013 and the highest monthly total since November 2007. Even though numbers were down in May, housing starts were back above the 1.1 million unit pace in June.
April auto sales were the best since 2006 despite dropping from March, which was the first month to exceed the 17 million unit pace since November. Q2 finished exceptionally strong with sales above a 17 million-unit pace for the first time in a decade.
Despite deceleration in manufacturing growth earlier this quarter, we saw manufacturing growth strengthen in May and June. After six straight months of declining or flat performance, the Institute of Supply Management (ISM) reported that the Purchasing Managers’ Index (PMI) increased to 52.8 in May, and 53.5 in June. We have yet to see manufacturing growth hit the pace experienced for most of 2014.
Rail Grows, But Still Lags Behind Truck in U.S.-Mexico Cross-Border Freight Transportation
According to the U.S. Department of Transportation Bureau of Transportation Statistics, while the flow of trucks and rail containers across the U.S.-Mexico border is experiencing growth, it’s not happening at a very fast pace. Rail container crossings grow faster when the economy is strong, and shrink when the economy is weak. Since 1999, truck crossings have experienced growth by more than 10% year-over-year only one time while rail growth has exceeded 10% growth in 7 of these years.
Ultimately, intermodal will grow at a faster pace than truck freight due to the long haul nature of cross-border freight, the shortage of long haul truck drivers, customs clearance advantages and the overall economic advantage of rail over truck for long haul transportation.
Q3 Forecasts & Expectations
In Q3, unfortunately there is not much of an expectation that we will see the economy pick up steam. Fuel prices will remain low but that does not seem to translate into additional consumer spending in other areas. The strength of the U.S. dollar is harming exports, which is putting pressure on manufacturing. Despite the very low cost of natural gas, which is a big boost to manufacturing competitiveness, growth is being dampened by the high value of the dollar and sluggish retail sales. When you add it all up, it appears that truck capacity will remain generally available throughout Q3.
On the regulatory front, we have the 34th extension of the highway bill, this one is for only three months and for one of those months Congress is on vacation. So towards the end of the quarter, we will either need another extension or a longer-term highway bill. Expect another extension. While there may be some regulatory rules published in the quarter, particularly for electronic logging devices, there will be a multi-year phase in period so there will be no short-term impact.
Did Q2 meet expectations or were there some surprises? What will you be watching closely next quarter?