Q3 Logistics Review
There was some question as we entered Q3 about whether freight volumes would surge resulting in capacity shortages. That clearly did not happen. In fact, capacity became more readily available throughout Q3. Below you’ll find some key highlights from the third quarter, including economic data driving freight demand, as well as legislative and regulatory issues affecting freight transportation. I’ll also share my expectations for the remainder of the year. Now, let’s take a look at Q3.
Capacity Remains Available, Fuel Prices Fall, Ocean Rates Fall but Remain Volatile
Continuing what we saw in Q2, truck capacity continued to become more readily available throughout Q3. According to the Morgan Stanley’s freight indexes, van, refrigerated and flatbed capacity is far more readily available for this time of year than normal. While capacity had modestly tightened through June, it has eased substantially since then. The dry van capacity-demand balance line is at its lowest point in the last six years.
And while refrigerated capacity began 2015 tighter than normal, the market shifted and capacity was not nearly as constrained as normal in Q2 or Q3. The index is now lower than at any point since 2009, and it appears capacity will not tighten for the balance of 2015 or into early 2016.
Diesel prices continued to fall, dropping to $2.476 per gallon in late September – the 17th decrease in the prior 18 weeks, totaling 43.8 cents. Diesel prices are at the lowest point since June 2009 and are 34% below prior-year levels.
East and west coast spot-market ocean rates remained volatile, but are at far lower levels following the conclusion of the west-coast port strike earlier this year. As of late September, east coast rates were down 44% while west coast rates were down 34% year-over-year. The spread between east and west coast ports declined from a peak of $2,937 on 2/27 to $1,048 on 9/18. The spread has not been this low since November of 2012. Carriers clearly exercised their market power during the strike as shippers diverted freight to the east coast, but now spot rates have corrected to levels considerably lower than those preceding the strike.
Retail Sales and Manufacturing Growth Sluggish, While Housing Starts and Auto Sales Remain Solid
Following a disappointing Q2, retail sales remained sluggish in Q3. Unadjusted for inflation, year-over-year sales were growing at 2.2-2.4% in Q3, but adjusted for inflation growth was 0.3%. Inflation adjusted numbers are more relevant for freight volumes.
Housing starts dropped slightly in August, but snapped back in September. Annualized housing starts totaled 1.206 million in August, up 6.5% from August. Starts were above expectations, and were 17.5% above the September 2014 rate.
Auto sales reached the high point for the year in September, at an 18.1 million unit annual rate (SAAR), and remained at or above a 17-million unit annual pace for five consecutive months. The unit sales pace continues to exceed the early decade average (2001 – 2007) that has served as our primary barometer of the auto industry’s recovery. This could be a sign of rising consumer confidence.
Manufacturing growth experienced at the end of Q2 began to weaken in Q3. The Institute of Supply Management (ISM) reported that the Purchasing Managers’ Index decreased to 50.2 in September from 51.1 in August – both down from 53.5 in June. PMI came in below expectations (50.5) and indicated the slowest rate of growth since May 2013.
A Long-term Highway Bill Postponed Again but Now Looks Possible
At the end of July, President Obama signed yet another extension of the Moving Ahead for Progress in the 21st Century Act (MAP-21) highway bill, extending funding until October 29, 2015. This was the third extension since MAP-21 was passed in July 2012 to fund surface transportation programs through FY2014. On October 29, the President signed a 3-week extension in anticipation of a longer-term bill.
The Senate passed a six-year highway bill on July 30; however, House Republicans were not on board and left town the day before it passed. The key challenge is how to pay for the $15 billion per-year gap between proposed highway spending and highway user fees, raised primarily from federal fuel taxes, which have not been raised since 1993. On November 5, the House passed a $300 billion 6-year highway bill. The two bills are now in a reconciliation process that, if successful, will send a long-term bill to the President.
While increases in fuel taxes are widely opposed in Washington, a minimal increase would go a long way in improving the nation’s highways. However, the current bills continue to use various gimmicks to close the $15 billion per year gap between receipts and expenditures. In the Senate bill only 3 of the 6 years are funded with no requirement to determine in advance how to fund the final 3 years. The House bill requires that a mechanism for funding the final 3 years be determined in advance.
Q4 Forecasts & Expectations
Freight transportation in 2015 continues to be dramatically different than 2014, and we don’t expect much change in Q4 or early 2016. As previously mentioned, we aren’t seeing peak season capacity shortages on a broad basis like we have in previous years.
On the legislative and regulatory front, we will see shortly if Congress can finally agree to a long-term solution to funding transportation infrastructure. It now seems likely, although the funding shortfall could doom the bill. The FMCSA is also working hard to complete a study to submit to Congress to try to reinstate the suspended HOS restart rules. While it’s unclear whether submitting the report is enough to trigger a regulatory “snapback,” the report must be submitted to the Department of Transportation Inspector General by the end of the year then will likely go to Congress in February. That means the current rules, which allow a truck driver to restart his or her weekly duty after 34 hours off-duty time, will remain in place into 2016.
Did Q3 meet your expectations? What will you be watching for the end of 2015?