The last year that diesel did not hit $2.50 per gallon all year was 2004
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.
Stephens data shows TL rates declining year-over-year
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.
Stephens LTL rate index hits all-time high on modest Q3 gains
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.
Graphs reproduced with permission from Stephens Inc. For more information contact: Jack Waldo at firstname.lastname@example.org or Brad Delco at email@example.com.
Manufacturing expands in October; 3rd highest PMI of 2016
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.
Strong new home sales keep inventories in check
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.
Retail sales continue slow rate of growth
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.
Archive for November, 2016
> 2016 > November