Morgan Stanley’s refrigerated freight index indicates that refrigerated capacity is tighter than last year, similar to 2015, and very close to the long-term trend line for early May. It also indicates that refrigerated capacity is more readily available now than it was in January, which is not an uncommon pattern.

For most of 2016, refrigerated capacity was more readily available than in 2015, but in Q4 the lines crossed indicating a tighter capacity environment than in the prior year. Capacity continued to tighten through the end of January but has eased since then and the late Q1, early Q2 ramp-up is not as pronounced as normal. For the last 18 months, the index has been very stable at a level reflecting excess refrigerated capacity.

Refrigerated capacity began 2015 the same way it ended 2014, significantly tighter than normal. Throughout Q2 of 2015, the market shifted with the result being that capacity was not nearly as constrained as normal. That was even more so the case in Q3 and Q4, as the index dropped to a level lower than in any recent year, including 2009.

We do not believe that refrigerated rates will increase much in Q2 or Q3, but later in the year we could see some increases as smaller refrigerated carriers adopt ELDs and see equipment utilization drop by 4-5%.  Demand for refrigerated transportation is less correlated to economic fluctuations than dry van or flatbed freight, so the future robustness of GDP growth will not determine demand growth 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.

MS 05-02-17 reefer

Graph reproduced with permission from Morgan Stanley. For more information contact: Alex Vecchio at Alexander.Vecchio@morganstanley.com

Morgan Stanley’s flatbed freight index indicates that flatbed capacity continues to tighten and is tighter than was the case in either of the last two years for early May. The index is just below the 11-year average for May so it would still be hard to argue that capacity is tight. In 2016, flatbed capacity was more readily available than was the case in 2015 until the last 6 weeks of the year, when the lines crossed. Flatbed capacity has continued to tighten so far this year and at a pretty steep pace the last two months.

2016 was a year of unusual stability and remarkable excess capacity in the flatbed market. With the ELD mandate not coming until December (well after the peak time of year for flatbed demand), it is possible that we will not see significant tightening of flatbed capacity in 2017, but if the slope of the line continues through the remainder of Q2 and into Q3, flatbed capacity may be in short supply this summer.

Flatbed capacity-demand balance favored the carriers over the shippers more so in 2014 than in the prior two years, but capacity never became as tight in 2014 as in 2010 and 2011. Low oil prices and a falloff in drilling activity meant that capacity never did tighten in 2015 or 2016. 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.

MS 05-02-17 flat

Graph reproduced with permission from Morgan Stanley. *2006-2016 average trend line excludes financial crisis years of 2008 and 2009. For more information contact: Alex Vecchio at Alexander.Vecchio@morganstanley.com

The Institute of Supply Management (ISM) reported that the Purchasing Managers’ Index (PMI) fell slightly to 54.8 in April from 57.2 in March. So far every month of 2017 has had a higher index than any month of 2016. After contracting in August 2016, the manufacturing sector has expanded at a strong pace.  PMI came in below expectations (56.5). The New Order Index fell by 7 points to 57.5. The Production Index increased by 1.0 points to 58.6. Of 18 manufacturing industries, 16 reported monthly growth in April.

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. In 2016, the index ranged from 48.2 (Jan) to 54.5 (Dec) but it was not a steady rise, with manufacturing contracting in February and August.

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 most other areas of the economy.

image

Weekly retail on-highway U.S. diesel prices decreased by 1.2 cents to $2.583 per gallon on May 1, continuing a trend of very modest fluctuations up and down in every week this year. Diesel has ranged between 2.53 and 2.60 per gallon since 12/19, never rising by more than 4.6 cents or falling by more than 1.2 cents in any week during that period.

In February 2016, diesel prices reached their lowest level ($1.980) since January 2005, dropping below the recessionary trough, before rebounding throughout the rest of the year, finally crossing the $2.50/gallon mark on 12.19. The last year that diesel did not hit $2.50 per gallon all year was 2004. We have been above that level all year to this point.

Diesel prices are 31.7 cents per gallon higher than one year ago, but are 27.1 cents per gallon lower than two years ago. Diesel prices stabilized between August 24 and November 16 of 2015, 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. On April 11, the Energy Information Administration (EIA) held its pricing forecast at 2.69 per gallon for 2017, still anticipating further increases this year.

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 risen above the late 2015 price levels. Diesel remains below the May price level in each of the five years prior to 2016.

The recessionary low price point for diesel was $2.023 in March 2009. Diesel prices peaked at $4.771 per gallon in July 2008.

image

image

The U.S. Bureau of the Census reported that seasonally adjusted real retail and food service sales were steady (+0.07%) at $193.2 billion in March. (Note that actual sales are deflated using CPI 1982 – 1984 = 100). March sales were 2.7% higher than the prior-year period.

Nominal (unadjusted for inflation) seasonally-adjusted retail sales totaled $474.8 billion in March (second graph), also flat (-0.2%) with prior month, and up 5.2% from prior year results. Prior to January, year-over-year sales growth had not exceeded 5% since August 2014, but have now exceeded that level in three consecutive months. Total nominal sales were up 3.3% for the full year 2016.

The results were below consensus expectations and February was revised downward. Nominal retail and food services sales excluding gasoline were down 0.2% year-over-year. Nonstore retailer sales (e-commerce and mail order) were up 11.9%. Gasoline station sales were up 14.3% year-over-year, a reversal from most of 2016 when full-year sales were down 6.3%. Department stores sales fell by 4.5% year-over-year, while sporting goods, hobby and book store sales fell by 3.8%. We focus primarily on real retail sales because they are a better indicator of freight volumes than the inflated figures.

image

image

Thanks to vigorous challenges by numerous industry participants to the flawed 2013 Hours of Service Restart Rules, the FMCSA finally and completely backed down in March of this year and the following notice appears on their website.

NOTICE: The Consolidated and Further Continuing Appropriations Act of 2015 was enacted on December 16, 2014, suspending enforcement of requirements for use of the 34-hour restart, pending a study. Based on the findings from the CMV Driver Restart Study, the 34-hour restart rule in operational effect on June 30, 2013, is restored to full force and effect.  The requirement for two off-duty periods of 1:00 a.m. to 5:00 a.m. in section 395.3(c) of the Agency’s hours-of-service rules will not be enforced, nor will the once-per-week limit on use of the restart in 395.3(d).

The CMV Study included 235 drivers and 3,000 restarts. The drivers included a mix of small and larger carriers, short-haul and long-haul routes, as well as a variety of equipment types. In it’s conclusion on the report to Congress, FMCSA wrote; “The study was not able to demonstrate conclusively that the restart rule that went into operational effect on July 1, 2013, provided “a greater net benefit for the operational, safety, health and fatigue impacts” [section 133(e) of The Act] compared to the restart rule in operational effect on June 30, 2013. Because the study did not demonstrate that the revised restart rule satisfied even the initial outcome requirements in section 133 of The Act, FMCSA has elected not to re-open the study to assess the additional outcome requirements of the Further Continuing and Security Assistance Appropriations Act, 2017.”

This was a huge victory for the shipping public and the motor carrier industry. It is an excellent example of the success the industry can have in challenging misguided, costly, and ineffective regulatory actions. The other obvious example is the successful fight against the damaging CSA/SMS system. Now that the industry has proven its ability to stop damaging regulatory changes, perhaps we will also see success in pushing through positive initiative, such as greater highway funding and nationwide twin 33’ trailers.

Housing starts totaled 1.215 million in March (seasonally adjusted annual rate – SAAR) down 6.8% from prior month’s revised figures, but up 9.2% from March 2016 results, and were below expected levels. Single family starts totaled 821k (SAAR), down 6.2% from February and up 9.3% year-over-year. Starts of multi-unit (5+)structures were 385k (SAAR) down 6.1% from February but up 9.1% over prior year. Total starts exceeded a 1.0 million unit annual pace for the 24rd straight month. Year-to-date starts are up 8.1%

For the full year 2016, total starts were 1.174 million, up 5.6% over 2015. Single unit starts led the way with 9.4% growth, while multi-unit starts declined by 1.3%. In the prior couple of years single-unit starts grew more slowly than multi-unit starts. For the full year 2015, total starts were 1.112 million, up 10.8% over 2014. Single unit starts were up 10.3% in 2015, while 5+ unit starts were up 12.9%. For the full year 2014, there were 1.003 million total housing starts, up 8.8% from the 925 thousand starts during 2013. Single family starts were up 4.9% and multifamily starts were up 16.4%. Total 2013 housing starts were up a robust 18.5% from the 781k housing starts recorded in 2012 and in 2012 starts were up 28.2%.

There remains a lot of ground to cover for the housing sector to fully recover from the recession. Housing starts are still well 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 more than 320 million. Some economists believe that slower population growth and household formation in the U.S. means that housing starts will not recover to 1.5 million units for a long time.

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. The ATA estimates that each housing start generates 8 truckloads of freight.

image

According to the U.S. Census Bureau and the Department of Housing and Urban Development, single-family new home inventories increased to 268k in March (seasonally adjusted). Inventories are now at the highest level since July 2009. March’s new home inventories were 24k (9.8%) above the prior-year level of 244k. New home inventories still remain somewhat low by historical standards, but are closing in on longer run average inventory levels (~340k).

The growth in inventories in the last year (seasonally adjusted) has been driven by homes not yet started (+17k), more so than by homes under construction (+4K) or homes completed (+3k).

New home inventories increased slowly during the first 9 months of 2016, from 239k in January to 242k in September, but then jumped to 256k by December, an increase of 17k from January. In 2015, inventories rose 27k; from 208k in January to 235k in December. Inventory levels increased 23k throughout 2014, peaking at 212k in December, and rose 38k in 2013, to 187k by December. The last year of flat inventories was 2012, when the absolute inventory of new homes remained within a consistent range of 142k – 150k.

Seasonally adjusted new home inventories dropped to 5.2 months of supply in March, down slightly from from 5.5 months a year ago. Sales of new single-family houses increased to 621k (seasonally adjusted annual rate), up 5.8% from revised prior month sales and up 15.6% from prior year. Full-year 2016 sales of 561k were up 12.0% from 501k in 2015.

Full year 2015 new home sales were up 14.6% over 2014. 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 of the year. In 2016, only one month (July) was less than 5.0. The average months of supply over the last 50 years is 6.1, so current new home inventory remain 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.

image

image

Annualized U.S. assemblies of autos and light trucks fell 3.6% to 11.12 million units in March (seasonally adjusted), and were down 4.5% from prior year. Assemblies were at the lowest level since February 2015. Seasonally adjusted assemblies have been above an 11-million unit pace since March 2015, but have only been above a 12-million unit pace once in the last 20 months (June 2016). Our graph is a three-month moving average of seasonally adjusted annualized assemblies. Using this moving average, year-over-year assemblies were down 3.4% and have hovered around or under 0 since May 2016. With sales flat and inventories high, it is not surprising that assemblies are weak.

The auto industry has come a long way since assemblies bottomed out at a 3.6 million-unit annual pace (seasonally adjusted) in January 2009. Average monthly seasonally adjusted assemblies were 11.4 million from January of 2001 through December of 2007, and have been averaged 11.7 and 11.8 million units in 2015 and 2016 respectively.

image

Moving into Q2, van capacity is tighter than in Q2 2016, is almost identical to 2015, but is more readily available than normal for this time of year. The index has recovered some but not all of its falloff from January, indicating somewhat greater excess van capacity than was the case early this year.

Capacity started to tighten up a little through July of 2016, but then the index flattened out through November. In December, capacity tightened and the index reached its highest level of 2016. That was a very different pattern than 2015, when capacity was at it tightest in January and became more readily available throughout the year.

While the negative impact on capacity of ELDs will not be felt until late 2017, any acceleration in the freight economy could lead to tighter van capacity by Q3 of  2017. In most years, capacity gets tighter as we enter Q2, but that is only marginally true in 2017. If there is a surge in freight volumes later in Q2, capacity will tighten and we will see upward rate pressure, but it is not at all clear that we will see demand increase enough in Q2 to absorb the excess capacity in the market today. 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.

MS 04-19-17 van

Graph reproduced with permission from Morgan Stanley. *2006-2016 average trend line excludes financial crisis years of 2008 and 2009. For more information contact: Alex Vecchio at Alexander.Vecchio@morganstanley.com