SONAR Monthly Market Update - A deep dive into the freight markets with unprecedented - FreightWaves
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SONAR Monthly Market Update A deep dive into the freight markets with unprecedented charts, analysis and market commentary. January 2019 Edition For distribution and use by FreightWaves SONAR seat licensed users only. sonar.freightwaves.com 1
Table of Contents 1. Economic Outlook…….…………………………….……………………………….……………………………….………………...Page 3-4 2. Manufacturing……………………………..……………………..….……………………………….………………………………….Pages 5-6 3. Retail and Inventories…..………………..…………..……...………………………………….………………………..……….Pages 7-9 4. Labor Markets………………………...……………...……………………..….……………………………….……………..……...Pages 10-11 5. Housing and Construction………..…………………………….…………………….……………….………………..…Pages 12-14 6. International Trade………...…………………………………..…………………………………………………..…………...…Pages 15-17 7. Pricing and Inflation…………………………………….………………………….…….……………..……….………..…….……...Page 18 8. Policy & Risks………………………………….………………………….……………………………….…………………….….….Pages 19-20 9. Freight Market Overview…………………….……………………….……………….………..…….…………….………Pages 21-32 sonar.freightwaves.com 2
Economic Outlook Source: Survey of Professional Forecasters, FreightWaves Economics Current Environment: Signs of a slowing economy Growth in the economy continued to show some signs of slowing down over the past month, even as performance remains generally above trend to round out 2018. The U.S. economy enjoyed two of the most impressive back-to-back quarters of growth in the middle of the year, with GDP growing at a 4.2% and 3.5% annualized pace during the 2nd and 3rd quarters. During this time, several areas of the economy enjoyed robust performance, with retail sales, manufacturing production, and goods trade all seeing the fastest growth in years. Aside from some weakness in housing, the economy has essentially been running on all cylinders for most of the year. This kind of growth from some of the key drivers of freight demand contributed to one of the strongest years for surface freight in recent memory, straining capacity in the industry and fueling rapid rate increases both in contracts and spot prices. sonar.freightwaves.com 3
Across nearly almost every sector, growth rates have come down from the highs experienced in the middle of the year. After a steady stream of positive results, signs are emerging across the economy that suggest that the pace of growth is slowing headed into next year. Growth in most key economic indicators has come down from recent highs, and the current environment suggest further slowing as we head into 2019. Consumer spending remains the primary engine of demand in the economy. U.S. households have benefitted throughout the year from a strong labor market, and the rapid pace of hiring and wage growth has fueled income growth in the economy. Going forward, conditions for U.S. consumers are likely to remain favorable as the tight labor market fuels additional strength in wage growth. However, U.S. households will not get the same boost in 2019 from a tax cut like they did in 2018, and the implementation of scheduled tariffs next year will likely hit consumers harder next year. As a result, growth on the consumer side is likely to be strong, but not as strong going forward. Tariffs also appear to be taking a bite out of business demand, as concerns over the future of trade policy have reduced the incentive for firms to invest. In addition, the recent plunge in oil prices has take the legs out from underneath the U.S. domestic energy sector, which had been one of the strongest areas of growth. This reduced appetite for investment has caused manufacturing activity to stumble towards the end of the year, and data on orders for investment goods suggests that demand will remain subdued in upcoming months. Housing also continues to face challenges. Construction activity has been the lone consistent source of weakness throughout 2018. Recent data has been distorted by weather-related distortions due to the hurricane season, but rising mortgage rates and and challenges with supply will again hinder housing activity in 2019. All of this suggests that the U.S. will continue to grow slightly above trend in upcoming quarters, but will slow significant from the rapid pace seen in the middle of the year. We expect growth of 2.4% in the fourth quarter, and 2.6% for all of 2019. sonar.freightwaves.com 4
Manufacturing In the industrial sector, industrial production (IPROG.USA) growth beat expectations in November by advancing 0.6% from October’s levels. Year-over-year growth improved to 3.9%, down from the rapid pace of growth in the 3rd quarter but still strong by historical standards. However, much of the gain was driven by a surge in utility production during the month, fueled by particularly cold weather across much of the country. This type of weather-related surge does not mean much for the fundamentals of the industrial sector, as gains in one month are typically reversed quickly once weather returns to normal. Manufacturing industrial production, which excludes utility and mining production from the total, stalled in November. unchanged from October’s levels. In addition, results from the previous two months were revised downward, leaving behind a more dismal view of the health of the manufacturing sector as we near the end of the year. Year-over-year growth in manufacturing production (IPROG.MFTG) has now tumbled all the way to 2.0% after reaching a multi-year high of 3.8% a couple of months ago. In addition, data on new orders suggests that manufacturing activity may remain subdued in upcoming months. Manufacturers’ new orders for durable goods (ORDR.DG) increased just 0.8% in November from October’s levels, on the heels of a 4.3% decline in the previous month. The fluctuations over the past couple of months have been caused by swings in the volatile transportation equipment component, which often experiences non-seasonal surges in aircraft orders. Excluding transportation equipment, durable goods orders actually declined by 0.3% as year-over-year growth stayed below 5%. Core capital orders, which are a proxy for investment sonar.freightwaves.com 5
Manufacturing (cont.) spending on equipment, fell by 0.6% during the month. Durable goods orders serve as a useful leading indicator of future durable goods shipments (SHIP.DG), typically leading shipments in the economy by 1-2 months. Orders excluding aircraft have now declined in 2 out of the last 3 months, heightening concerns over the future strength of manufacturing activity. Durable goods manufacturing has been one of the standout areas in terms of industrial output throughout the year, and a slowdown in durable goods production would further restrain output. Oddly enough, the hard data on output and orders is telling quite a different story than survey results from the manufacturing sector. The Institute of Supply Management’s manufacturing purchasing managers’ index (PMI) continues to signal robust growth in the manufacturing sector. Results from PMI data represent the percentage of survey respondents that report that activity is expanding, so numbers above 50 signal expansion in the manufacturing sector. PMI data historically has a tight correlation with year-over-year growth in manufacturing production, with readings above 55 signaling above average growth in manufacturing. Because of this, it is a bit surprising to see the recent results from the manufacturing PMI data (ISM.PMI), which has hovered between 55 and 60 throughout most of the year. PMI data has come down slightly from the 14-year high of 61.3 set in August of this year, but still remained elevated at 59.3 even as manufacturing production growth slowed considerably. Moreover, survey responses related to new orders have also been exceptionally strong, diverging from the hard data on new orders in the economy. These type of disconnects in the data happen from time to time and are usually resolved quickly, either through one of the series shifting to meet the other going forward or revisions to previous data showing that the disconnect never existed. Some of the regional surveys of manufacturing activity have also declined recently, which would suggest that the national PMI data will soon come down to match the actual output data. sonar.freightwaves.com 6
Retail and Inventories As mentioned earlier, after a brief lull in spending to start the year, consumer spending has been one of the real highlights in the economy throughout 2018. This trend in retail spending largely continued in November, though total sales in the sector rose just 0.2% from October’s levels. Year-over-year growth (RESLG.USA) moderated to 4.2%, which is well below the 6+% highs seen earlier this year but still strong by historical standards. In addition, the gain in November came despite a sizeable decline in gasoline sales . Retail sales figures are nominal measures, and the collapse in gas prices throughout the month depressed sales figures at gas stations. Core retail sales, which exclude motor vehicles and gas, rose 0.5% in November and are now up 4.6% from this point last year. Gains during the month were generally broad-based with every other major industry category except for building materials, apparel, and restaurants expanding during the month. Electronics stores, furniture stores, and nonstore (mostly online) retailers led the way, with each industry seeing stronger than 1% monthly growth. November’s retail result give the first official glimpse at sales performance during the holiday season, and the strength of core spending during the month points to an impressive peak season for retailers. Anecdotal reports and data from private companies such as Mastercard and Adobe Analytics further underscore this strength, indicating that holiday growth in 2018 was one of the strongest in recent years. We expect the official holiday sales numbers, which exclude auto, gasoline, and building material sales, to come in at 4.5% higher than they were in 2017. sonar.freightwaves.com 7
Retail and Inventories (cont.) This would place it slightly below the 5.3% pace seen in 2017, but still makes 2018 one of the strongest years for holiday retail in the past decade. As has been the case all year, e-commerce likely grew in above 15% during the holiday season, continuing to gain significant share in the retail space. It is also worth remembering that e-commerce during the holiday season works a bit differently than it does during the rest of the year. Because so many of the purchases are gifts for others, there is typically a surge in return volume in the weeks following Christmas. This typically keeps parcel demand high through the early part of January, and for LTL carriers may require some deliveries from a residential location to a warehouse or retailer. However, there are signs emerging that retail growth may begin to slow down going forward. Consumers are likely to still find themselves in a generally favorable environment in upcoming months, with solid job growth and rising wages providing the fundamentals for retail spending. However, consumers will not another boost to disposable income in 2019 as they did in 2018 with the passage of the Tax Cuts and Jobs Act. As a result, disposable income growth should remain healthy, but not as strong as it was throughout 2018. Secondly, the next wave of tariffs on imports from China will target more consumer goods if they are implemented as planned in 2019. This means that the prices of things that households typically purchase may experience a level shift as retailers are forced to accommodate the higher cost of imported goods. This would further restrain consumer spending in the economy and lead to weaker retail performance in 2019. Lastly, equity markets have plunged over the past couple of months. The S&P 500 has declined nearly 15% since peaking on October, with nearly 10% of that decline coming in December alone. This reduces the amount of household wealth in the economy, which negatively affects consumer spending. There are also signs that suggest that this recent drop in the stock market is starting to affect consumer confidence. The Conference Board’s consumer confidence index experienced the largest monthly drop in over three years in December, with a severe decline in consumer expectations about the future health of the economy. Confidence is still generally high even after the dip in December, but if the collapse in stock markets deepens and confidence falls further, consumers may not be willing to go out and spend even if they have the ability to go and purchase products. sonar.freightwaves.com 8
Retail and Inventories (cont.) On the inventory side, levels have climbed steadily over the past couple of months after falling in the 2nd quarter of the year. Due to tariff concerns much of this inventory build has been driven by US businesses importing more goods than they traditionally would. This has caused inventory/sales ratios to creep up from the lows seen earlier in the year. The total business inventory-sales ratio (TBIS.USA) reached 1.35 in October after hitting a multi-year low of 1.33 in the middle of the year. This trend is likely to continue for the remainder of the year, which should ease some time-sensitive pressure on carriers that were previously held to just-in-time inventory movements. In addition, if businesses are indeed bringing goods into the ports earlier than normal and storing them in inventory, then once tariffs hit there should be a shift away from port volumes and a rise in shipments from warehouses to retailers or manufacturers. When this happens, inventory/sales ratios should continue to drift downward, resuming the trend seen earlier this year. sonar.freightwaves.com 9
Labor Markets Of course, any strength that emerges from the retail sector hinges on continued support from job and income growth. The impressive pace of hiring and accelerating path of wage growth boost consumer sentiment in the economy provide critical support for spending behavior. Job growth slowed down as the the economy added 155,000 workers to payrolls during the month, down from a downwardly-revised gain of 237,000 in the previous month. This fell well short of consensus estimates of a 198,000 gain, but is still a solid number on the heels of last month’s impressive result. Job growth has now been positive for a record 8 years and two months in a row, and has averaged over 200,000 per month since the start of 2018. Other measures of labor market health suggest that hiring conditions remain generally tight in the economy. The unemployment rate (UEMP.USA) held steady at 3.7%, matching the lowest rate in the economy since 1969. Wage growth also continued to advance at a solid pace in this morning’s report, as average hourly earnings rose 0.3% from October’s levels. Yearly earnings growth exceeded 3% last month and remained unchanged at 3.1% in November. This would suggest that the shrinking pool of available workers is leading businesses in the economy to raise wages in an effort to attract and retain employees. Going forward, the combination of a lack of qualified available labor and higher wage rates will likely cause the pace of hiring to slow from the current pace. The 155,000 jobs added result seen in November is likely to become the norm for the labor market. The economy is beginning to transition from a high job growth, modest wage growth environment to one with more modest job gains but better wage growth. As long as economic growth in the economy remains at or above trend, labor market conditions will remain tight and this shift should continue in upcoming quarters. However, like many of the other indicators in the economy, there are some concerns that hiring in the economy may slow faster than expected. Survey data has increasingly reported that businesses in the economy are concerned about all of the uncertainty surrounding trade sonar.freightwaves.com 10
Labor Markets (cont.) policy. The U.S. recently agreed to a cease-fire in the ongoing trade dispute with China, but has yet to reach a concrete resolution. What this means is that the air of uncertainty surrounding tariffs is likely to remain at least through the early parts of 2019, and businesses may be more reluctant to hire new workers. Our view is that a prolonged trade dispute will eventually have a negative impact on hiring trends in the economy. However, most of the job growth in the economy comes from the service sector, which is less affected by tariffs and trade policy. As a result, job growth is likely to remain strong enough to keep the labor market tight in upcoming quarters.Despite the sowing pace of job growth in the overall economy, hiring within the transportation and logistics industry remained strong as employment grew by 25,400 during the month. As was the case in October, much of the gain was driven by parcel companies, which saw the largest monthly job gain in nearly two years with 9,900 workers added to payrolls. Warehousing and storage also enjoyed strong employment growth, adding 6,200 jobs in November The trucking industry also saw solid hiring during the month, adding 4,500 workers during the month on a seasonally adjusted basis (EMPS.TRUK). This was offset by downward revisions to previous data, which revealed a slight decline in trucking hires in October. Still, trends within the industry continue on a general climb, and employment within for-hire trucking is now 2.5% higher than at this point last year. To put this in perspective, consider that employment in the economy overall is growing at a 1.7% pace. This would suggest that the trucking industry is gaining some ground as it attempts to address the capacity crunch. Hiring in the industry is not occurring as quickly as it among parcel companies and warehouses, which benefit from exceptionally strong growth in e-commerce demand. Trucking employment is growing faster than other modes of surface transportation however, and is even outpacing manufacturing hiring in the economy. sonar.freightwaves.com 11
Housing and Construction As mentioned earlier, housing and construction has been a consistent source of weakness for freight demand and the economy overall. Housing continues to be plagued by problems on both the supply and demand side of the market, restaining the amount of activity that most expected at the start of this year On the construction side, housing starts(HOUS.USA) jumped in November, rising to a 1.256 million annualized pace from a 1.217 pace in the previous month. The gain in November was entirely driven by a rise in the volatile multifamily component of housing starts. Single family home starts fell 4.6% in November and are now 3.6% lower than at this point last year. As was the case in September and October, data on November housing starts was distorted by weather events. While results in previous months were restrained by hurricanes hitting the South region, November data on single-family home starts was held back by the recent wildfires in California. Single-family starts in the West region (HOUS.URWT) fell by a whopping 24.4% in November, helping to bring down the overall housing numbers. This decline was partially offset by a 6.8% gain in the South, likely boosted by rebuilding activity after the hurricane season. All of these weather-related fluctuations have made it difficult to interpret the underlying trends in recent months. On one hand, the results from the single-family construction sector were not as bad as the numbers might suggest, because the downturn in the West is only temporary. In fact, sonar.freightwaves.com 12
Housing and Construction (cont.) the weakness in November should lead to additional construction in upcoming months, as residents look to either rebuild or replace their damaged homes. On the other hand, there was already some rebuilding activity helping to boost single family construction during the month. In addition, the West wasn’t the only region to experience a decline during the month. Every other region except for the rebuilding-aided South saw declines in single family home construction during the month, suggesting that the softness in the sector is much broader than just a temporary weather problem. The fact is that housing had already been a disappointment before any of these major events occurred, and once all of the rebuilding happens, the construction industry will still be faced with some key concerns. The construction industry continues to struggle with finding skilled workers to build homes. In addition, home builders have struggled with a lack of developed lots for building. This shortage of available lots for construction means that prospective home builders have to pay more for the limited supply available. This adds to the costs of building new homes, and further contributes to the disappointing building activity in 2018. Headed into next year, there are no easy solutions for these problems, and we expect housing starts to continue to struggle once all of the weather effects fade. Unfortunately, it may be quite a while before we get a clear picture of construction trends. Even without major weather events like hurricanes and wildfires, housing data can be difficult to interpret during the winter months. Abnormally cold or warm weather in December, January, and February can cause unusual jumps or declines in building activity. Add to that all of the pent up building activity caused by damages from recent events, and it is likely that housing construction data will be quite volatile through the early part of next year. On the demand side, sales have also been a disappointment throughout the course of the year. However, recent signs suggest that the pace of sales may be picking up as we near the end of the years. Purchases of previously-owned homes rose for the second straight month, rising to a 5.32 million annualized pace in November from a 5.22 million pace in October. However, even with improvement in recent months, existing home sales are still 7.1% lower than they were at this point last year. The lack of available inventory for purchase remains a key issue for existing home sales. Home building activity has been weak, so potential buyers are having a hard time finding homes for purchase. This, in turn, has pushed up prices in the economy throughout the course of the year and further affected demand. Rising mortgage rates may also be curbing activity. The pace of home price appreciation has eased in recent months but the 30-year mortgage rate has increased by 60 basis points sonar.freightwaves.com 13
Housing and Construction (cont.) throughout the course of the year. This has further affected the ability of potential consumers to purchase a home. Lastly, the recent change in the tax code contained some provisions that were unfavorable to homeowners. Specifically, the limits placed on the amount of property taxes that can be deducted from taxable income have removed some of the incentives for purchasing higher-end homes, particularly in high property tax states in the Northeast. As with construction, these issues are not disappearing any time soon, so expect home purchasing behavior to advance at a slow pace in upcoming quarters. The softness in home buying has begun to affect some of the connected industries in retail. Home buying typically drives remodeling and renovation spending, as well as additional spending on home furniture and household appliances. Retail spending on building materials and appliances have seen growth in 2018, but have lagged behind overall retail spending in the economy. It is through these channel that home sales affects freight demand in the trucking industry, and weakness on the home sales front combined with softness in home building has negative implications going forward. sonar.freightwaves.com 14
International Trade In the trade sector, all eyes have been focused on goods import and export numbers for signs that the recent implementation of tariffs on many imported goods is beginning to affect global trade patterns. To this point, tariffs have certainly introduced some volatility into usual trade behavior, but overall trade volumes remain generally strong as we round out the year. On the export side, much of the volatility has been driven by agricultural exports. China implemented tariffs on US exports of agricultural products such as soybeans and sorghum in July of this year in retaliation for some tariffs that the Trump administration placed on imports from China. This led to a surge in agricultural exports during the 2nd quarter in advance of the tariffs, and pushed overall goods export growth (GOEXG.USA) to a multi-year high above 13% in May. China followed up the tariff hike with an outright ban on soybean imports from the U.S. As a result, exports of agricultural products have struggled in recent months, dropping 6.8% in October after an 8.0% decline in September. This has weighed down overall export growth, which has fallen below 9% in the most recent data. China has recently agreed to lift the ban on soybean imports, which should help export performance in upcoming months Not everything here is tariff related however. Global growth among some of the U.S.’ key trading partners is beginning to show signs of slowing down, most notably the UK and the rest of the European Union. This makes for a tough export environment, and will likely continue to be an issue in upcoming quarters even if tariffs are not increased any further. In addition, the U.S. Dollar has appreciated over 5% in real terms since the start of the year. This makes U.S. made goods comparatively more expensive and further hampers export performance On the import side, the U.S. has already implemented 10% tariffs on a number of Chinese imports, in addition to earlier tariffs on imports of steel and aluminum. Up until recently, the sonar.freightwaves.com 15
International Trade (cont.) U.S. appeared set to raise the tariffs on Chinese-made goods to 25% at the start of 2019, which led many businesses to begin bringing in imported goods ahead of schedule to avoid the potential tariff hike. As a result, goods imports (GOIMG.USA) have surged in recent months, with growth reaching as high as 11.5% before moderating in October. Like exports, there will likely be some payback on the import side in upcoming months. Even if tariff increases never materialize, businesses already find themselves with higher than normal inventories of imported goods, and will likely scale back import behavior while these inventories get drawn down. This may disrupt some of the normal seasonal patterns, particularly those are Chinese New Year which takes place early next year. Also like exports, there are some fundamentals at play in the recent import results. The strength in the domestic U.S. and general tightness in capacity for U.S. businesses encourages imports of goods from the rest of the world. In, addition, the gain in the value of the U.S. dollar makes foreign goods comparatively cheaper and further encourages import volume. What this means is that the trade deficit may rise even with the U.S. placing or increasing tariffs on goods from the rest of the world. There are likely to be some wild swings in import and export performance as the U.S. and other countries hash out their plans for trade policy, but the deficit should tend to generally widen in upcoming quarters A widening trade deficit is not necessarily bad news for freight demand, however. Both import and export movements are good for ocean, air, and surface freight demand, so as long as overall trade is growing, it is generally good news for carriers. October’s results were a bit of a disappointment in this regard, as the decline in goods exports outweighed the gain in imports. Still, year-over-year growth in to the total value of traded goods (exports plus imports) is growing at al healthy clip despite all of the global concerns over U.S. trade policy. Growth has hovered near double digits since the end of 2017, and has yet to show any real signs of slowing. sonar.freightwaves.com 16
International Trade (cont.) The bigger concern from a trade perspective isn’t whether or not tariffs will increase to cost of trading with other countries, it’s the state of global growth. With signs in the U.S. economy pointing towards a less impressive year of growth in 2019 and growth among major trading partners also beginning to slow, overall trade volume growth will likely moderate from the rapid pace seen in 2018. sonar.freightwaves.com 17
Prices and Inflation Overall, signs from nearly every areas of freight demand point to softening growth headed into next year. In addition, hiring trends within the industry suggest that trucking has been adding capacity at a decent clip. As a result, trucking will likely feel less capacity-constrained in 2019 than it did in 2018. As a result, rate increases should calm somewhat within trucking. Year-over-year rate inflation in the trucking industry is facing increasingly tough comparisons to last year, which is going to put downward pressure on yearly gains going forward. Freight rates began their surge last in August in the aftermath of Hurricane Harvey, and continued through the impressive holiday season of 2017 and the ELD mandate. As a result, the tough comparisons should lead moderating yearly rate growth even if rates continue to climb. This phenomenon is already playing out in the Producer Price Index (PPI) data released by the Census Bureau, which measures the prices that businesses receive for the goods and services they provide.. Year-over-year growth in the PPI for the trucking industry (PPIG.GFTK) has come down from the record high of 9.8% set in July of this year, settling in at 8.3% in November. However, rates are still making solid advances in the industry, with the PPI for trucking making an impressive 1.2% monthly gain in November after a solid 0.5% increase in the previous month. Gains during the month were largely driven by long-distance truckload services, which posted a second consecutive monthly gain above 1% with a 1.3% gain in November. Both truckload and LTL services enjoyed healthy gains during the month, with rates rising 1.2% and 1.6%, respectively. Local trucking rates also experienced a respectable 0.5% increase during the month, and are now 10.1% higher than at this point last year. This would suggest that carriers still retain some pricing power in this environment of moderating demand,and have been able to extract higher rates across many different types of freight. Year-over-year rate inflation probably will not reach the highs seen in July for quite some time, but the pace of rate increases is still well above average as we head into next year. sonar.freightwaves.com 18
Policy and Risks Much of this outlook for above-average but moderating growth going forward hinges on the policy environment as we head into next year. Drastic changes to fiscal, monetary, and trade policy could have significant implication for the performance of the economy in upcoming quarters, and there are a number of issues that remain unresolved at the end of 2018. Trade policy has been at the forefront of the policy arena throughout much of the year, beginning all the way back in February when President Trump announced the first tariffs on steel and aluminum imports from the rest of the world. Much of the attention has been focused on the U.S. trade relationship with China, which has turned into an escalating dispute over what the U.S claims are unfair trading policies regarding U.S. intellectual property. The U.S. was initially scheduled to increase existing tariffs on goods imported from China to 25% at the start of the year. In addition, the Trump administration threatened to broaden the scope of the tariffs to potentially include all goods imported from China. However, President Trump and President Xi Jinping of China met during the G-20 summit in Argentina at the end of November and agreed to halt any escalation in the trade dispute until March while the two sides try to come to an agreement on trade policies going forward. The good news is that this gives the economy a bit more time before some of the more painful tariffs kick in. As mentioned earlier, a broadening in scope of tariffs combined with higher tariff rates would have a bigger impact on U.S. consumer and could damage consumer confidence and cause a level shift in prices in 2019. Unfortunately, the agreement reached during the G-20 did little in the way of actually solving any of the existing issues. What this means is that the cloud of uncertainty that has lingered over the economy throughout 2018 is going to remain an issue in 2019 as well. Businesses already appear to be reluctant to make any big investment plans given the unresolved status of trade disputes, and this trend will continue until some of these issues reach a conclusion. In the fiscal arena, the partial shutdown of the government has thrown a surprising wrinkle into the mix. President Trump and Congress were unable to reach an agreement to fully fund the government by the December 21 deadline, leaving several key areas of government such as the Department of Homeland Security and the Department of Transportation without money at the end of the year. Historically, government shutdowns are fairly short-lived. The government had already shut down twice in 2018, with each shutdown lasting only a few days. The last significant shutdown came in October of 2013, when President Obama and Congress argued over funding for Obamacare. and shuttered the government for two weeks. GDP growth during sonar.freightwaves.com 19
Policy and Risks (cont.) that quarter was noticeably impacted, with the shutdown subtracting approximately 25 basis points from quarterly growth. This current shutdown will likely be less painful on a week-to-week basis, because most agencies have already secured funding through previous agreements. However, most signs point to this shutdown being considerably longer than average. Congress is out of session until January 3, and has made no plans to hold emergency sessions to resolve the shutdown. In addition, the Trump administration has drawn a hard negotiating line over funding for the border wall along the Mexico border, and will soon have to deal with an incoming House where Republicans no longer hold the majority. If this shutdown drags on, the economic impact could be much larger even if only part of the government is not operating. In addition, questions have emerged over the future pace of monetary policy. The federal Reserve increased interest rates for the fourth time this year in December The prevailing feeling from the Federal Reserve for most of the year has been that there would be an additional 3-4 hikes in the key federal funds interest rate next year, matching the pace seen throughout 2018. However, the Federal Reserve has recently changed its tone, suggesting that there will be a pause in rate increases next year. With inflation low, unemployment near historical lows, and signs emerging that growth is slowing, the Fed may decide to hold off on rate increases entirely. It is worth noting that there is a considerable lag between when monetary policy is enacted and when it actually takes hold on economic activity in the economy. What this means is that the economy next year will be affected by the rate increases that were put into place throughout 2018, particularly for the housing and automotive sectors. Even if there are not further increases from this point, much of the impact on 2019 growth have already been put into place. sonar.freightwaves.com 20
Freight Market Update The November freight market recovered slightly after bottoming near the end of October. Tender rejection rates increased slowly through the first couple of weeks before spiking near the Thanksgiving holiday. Volume was a factor as the national tender volume index (OTVI.USA) averaged approximately 1.5% higher than October during the month. There was not a lot of volatility aside from the typical holiday disruption. As with October there was no noticeable event that lead to national disruption. sonar.freightwaves.com 21
Even with volume increasing slightly over October, there was not enough to destabilize the market like we saw in 2017. Last year the market was still reeling from the hurricanes and was entering one of the biggest retail shipping seasons in the past five years. Even though total volume was higher in 2018 there were numerous issues with imbalance as trucks had moved to the gulf coast region for the recovery efforts. The big story this year has been the tariffs and their impact to the economy and subsequently freight market. Maritime shippers have been able to capitalize on increased volume as the international shippers scrambled to pull inventory into the U.S. in order to buy time to reorganize their supply chains. This activity has put increasing pressure on ports and drayage carriers. A lot of the volume hits the largest port in the country in Los Angeles, but it has overflowed to some of the eastern ports like Savannah. November saw rates continue to increase for most of the month, but then took their first significant downward turn in November for the first time since the summer. The volume spilled into the freight market in November, fueling the L.A. markets with outbound freight. sonar.freightwaves.com 22
The Cass Freight Expenditure Index – an index that measures total freight spend including intermodal and rail – fell for the second consecutive month, returning to a more normal pattern after increasing during this time in 2017. After hitting record highs from May to September, the index has dropped from a value of $2.99 to $2.85 in November. The drop is another indication demand is weakening in relation to supply, and volatility is lower. Along with signs of freight market slowing there is indication the capital expenditure side is slowing as used truck prices for 3 (UT3.USA)and 4 year (UT4.USA) models contracted together for the first time this year. The stimulus from the tax breaks and booming freight market sonar.freightwaves.com 23
revenue may be running low as orders are filled and signs of a slowing economy are visible. There are still reports of backlogs from OEMs as there is about a 6-9 month cycle from order to delivery, but it looks as though demand on the used truck end may have peaked. The big story of the month was the continued volume coming out of Southern California. After having a record month, both the port of Los Angeles and Long Beach cooled down – L.A. loaded inbound volume down 8.8% and Long Beach up 0.2% YoY. This did not translate to the outbound freight due to the delay of getting freight off the ship to a facility to prepare for inland shipping. Some of the freight does get put straight onto the rail but a lot of it will be brought to a transloading facility or stored until needed. sonar.freightwaves.com 24
Related to the inbound container volume, intermodal containers shipped on rail have been steadily increasing since 2017 and hit the second highest weekly volume of all time the last week of November – 271,198 containers. The biggest volume week occurred in late September of this year at 272,955 containers. With L.A. and intermodal dominating the freight market in November, tender rejection rates increased 416 bps in the first two weeks. They hit the top on November 23rd, the day after Thanksgiving, at 14.67% before starting to fall and ending the month at 8.54%. The rollercoaster ride was the result of carriers moving off and on the coast as there was little freight moving back into the market. Aside from the abundance of port volume, reefer demand also played a big role in keeping L.A. heated most of November. Reefer rejection rates hit summertime levels around Thanksgiving as holiday demand fueled a lot of food product movement. Reefer rejection rates topped 35% in late November – a level higher than all of May and most of June when produce season in normally in full swing. With the main production areas for lettuce and other Mediterranean crops moving south these rates subsided quickly by the end of the month. sonar.freightwaves.com 25
Further up the coast in the Northwest tender rejection rates hit annual highs as the apple harvest and Christmas trees moved out of the region. Oregon is the number one producer of Christmas trees in the country and the week of Thanksgiving is the heaviest week on average. The Outbound Tender Rejection Index for the Northwest region (OTRI.URNW) reflected this with the index peaking at 27.96% after Thanksgiving. The Northwest markets typically have more inbound than outbound loads -backhaul- but trended the other direction this month. The Portland Headhaul Index (HAUL.PDX) hit its highest value of the year of -10.52, an indication that outbound volume had increased sonar.freightwaves.com 26
significantly in relation to inbound volume. This is the time of year carriers can go into the region and have a good chance at landing a load without deadheading long distances. The rural Pendleton, OR (OTRI.PDT) and Twin Falls, ID (OTRI.TWF) markets hit their highest rejection rate levels of the year in late November after trending up from August through October. As mentioned, the late fall harvests had an impact on capacity, but this was probably exacerbated by the rush of freight coming out of L.A. as trucks were occupied deeper into the 4th quarter than usual. sonar.freightwaves.com 27
The extended port season had little impact on the rest of the U.S. as volume was relatively low in other major markets. The Dallas market which is heavily tied to activity on the West Coast did experience a boost of volume after declining steadily since the end of June. Subsequently rates coming from L.A. to Dallas increased and topped their summer peak level, hitting the annual high of $2.52/mile the day after Thanksgiving. This did not last long as the rates swiftly recovered after peak demand to around $2.00/mile a week later. The rates from L.A. to Seattle increased but not to the same extent as that had in relation to the summer peak in years past. Thanksgiving rates are typically 13-17% lower than summer peak levels. 2017 was an anomaly as the Thanksgiving rates were only 1.6% lower than the sonar.freightwaves.com 28
summer peak. This year we saw rates 22% lower than the late June peak. This is a function of June being the hottest month for freight in over a decade and the general market cooling. Rates were still up approximately 7.7% year-over-year. The market remained relatively quiet on the east coast. Chicago was flat with a little hitch in volume occurring around Thanksgiving. Volume took a quick dip in the Joliet market, where several railheads are located, prior to the holiday and then jumped after the break as the L.A. freight hit the market for the holiday rush. Capacity was plentiful as tender rejection rates fell throughout the month, however. sonar.freightwaves.com 29
Further east Harrisburg, PA experienced declining volume but decreased capacity, save for the days immediately preceding Thanksgiving. With carriers supplying the west coast this left the northeastern corridors exposed to reduced capacity even as volume declined. Volume dropped approximately 13% the first 16 days of the month then spiked 13% before dropping 21% to finish the month well below where it started. Tender rejections also recovered after the break. Atlanta was relatively quiet in November along with most of the Southeast. Volume was relatively falt but did take a few turns during the month. Capacity was not as available as it had been leading into the holiday but moderated to close the month. sonar.freightwaves.com 30
The major port in the southeast is the port of Savannah. As the west coast ports were clogged with freight, maritime shippers discounted rates to the east coast to help relieve some pressure. This did not hold for long as rates and volume increased after the first week of November. Outbound volume surged after Thanksgiving as well as freight was moved from the port to regional distribution centers and cross dock facilities. Many major shippers like Home Depot and Amazon have facilities nearby. sonar.freightwaves.com 31
Heading into the colder months weather becomes an increasing factor on day to day movement. Unlike tropical storms the winter events tend to be short lived disruptors versus the months it can take to recover from a hurricane. Aside from a few bigger systems that moved across the upper Midwest and into the Northeast there was little major impact from any significant weather event. The days leading up to Thanksgiving were very quiet in terms of precipitation across the country. Looking Ahead Moving into December we have not observed too many large disruptions. November was a far cry from the November of 2017 and so far, December is proving to be much different as well. Is it a return to normal or just a brief respite? Economic conditions are smoothing, but freight volume is higher than it was a year ago. The biggest difference seems to be the lack of large disrupting event that throws the market out of balance. The heavy port volume may have been a bit of a pulling forward of volume which may leave the winter months with less to move. Although there is a surplus of freight sitting in warehouses that will move eventually. It is just a matter of how much is needed and when. sonar.freightwaves.com 32
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