Volatile energy sector, high inventory levels may result in ‘sluggish’ 2016 start for U.S. shipping industry

Editor’s note: This report is a component of the Arkansas Transportation Report, a monthly compilation of data and news regarding the trucking, railroad, airline, and river barge industries.
––––––––––––––––––

While February numbers for the trucking and other freight hauling sectors were positive compared to recent months, two economists who watch the industry are uncertain shipping and tonnage levels will see a “robust rebound” for the first half of 2016.

The American Trucking Associations’ Truck Tonnage Index rose a surprising 7.2% in February following a revised 0.3% dip in January. The increase is the largest monthly move for the index since January 2013 (11.4%) and the largest year-over-year increase since December 2013 (10.4%).

The not seasonally adjusted index, which represents the change in tonnage actually hauled by the fleets before any seasonal adjustment, equaled 129 in February, 0.4% above the previous month. For all of 2015, the seasonally adjusted tonnage was up 2.6% compared to 2014.

ATA Chief Economist Bob Costello noted in his report that the February rise reflects some pent up activity from winter storms in January. He warned against being too excited about the February gain.

“The strength was mainly due to a weaker than average January, including bad winter storms, thus there was some catch-up going on in February. Normally, fleets report large declines to ATA in February tonnage, in the range of 5.4% to 6.7% over the last three years. So, the small increase this year yielded a big seasonally adjusted gain. If March is strong, then I’ll get more excited,” Costello wrote.

ONGOING INVENTORY ISSUES
Costello continued his warning about high inventory levels with U.S. businesses.

“I’m still concerned about the elevated inventories throughout the supply chain. Last week, the Census Bureau reported that relative to sales, inventories rose again in January, which is troubling. We need those inventories reduced before trucking can count on more consistent, better freight volumes,” he said.

Trucking serves as a barometer of the U.S. economy, representing 68.8% of tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods. Trucks hauled just under 10 billion tons of freight in 2014. Motor carriers collected $700.4 billion, or 80.3% of total revenue earned by all transport modes. The Arkansas Trucking Association reports that the industry supports 83,000 jobs and contributes $3.5 billion in annual wages.

The February Cass Freight Index report showed that shipments were up 8.3% compared to January, but down 2.6% compared to February 2015. Cass uses data from $26 billion in annual freight transactions to create the Index. The data comes from a Cass client base of more than 350 large shippers.

‘FRAGILE ECONOMIC CONDITIONS’
Rosalyn Wilson, a supply chain expert and senior business analyst with Pasadena, Calif.-based Parsons, who provides economic analysis for the Cass Freight Index, said weak global markets and “China’s economic turmoil” will be a negative for the industry in 2016. Also a drag on the industry is the recession in the nation’s energy industry, she said, noting that “current economic conditions do not support a robust rebound.”

“The volatility in the energy markets, as well as fragile economic conditions worldwide, has introduced a strong element of uncertainty into future freight growth in the U.S.,” Wilson wrote, adding that economic indicators point to a “sluggish” first half of 2016.

Like Costello, Wilson also said high business inventories are a problem.

“Consumers are in a stronger position with positive income growth, but still remain conservative in their spending; and more growth has been seen in the purchase of services (eating out, hotels, airfare, movies, etc.) rather than goods purchases. Inventories remain very high in the goods sectors, which has reduced imports and domestic manufacturing.”

Continuing on that point, Wilson noted: “The goods sector is fast approaching the need to rationalize bloated inventories as it did midway through the recession. Interest rates and warehousing costs are on the rise, increasing the cost of carrying that inventory.”

Following are other points of analysis in the February Cass Freight Index.
• Railroad carloadings rose 1.1% in February after plummeting 20.6% in January. Carloadings continue to be hampered by declining coal shipments. Carload traffic rose for motor vehicles and parts, miscellaneous carloads, and waste and nonferrous scrap.

• The weakness in intermodal is indicative of the faltering manufacturing sector, bulging inventories and weak container shipments at the ports.

• The housing market and residential construction ticked up in both January and February which results in new freight. That market will be very sensitive to climbing interest rates though.

• Following the trend, we should expect continued growth in March, although somewhat subdued compared to February.