National freight sector remains ‘uneven,’ muted consumer spending a concern

Editor’s note: This story is a component of the Arkansas Transportation Report, which is produced by Talk Business & Politics and sponsored by the Arkansas Trucking Association and the Arkansas State Chamber of Commerce/Associated Industries of Arkansas.
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The national freight industry has been less than solid for the first half of the year, and the second half of the year is likely to be “uneven” if not “flattish.”

July shipments were down 2.6%, and freight expenditures down 5.1% compared to the same period in 2015, according to the Cass Freight Index. The American Trucking Associations’ For-Hire Truck Tonnage Index fell 2.1% in July, following a revised 1.6% decline in June. Year-to-date, compared with the same period in 2015, tonnage was up 3.2%.

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 volatility in the supply chain and continued moves in the retail sector to manage inventories has reduced freight demand.

“July’s Cass Freight Index confirmed that overall shipment volumes (and pricing) are persistently weak, with increased levels of volatility as all levels of the supply chain (manufacturing, wholesale, retail) continue to try and work down inventory levels,” Wilson said in her report. “That said, there have been a few areas of growth, mostly related to e‐commerce, with lower levels of expansion being experienced in transit modes serving the auto and housing/construction industries. All of this added up to slightly lower shipment volume in July, the seventeenth straight month of year‐over‐year decline.”

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.

MODERATE GROWTH EXPECTED
ATA Chief Economist Bob Costello also said “inventory correction” issues create uneven demand in the trucking industry.

“On a monthly basis, tonnage has decreased in four of the last five months and stood at the lowest level since October during July,” Costello said in his report. “This prolonged softness is consistent with a supply chain that is clearing out elevated inventories. Looking ahead, expect a softer and uneven truck freight environment until the inventory correction is complete. With moderate economic growth expected, truck freight will improve the further along the inventory cycle we progress.”

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.

‘INCONSISTENT’ ENVIRONMENT
Reports from Wilson and Costello mirror the commentary from Fort Smith-based ArcBest, which recently reported an almost 49% decline in second quarter net income.

“The inconsistent economic operating environment combined with a surplus of transportation capacity continues to impact available business levels and operating margins at ABF Freight and at each of ArcBest’s asset-light logistics companies,” the company noted in the earnings report released early July 29.

For the first half of 2016, the company posted net income of $4.128 million, below the $20.712 million in the same period of 2016. Revenue in the first six months totaled $1.298 billion, down from $1.309 billion in the same period of 2016.

FLAT INDUSTRIAL PRODUCTION
Wilson said the U.S. economy slipped into an industrial recession in March 2015 thanks to a rapid decline in energy exploration and production. Consumer spending was supposed to have saved the day, but it didn’t. Instead of the U.S. economy benefitting from lower fuel prices, consumers made different decisions, according to Wilson.

“Nearly all of us practicing the dismal science of economics began predicting in the Spring of 2015 that as the price of oil and natural gas fell, the consumer would take the increase in disposable income – created by the decreases in the costs of their daily commute and heating and cooling their house – and spend it. Why? Because since the end of World War II, the greatest predictor of consumer spending, expansion or growth, was the expansion or growth of consumer disposable income. But instead of following the playbook, most U.S. consumers have been choosing to pay down debt and increase their savings rate. Simply put, the consumer has not yet picked up where the industrial economy left off,” Wilson explained.

Wilson predicts flat industrial production through the rest of 2016, and noted that if consumers continue to be stingy, it could push the U.S. into another recession.

“That said, there is a bit of irony in our prediction of possible recession,” Wilson noted in her report. “The longer the consumer saves and pays down debt, the more likely it is that the U.S. falls into a recession. But, the longer the consumer saves and pays down debt, the shorter and more mild the recession will be since there will be less excess to clean‐up. Stay tuned.”

Following are other notes from Wilson’s report.
• Inventories have now contracted from GDP for five consecutive quarters. This is the longest stretch outside of a recession since 1956‐57 and the largest in magnitude since 1995.

• Overall inventory levels remain elevated compared to sales, but with further improvement on many ratios in the second half of 2016, and unless demand takes another step down, we believe the persistent drag of de‐stocking should progressively lessen as we enter 2017.

• We continue to assert the trucking industry provides one of the more reliable reads on the pulse of the domestic economy, as it gives us clues about the health of both the manufacturing and retail sectors. Tonnage itself appears to be growing (three‐month moving average +2.75% not seasonally adjusted, +3.24% seasonally adjusted). No matter how it is measured, the data coming out of the trucking industry has been both volatile and uninspiring.

• On the consumer side of the equation, we do see some signs of hope – especially for those retailers with a strong e‐tailing or omni‐channel offering. As we have pointed out, the U.S. consumer has been saving and paying down debt with this disposable income for over six quarters. By this holiday season, we expect them to begin to spend at least part of their income. If not, the risk of an overall recession grows.