Many of us agree that pictures can tell a multitude of information. In today’s Transportation Activity Index, we would like to focus on two different views of market drivers of transportation activity (we captured the two that drive the biggest percentage of the total transportation universe).
The first is one that we have shown many times, but last night’s update on these figures is critical. Business inventory and the management of that inventory is a key component of what happens in the transportation sector. The chart at right shows the Inventory to Sales Ratio from the Federal Reserve for the past 20 years. Several things strike us. First, the drop in the index over the last twenty years (putting to one sie the spike in 2008/2009) is a factor of maturing supply chain management. As supply chains get “smarter” and more sophisticated (especially as they can begin to better predict demand), the amount of inventory that must be managed at any one time will drop significantly.
However, and secondly, what we see happening in the latest measures is a showing of business uncertainty – concern over where the economy is headed and lack of confidence that demand will be significant enough to warrant having more inventory on hand than usual. The chart at right is the same business sales to inventory ratio from the Fed, but shown just since the year 2000 for more granularity. The latest reading of the ISRATIO shows a drop in the ratio after remaining flat for essentially the last six to eight months. Note the period covered is a five year view in the second graph at right. We can see business anticipation of growth and demand in the figures. The rise in the index during the 2006 peak we saw (some in transportation call it the most successful, profitable year in many company’s histories). Using that as a barometer, we can say that the current environment is one of “significant conservatism”.
Some of the impacts for the transportation sector (from a low ratio) would include:
- Tight inventory creates more opportunities for express transportation services. Anything that can move small shipments very quickly should do well in this environment.
- This also causes a drop in commodity prices – which would actually entice some companies to stockpile raw materials. Therefore, we can’t just assume that the bulk commodity transportation sector will slow – in fact, it could easily move upward. What happens after that is another matter. With stockpiling of materials there would seemingly be a bit of a respite for a while – and that would come across as an unseasonably slow period of a month or more later in the year.
- Transportation capacity will remain tight because there will be more shipments – but yields will reduce because shipment weights will be lighter. Fuel prices are easing, so the ability to remain profitable will remain strong.
In all, this can still be a very profitable period for the transportation sector. Understanding the impact of tight inventory management is half of the battle of knowing what shippers are looking for.
Our second “chart of the week is a review of the newly released Industrial Production Figures referenced against the Business Cycle index – using the US Leading Indicators Index. This latter index is typically one of the early indicators of a shift occurring in business cycles and economic activity.
The charts show somewhat of a correlation with one another. If we watch the IPI reading from April, we saw an improvement in the index. Even though the USLIND Index was trending downward in March (the April reading will be released in the last week of May).
Transportation companies have used the IPI for decades to forecast transportation demand. As the IPI moves upward, they typically will see a general increase in demand for transportation services. Whether it is the movement of raw materials forward into the upstream manufacturing cycle or the movement of finished goods downstream into the retail or wholesale goods segments, the IPI is a good indicator of activity. Therefore, we can understand why there is some capacity issues in the country – especially when you look at the IPI in comparison to levels achieved over the past ten years. The IPI was only higher in 2006 and early 2007.
Looking forward, we will be watching the USLIND closely for its April reading and any indication from early releases and revisions of the current USLIND. Those changes will help us understand further whether these upward conditions will continue or whether we are headed for a bit of a “soft landing” for freight movement.