The end of May brought with it a host of good economic news in the US. A key manufacturing index was up, construction seemed to get a boost, durable goods orders were up earlier in the month, and the jobs report is expected to show a significant boost – courtesy of the census. All of this is adding up to what transportation industry experts hope is a more traditional peak shipping season. Early indications would suggest that capacity is tightening and shippers are starting to get a jump on seasonal inventory build-ups.
General: Manufacturing: The May ISM Purchaser Manufacturing Index came in at a strong 59.7, down from 60.4 in April – but respectable and signified only the mild “breather” we had been talking about for the month. For all intent and purposes, the optimistic economists in the country believe that we have passed the difficult phase of the year. A first quarter boom followed by an early second quarter lull. That should be followed by a stronger, and more traditional, peak third quarter season.
In nearly every category (including company open-ended comments), the feedback from participants is that the entire sector is improving. As the lists below show, there are many positives and only a couple of dark clouds – both of which seem to be working their way through the industry without causing too much trouble.
Some other highlights to point out in the report:
Positives: New Orders remained constant at a strong 65.7 Production was down only slightly – the result of some hiring by manufacturers (which actually lowers productivity per employee) Employment up by 1.3 percentage points – proof of more hiring in the sector and higher capacity being added to the sector Inventories declined significantly – a sign that consumption has continued and businesses are keeping their inventories tighter. This should translate into positive raw material and finished goods transportation in a month to six weeks. Transportation companies should “feel” this rebuilding of inventories. Backlog of orders grew by 2 full percentage points, a sign that new order demand is currently being processed on the assembly line and finished goods will be hitting the transportation sector in the next six week manufacturing cycle.
Negatives: A potential problem with currency rates as the dollar strengthened against the Euro affected the rate of import and export activity. Exports slowed to flat and imports were actually down a bit. This could also signal building demand and the lag from the April softening that we have been describing. That would suggest that maritime and international air cargo would begin to build in June.
Because demand is increasing so fast, there is a bit of inflationary pressure on raw commodities as a result. Here is the situation to watch:
Prices on the ISM’s report are down – suggesting that manufacturers are still forced to remain a bit more competitive to keep volumes of sales moving
But, raw material prices are increasing also. This causes a squeeze on profit margins.
Ultimately, these higher prices will be passed on to consumers as higher retail prices.
Transportation General Some of what we are hearing on the transportation front echoes positive reports being sent by the manufacturing sector. Across the industry, providers of transportation are reporting much stronger volumes – and still at rates that dwarf the early 2009 activity.
Maritime: the Baltic Dry Index has shot up to over 4,000 points (up from 3,500 in mid-May) on the build-up in raw materials and commodities movements. Inbound cargo is also starting to pick up noticeably by most in the sector. Anticipating a busy peak season, many users of inbound port services are watching the situation carefully in the Gulf.
Air cargo: retail and manufacturing strategies to keep inventory levels low are still playing out in the sector. That is helping to boost the inbound air cargo volumes from Asia – some shippers are using smaller order quantities in high-speed modes to fill stock outages.
Trucking: volumes from TL to LTL are picking up at a solid rate. Shippers have begun to report some industry-specific increases in transportation costs as competitors work to “rationalize” pricing in the LTL sector. The net result for many of these companies is that they will get stronger – especially as capacity tightens.
Rail: rail volumes are still strong and the sector is still projected to be one of the primary benefactors of several different trends – ranging from sustainability measures to using rail as a hedge against fluctuating fuel costs. Intermodal and the movement of raw commodities are keeping volumes respectable and an anticipated busy harvest season (due to supporting growing weather conditions across the country) should help to keep capacity tight through the rest of the year.
Note: As with everything, there are unanticipated bombshells that can derail recovery. There is a need to watch a series of geopolitical developments that could derail growth (Middle East, North Korea, Mexico), environmental situations (oil spill in the Gulf, active hurricane season, volcanoes in Europe, etc.), and a host of potential economic debacles in the financial sector. All of these could radically change the outlook for economic recovery very quickly. For now, we’ll keep the comments positive and hope that this will be one of the best peak seasons for quite a number of years.