Freight Transportation Outlook Update, August 19, What of the Peak Season?




Commentary:

Overall:
The outlook for the next thirty days for the freight transportation industry is somewhat muted. Traditionally, August, September, and October are strong transportation months – the “peak season” of annual transportation activity. Because of the global recession, this year will be remarkably different.
Many of the freight indexes will remain at, or near, historic lows for the sector with only “green shoots” of improved activity before the end of the year. Given some of the challenges beginning to emerge in the economy, there is also a risk of another downturn after the current wave of increased automotive activity works its way through business inventories and the boost that the Cash for Clunkers program provided the industry.

Macro Economic Trend:
The Macro Economic Trend line represents the key elements of the economy that tend to drive freight transportation activity. This line is comprised of elements such as consumer sentiment and spending, retail, construction, manufacturing, the US dollar, oil and commodity prices, and other drivers of freight transportation. The trend line provides a visual cue into the direction of the current trend and the level at which that trend is either contributing to, or detracting from general growth. The stairs on the left side of the graph represent the general position of the current economic situation and how far from growth that condition is.

8/19 Update: Concern over a slowdown in consumer sentiment, continued rise in unemployment, and hints of high government debt burdens are weighing on markets and slowing economic activity. Retail continues to be lackluster and some of the most recent corporate earnings reports provided a 2H 2009 forecast that is well under where analysts had expected it to be. For this reason, the outlook for consumer-driven activity is much weaker than anticipated in the near term and freight transportation companies are going to experience continued weakness through the end of 2009. There will be a slight lifting of freight volumes with all annual upticks during the Christmas season, but against historical volumes, it will remain one of the weaker freight environments in decades.

Macro Freight Trend:
The Macro Freight Trend takes a number of key elements of the freight transportation economy and averages those to create the trend. This line is comprised of elements such as for-hire truck transportation, air cargo, deep sea shipping activity, rail freight volumes, and other modes and elements of the freight transportation industry.

8/19 Update: Freight volumes across modes continue to show general weakness – fueled by the general economic recession. Of all modes, only the rail commodities market is reporting a slight uptick in activity – largely driven by increased demand for metals and grain in the export markets. Keep in mind that some transportation companies are beginning to report “positive” improvements in volumes – but these are still at critical low levels for these carriers. The freight transportation sector has felt the current freight sluggishness, in general, since the fall of 2007. Given the long length of time of operating in this environment, any positive change in volumes is welcome – and it becomes a headline. Many of the transportation companies have now adjusted costs in their transportation networks to meet current demand – the downsizing at providers is largely over. As new volumes come on through improved economic activity, most of the carriers in the sector will see immediate improvements in utilization and yield – despite strong pricing competitive pressure.

The trend for the freight transportation sector remains weak in the next thirty days – but could see an anomaly develop in two areas. First, the Cash for Clunkers program has spurred manufacturing activity for all of the major producers in the US (including Toyota and Honda specifically). This has a trickle-down effect and the Institute for Supply Managements PMI should show that the sector expanded in August. This is a short-term spike in activity that is likely not sustainable from the government program alone. Second, business inventories are at historic lows. Even a small improvement in sales volumes at the nation’s retailers would cause for some scrambling to fill stock-outs – creating activity at manufacturers and wholesalers to fill those stock replenishment orders. Both of those conditions would serve to help the freight transportation sector see a more positive early fall season.

The back-half of the season (October, November, and December) will need a boost from other stimulus programs or a general increase in international trade to find support. If the dollar remains weak, there could be support for general increases in exports. But, economists are becoming more skeptical that the current improvement in the economy will be sustainable – and some government spending programs could actually hurt that outlook by adding to the debt burden (and the perceived risk of inflation offset by the Fed’s action to tighten interest rates – all of which slows growth for the macro economy and the freight transportation sector). If the health care or energy bills are passed this fall, there is likely to be more pressure on the stock market and companies will cut labor costs to compensate for the increase in overall operating costs that will come with those pieces of legislation. This would impact volumes as well as the unemployment rate increased.

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