Freight economy ‘extraordinarily strong’

Capacity crunch could curtail growth.    Growth in the North American freight market picked back up in July after slowing slightly the previous month, according to the latest Cass Freight Index Report.
   Volume growth rates returned to double-digit levels, with shipments increasing 10.6 percent year-over-year for the month after a 7.2 percent uptick in June, while expenditures grew 17.9 percent following a 15.9 percent. Both volumes and spending extended their runs of year-over-year increases that began 22 and 19 months ago, respectively.
   On a sequential basis, both volumes and expenditures were relatively steady, with shipments declining 0.2 percent and freight spending rising 0.2 percent compared with the previous month.
   “From both a volume and a pricing perspective, the U.S. freight economy continues to be extraordinarily strong,” wrote Donald Broughton, founder and managing partner of Broughton Capital and author of the report. He said the continued growth of the domestic freight market is a clear signal that, for the time being, “the U.S. economy is ignoring all of the angst coming out of Washington, D.C., about the trade war.
   “Despite concerns coming out of Wall Street about the increased threat of inflation or the continued increase in interest rates, [the Cass shipment and expenditure] indices are displaying accelerating strength on top of increasingly difficult comparisons,” he added.
   Broughton warned, however, that although the current growth rates indicate a growing U.S. economy, “that level of growth may have reached its short-term expansion limit” due to capacity limitations.
   “We are confident that the increased spending on equipment, technology and people will eventually result in increased capacity in most transportation modes,” he wrote. “That said, many modes are reporting limited amounts of capacity or even no capacity at any price shippers are willing to pay.”
   Broughton also noted that the impressive year-over-year growth in July came at a time of year when freight movement is typically slower due to seasonal demand swings.
   “The first seven months of 2018 have clearly signaled that, barring a negative ‘shock event,’ 2018 will be an exceptionally strong year for transportation and the economy,” he said, citing growth rates in July, June, May, April and March, all of which exceeded any recorded in 2014, which was a “very strong year.”
   “We normally only see such high percentage increases in volume when related to easy comparisons,” he added. “That these percentage increases are so strong against tough comparisons explains why capacity is so constrained and realized pricing is so strong.”
   The two primary factors leading to heightened demand, according to Broughton, are increased consumer spending and the strengthening of the industrial economy.
   “The consumer economy is not only alive and well, but growing robustly,” and the industrial economy is not only growing, but that growth is accelerating, he said.
   “It is too early to definitively tell, but it appears that the steel industry is accelerating in the U.S. in the wake of the tariffs, which adds to our bullish outlook for the industrial economy in the U.S.,” added Broughton. “Similar to our point about steel, the auto industry is also — so far — immune to the tariffs and add to our bullish outlook for the industrial economy in the U.S., at least for the short term.”
   In terms of expenditures, Broughton said the July index reading represented a new all-time high, exceeding the previous record set in June 2014, adding that spending “appears poised to stay at record levels with ease in coming months.”
   According to Broughton, the 17.9 percent growth in July “clearly signals that capacity is tight, demand is strong and shippers are willing to pay up for services to get goods picked up and delivered in all modes throughout the transportation industry.” He added that as with shipment volumes, “we have to go back to the easy comparisons of 2009-2010 to find such large percentage increases and the current comparison is anything but easy.”
   Freight spending turned positive on a year-over-year basis for the first time in 22 months in January 2017, although Broughton noted this was against an easy comparison, as the index in January 2016 reached lows not seen since 2011, when the U.S. economy was still rebounding from the Great Recession.
   Broughton attributed the continued growth in large part to a steady increase in the price of fuel and the associated carrier surcharges, but said that although the increase attributable to fuel is still “significant,” intermodal carriers are gaining pricing power independent of oil prices.
   The Cass Truckload Linehaul Index, which measures rates excluding fuel surcharges, for example, grew 10.2 percent year-over-year in July, the the 16th consecutive month of year-over-year gains and the first double-digit percentage increase since the index began in 2005. And the Cass Intermodal Price Index, which does include fuel, continued a 22-month streak of pricing gains in July with a 12 percent bump, the largest year-over-year increase since July 2011.