One of the challenges the transportation industry is facing right now is how to gauge current operational performance and that of the economy as we round out the first quarter. Year-over-year comparisons can be misleading with 2018 being such an extraordinary year, often negatively amplifying any change in key performance indicators.
Most industry experts suggest skipping 2018 and looking further back to 2017 and even 2016 for comparisons, with both indices in our chart of the week being good examples of why this may be prudent advice. The widely-watched macroeconomic ISM Manufacturing New Orders Index - a measure of production set to come on tap and demand for industrial products, and the DAT Freight Barometer Flatbed - a measure of activity in the flatbed spot and contract markets based on rate and load availability, both reached 10-year record levels in mid-2018 after both grew close to 33% over a 12-month period from July 2016. Both indices are indexed to 50 with greater than 50 representing an expansion from the previous month with less than 50 representing a contraction.
The New Orders Index is based on industries that create flatbed demand through the production of goods that truckers haul, including lumber, machinery, metal products, and construction equipment, which is why the 2018 and ongoing relationship between the two indices is important to watch. While corporate tax cuts and higher oil prices helped to stimulate the industrial and energy sectors and boosted demand for flatbed activity in 2018, neither of these factors is likely to provide the same lift in activity this year.
The New Export Orders Index moved to 55.5 in February, which marks the 38th month of consecutive expansion for the index, however, the current growth trend is declining despite overall expansion. The New Orders Index typically leads real results in Manufacturing by one to two months. The decelerating pace in the New Orders Index suggests that the current slower growth trend for Manufacturing as a whole for the industrial economy will persist in the coming months. The DAT Freight Barometer Flatbed has also been in positive territory for the past 24-months after reaching record levels in June 2018 at 115.9. It has since moved back to more normal levels to 53.24 based on February data, which provide evidence the industrial economy is still driving demand for flatbed carriers, albeit at lower levels.
A big part of the increased activity in flatbed early in 2018, came from a strong uptick in building material shipments in 2017 following Hurricanes Harvey and Irma with increases in oil prices in early 2018 making fracking more profitable in all parts of the U.S. - both events increased demand for flatbeds to haul drill pipe, lumber, and building supplies.
The flatbed outlook for 2019
Oil prices (SONAR: WTI.USA) have risen in recent months, but remain more than 10 percent below last year’s prices. As a result, fracking activity should still be generally strong but will likely not see the same growth as it experienced last year. There is likely still some pent-up demand in construction activity, which should help things in upcoming quarters.
Construction has yet to really recover following last year’s hurricane season, the California wildfires late in 2018 and the polar vortex in early 2019. Eventually, housing and construction should get a boost from some of this disrupted activity and should resume a gradually improving trend going forward. This should give some support to the demand for flatbeds this year and allow for some modest positive growth in activity.
The challenge is that this slight growth comes against a backdrop of expanding capacity. As the truck orders from 2018 are fulfilled this year and this capacity comes on line, flatbed carriers may well find themselves with more trucks than they need to meet the modest growth in demand. As a result, the flatbed sector should find itself far less constrained in 2019 that it was in 2018.
About Indices presented in this article
(SONAR: ISM.MNEW) ISM Manufacturing New Orders Index - a measure of production set to come on tap and demand for industrial products based monthly surveys of 400 purchasing manager.
(SONAR: DFBF.USA) DAT Freight Barometer Flatbed - a measure of activity in the flatbed spot and contract markets based on rate and load availability.
About Chart of the Week
The FreightWaves Chart of the Week is a chart selection from SONAR that provides an interesting data point to describe the state of the freight markets. A chart is chosen from thousands of potential charts on SONAR to help participants visualize the freight market in real-time. Each week the Sultan of SONAR will post a chart, along with commentary live on the front-page. After that, the Chart of the Week will be archived on FreightWaves.com for future reference.
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