North American freight market growth rolls on in February

Shipment volumes for the month jumped 5.9 percent from January and 11.4 percent compared with February 2017, while expenditures grew 5.2 percent sequentially and 14.3 percent year-over-year, according to the latest Cass Freight Index Report.    The North American freight market continued to show “increasingly positive” growth in February 2018, according to the latest Cass Freight Index Report.   
   Shipment volumes and expenditures extended a run of year-over-year increases that began 17 and 14 months ago, respectively, with volumes up 11.4 percent and spending up 14.3 percent compared with February 2017.
   On a sequential basis, shipment volumes and expenditures grew 5.9 percent and 5.2 percent, respectively, compared with the previous month.
   Donald Broughton, founder and managing partner of Broughton Capital and author of the report, said the continued growth of shipments in February “is yet another data point confirming that the strength in the U.S. economy continues to accelerate.”
   “Volume has continued to grow at such a pace that capacity in most modes has become extraordinary tight,” he added.
   Although this increase in demand has led to “outsized pricing power” for transportation providers, this trend is likely to flatten out over the long term due to the cyclical nature of freight rates, according to Broughton.
   He noted that in past periods of increased pricing power brought on by a lack of capacity, the natural inclination for carriers has been to create additional capacity to satisfy the heightened demand, and the introduction of supply in turn puts downward pressure on rates.
   “We observe, then, the industry’s ability to use increased profitability to fund enough capacity to kill outsized pricing gains in the long term,” Broughton wrote.
   Despite the fact that February is generally a weaker time of year in terms of freight transportation demand, volume levels for the month were roughly equal to those of June 2014, which was a high point for the year, a comparison Broughton called “extraordinary,” as 2014 was a “very strong freight market overall” and the June data point was recorded prior to the industrial recession that began in December 2014.
   Further, the nominal value of the February shipments index was also higher than any monthly value posted in 2015, 2016 and 2017.
   “With February normally being one of the more seasonally weak months of the year, we find this data point extremely bullish,” said Broughton. “With both January and February 2018 well above January and February in the record freight year of 2014, we find it easy to predict that 2018 is poised attain new record highs.
   He noted that the 11.4 percent year-over-year increase in shipments is that much more significant because the recovery in shipping began in the second half of 2016, meaning the February 2018 growth figure came against a tougher comparison and “only when comparisons were weak (i.e. 2009-2010) were the percentage increases so high.”
   “That these percentage increases are so strong – and strong against tough comparisons – explains why our outlook is so bullish, why capacity is so constrained, and why realized pricing is so strong,” he said.
   In terms of expenditures, Broughton said the Cass index had been posting larger and larger year-over-year increases in 2017 and, as with shipment volumes, the February 2018 comparison was “anything but easy.”
   “We have commented repeatedly that this is indicative of an economy that is continuing to expand,” he wrote in the report. “February’s 14.3 percent increase 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 modes throughout the transportation industry.”
   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 the increase attributable to fuel is now diminishing and trucking and intermodal carriers are gaining pricing power independent of oil prices.
   And similar to the trend seen in shipment volumes, expenditure levels in February exceeded every previous February since the recovery from the 2008-2009 recession.
   “As we’ve noted, since oil was markedly higher in 2013 and 2014, we see this data point as very encouraging,” he said.
   Broughton also noted the deluge of parcel volumes associated with online retail consumption, but said the current strength of the North American freight market can be attributed to more than just the ongoing growth of e-commerce.
   According to the report, most modes have not made sufficient investments in capacity and infrastructure in the past few years, meaning capacity has remained relatively steady even as demand has increased.
   Even so, Broughton said the continued growth is “much more of a demand story” than one of tightening capacity.
   The two primary factors leading to increased demand, according to Broughton, are the strengthening of the industrial economy and the consumer economy.
   “Simply put, industrial activity is alive and well, and accelerating strongly,” he wrote. “The recent changes to [U.S. federal] tax law and the ability to accelerate depreciation should only serve to further strengthen the capital-intensive industrial economy.”
   The recently signed Tax and Jobs Act cut the effective federal tax rate for U.S.-based corporations from 35 percent to 21 percent.
   In the consumer economy, Broughton said there hasn’t been a true “recovery” in income and spending growth since 2009, but that the millennial generation, who outnumber their baby boomer parents, has “begun to prove the critics wrong” by getting married and purchasing their first homes.
   “Millennials have started to form households, and thus have started the goods accumulation phase of their lives as well,” he said. “Consumer spending is poised to be strong for the foreseeable future, and the recent appearance of some wage inflation only emboldens our view on this.
   “Bottom line, both the industrial and consumer economies are shifting into high gear,” said Broughton.