Key data continues to indicate that truck freight volumes are building with improvements in rates not far behind – though analysts still remain cautious about the long-term potential of both these trends.
Jon Langenfeld, associate director of research for investment firm Robert W. Baird & Co. pointed out in the company’s latest freight sector brief that above-seasonal demand trends in the first quarter are suggestive of early stages of economic recovery-- with an improving supply/demand truck balance supporting upward movement in rates over the next several quarters
“Freight fundamentals are firming and a domestic ‘freight pricing renaissance’ appears to be forming,” Langenfeld said. “Inventories remain lean, supporting future freight growth, with improving consumer confidence should support a sustained inventory build and freight volumes as economic fundamentals improve.”
Several indices tracked by the Institute for Supply Management (ISM) show the economy remains in a positive growth pattern. The firm’s Purchasing Managers Index (PMI) clocked in at 56.5% in February, the tenth consecutive month it’s increased, though it is down slightly from January’s 58.4% reading. A reading above 50%, ISM noted, indicates that the manufacturing economy is generally expanding.
ISM’s New Orders Index registered 59.5% in February – its eighth consecutive month of growth – with the group’s Production Index hitting 58.4% in February-- the ninth consecutive month it’s been above 50%, which is generally consistent with an increase in the Federal Reserve Board’s Industrial Production figures. “While new orders and production were not as strong as they were in January, they still show significant month-over-month growth,” said Norbert Ore, ISM chairman.
“Starting in the latter part of 2009, manufacturing sector businesses began rebuilding inventories back to respectable levels,” said Chris Kuehl, economist for the National Association of Credit Management (NACM). “The first phase in an economic recovery is the replenishment of reduced inventory and there can’t be growth without the supply to meet expected demand,” he explained.
“If there had been no effort to bolster inventory levels, the arrival of demand would have provoked massive shortages, bottlenecks and ultimately inflation,” Kuehl added. “For now, businesses are looking at low interest rates, commodity prices and labor costs. This is the safest time to build that base, but now they have to wait for the second phase—consumer confidence, which remains in the doldrums to an extent.”
As a result of these broader economic trends, Baird’s Langenfeld noted that spot truck demand and the industry’s overall supply/demand balance is tracking 2008 and approaching 2006 levels – two relatively positive freight periods.
He added that anecdotal reports of tight Midwestern capacity, paid repositioning, and tight intermodal container capacity – all amid a seasonally weak first quarter – support Baird’s view that industry fundamentals are strengthening at a better-than-seasonal rate. “Improvement in demand over the next several quarters should drive accelerating pricing growth as shippers struggle to find reliable capacity.”
“Truckload freight rates are stable with improving outlook, as continued capacity rationalization through the past three years continues to bring supply/demand dynamics near equilibrium,” Langenfeld said. “Into early 2010, LTL volume and pricing trends, though remaining weak, appear to be finding a bottom, but excess industry capacity – 15% to 20% by our estimate – will continue to weigh on [LTL] pricing growth.”