While truck freight volumes continue to strengthen, the pace noticeably slackened in June, causing concern among some industry analysts. According to Jon Langenfeld, associate director of research at Robert W. Baird & Co., though absolute freight volumes remained solid in June, above 2007 levels, trends notably flattened as well during a month that typically experiences a spike in spot demand.
“The nature of spot market activity typically garners more incremental, unplanned freight [so] a flattening trend reflects a potential cautionary sign for freight growth and the economy,” he said in Baird’s monthly “Freight Flows” research brief.
The American Trucking Assns. (ATA) reported some slippage in freight demand, too, with its for-hire truck tonnage index decreasing 0.6% in May, which was the first month-to-month drop since February of this year.
By contrast, Baird's Domestic Freight Index inched up to 6.2% in May, vs. 6.1% in April, which Langenfeld believes reflects a continuation of accelerating freight trends experienced in April.
“Looking ahead, industry contacts generally suggest freight trends remained strong through early June, although potentially not as uniformly robust as May,” he noted. “Positively, inventories remain lean, so we expect inventory replenishments to remain a tailwind for several quarters.”
Broader economic indicators also suggest an economy still in growth mode albeit at a slower pace. According to the Institute for Supply Management (ISM), its purchasing managers index (PMI) dropped to 56.2%, a decrease of 3.5 percentage points compared to May’s PMI reading of 59.7%.
However, Norbert Ore, chairman of the ISM manufacturing business survey committee, noted that a PMI in excess of 42%, over a period of time, generally indicates an expansion of the overall economy.
“The manufacturing sector continued to grow during June; however, the rate of growth as indicated by the PMI slowed when compared to May,” he said. “The lower reading for the PMI came from a slowing in the new orders and production indexes. We are now 11 months into the manufacturing recovery, and given the robust nature of recent growth, it is not surprising that we would see a slower rate of growth at this time.”
Ore added that the past relationship between the PMI and the overall economy indicates that the average PMI for January through June (58.5%) corresponds to a 5.5% increase in real gross domestic product (GDP). “In addition, if the PMI for June (56.2%) is annualized, it corresponds to a 4.8% increase in real GDP annually,” he said.
Baird’s Langenfeld said that freight typically experiences an initial surge above GDP growth as the economy rebounds, but eventually retrenches before reaccelerating to a new cycle high. Also, as inventories remain at depressed levels, this should help buffer any slow down.
“The inventory-to-sales [ratio] is at record low levels, yet general sentiment reflects a cautious outlook among shippers who remain wary of replenishing inventories,” he stressed. “Given this sentiment, we would tend to believe inventory replenishment is likely [to be] a more drawn- out process as shippers gauge demand growth.”
