The most recent freight report generated by Cass Information Systems and Avondale Partners shows that freight shipments continued a long slide in July, down 2.6% over the previous year, making it the 17th straight month of year‐over‐year declines.
“Overall shipment volumes and pricing are persistently weak, with increased levels of volatility as all levels of the supply chain – manufacturing, wholesale and retail – continue to try and work down inventory levels,” says report author Donald Broughton, Avondale managing director, chief market strategist and senior transportation analyst.
“That said, there have been a few areas of growth, mostly related to ecommerce, with lower levels of expansion being experienced in transit modes serving the auto and housing/construction industries,” he adds.
Inventories have now contracted from GDP for five consecutive quarters to a total of 3% of GDP, Broughton points out. This is the longest stretch outside of a recession since 1956‐57 and the largest in magnitude since 1995. With consumers saving instead of shopping, he also expects this destocking to continue well into the Third Quarter for the retail industry in particular.
With declining auto sales in August, he remains concerned about elevated levels of cars on dealer lots, and the continuing efforts to streamline finished inventory in most machinery sectors.
The Institute for Supply Management reports that in August both manufacturing orders and production dropped, along with employment in that sector, raising concern that industrial weakness may have returned.
IPM says that 11 of 18 industries it surveys posted declines, including electrical equipment, appliances and components, machinery, and apparel, leather and allied products.
Among the six industries reporting growth were computer and electronic products; food, beverage and tobacco products; and chemicals.
The Chemical Activity Barometer, a leading economic indicator created by the American Chemistry Council, expanded 0.4% in August following an upward revision for July, marking the barometer’s sixth consecutive monthly gain. Including adjustments, the CAB is up 3.2% over this time last year, the strongest year-over-year growth since January 2015, ACC reports.
However, ACC also reports that U.S. production of major plastic resins of 6.7 billion pounds during July revealed a drop of 2.4% from last year.
Truckload rates are down 1.6% from last year, and while less-than-truckload rates have risen, profits continue to be elusive for most carriers.
Intermodal has taken a beating in the current environment. Overall traffic for U.S. Class 1 railroads declined 6.1%, as intermodal units fell 5.4% and commodity carloads originated fell 6.9%, largely due to the decline in demand for oil and gas.
Rails have seen persistent weakness, with overall volumes being negative 77 out of the last 78 weeks.
Optimistic Retail Outlook
In July the National Retail Federation said retail sales will climb 3.4% over last year rather than the 3.1% it had forecast earlier (AA, 7-31-16, P. 3). Included in the overall figure are online and other non-store sales, which NRF expects will increase 7- 10% rather than the 6-9% forecast earlier.
“There are many factors that could prove to be hurdles, but our overall outlook is optimistic,” observes NRF chief economist Jack Kleinhenz.
Retail also has weathered some high profile setbacks during the past year with widespread store closures by Macy’s and Sears, and the elimination of Sports Authority from the market. Several other store chains are barely hanging on, and more bankruptcies are expected.
Ecommerce keeps burgeoning, though. “On the consumer side of the equation, we do see some signs of hope – especially for those retailers with a strong e‐tailing or omnichannel offering,” Broughton asserts.
Because consumers have been paying down debt instead of spending when they have more money in their pockets, he says it all boils down to how the Christmas season shapes up this year.
In earlier years, economists repeatedly complained that American consumers were carrying too much debt, so it seems ironic now that the new frugality could lead to a recession.
“The U.S. consumer has been saving and paying down debt with this disposable income for over six quarters,” Broughton notes. “By this holiday season, we expect them to begin to spend at least part of their income. If not, the risk of an overall recession grows.”