June 3, 2015

The Six-Year Itch: Are subpar transport numbers foreshadowing first downturn since '09?

Experts adopt cautionary pose, noting second-quarter weakness but calling it more of a normalizing process.

By Mark B. Solomon

The nation's first quarter gross domestic product contracted by 0.7 percent. But the downturn was explained away by such anomalies as bad weather, slowdowns at West Coast ports, the impact of declining oil prices on the industry's capital spending patterns, and a strong U.S. dollar that weighed on exports.

Winter has turned to late spring, and the backlogs caused by the labor-management disturbance at 29 West Coast ports have largely been cleared. However, the economic picture, at least as painted by the recent spate of transport data, remains distinctly clouded. For the first time in several years, pundits skilled at finding silver linings in any cloud are leavening their analyses with sobering comments about the near-term outlook.

The American Trucking Associations' (ATA) monthly truck tonnage index, a closely watched measure of shipping and economic activity, declined 3 percent in April on a sequential, seasonally adjusted basis, following a 0.4-percent upward revision in the March data over February. Compared to April 2014, the index rose 1 percent on a seasonal basis, down from a 4.2 percent gain in March. The April numbers represent the smallest year-on-year gain in more than two years. Through April, tonnage is off 5.3 percent from its January high, the group said.

The data led Bob Costello, ATA's normally upbeat chief economist, to wax almost negative about the current quarter. Noting that truck shipping is a harbinger of broad economic activity, Costello said that unless tonnage recovers in May and June, GDP growth "will likely be suppressed in the second quarter." He also cautioned that any "significant jump from the first quarter is looking more doubtful." May data will be released around mid-June.

The segments of the trucking business that rely on strong freight traffic to drive demand for their products are also seeing a taper. Orders in May for medium- to heavy-duty trucks fell 8 percent from May 2014 levels, according to ACT Research. Net orders—orders minus cancellations—for Class 8 rigs hit their lowest levels since September 2013, according to the group.

Truck-trailer net orders in April declined 19 percent from March and 30 percent year over year, according to FTR, a consultancy. Orders for dry-van trailers, the most common type, were down 32 percent from March levels, with new builds down 6 percent sequentially due to a shrinking number of new-build slots available, FTR said. The firm said the numbers, on balance, were "disappointing" and said they reflect a reluctance by fleet managers to commit to equipment deliveries amid a slowing economy and a moderating freight market.

Over on the rails, the situation is spotty. Intermodal trailer and container traffic through April was up 3 percent year over year, according to the Intermodal Association of North America (IANA). International container volume led the way with a 4.2-percent gain, part of it due to a snapback from suppressed first-quarter volumes, which were due to the labor issues at West Coast ports. For the week ending May 23, intermodal traffic was up 4.3 percent from the year-earlier period, according to the Association of American Railroads (AAR). But carload volume, which is separate from intermodal, fell 9.1 percent in the May period, and is down 7.6 percent year over year, AAR data show.

Larry Gross, a senior analyst at FTR, said a new normal of sorts may be emerging in intermodal, with long-term growth settling at between 4 and 5 percent. Gross said he was most worried about the weak carload numbers because they extend beyond coal demand—which has its unique problems due to stiff competition from natural gas and tough federal environmental regulations on mining activity—to other commodities. "The declines are very widespread, with only autos showing a small increase," Gross said in an e-mail.

At the Port of Los Angeles, the nation's busiest seaport, containerized volumes, measured by 20-foot equivalent units (TEU), in April dropped 6.1 percent from the same period in 2014. Loaded container traffic dropped 11.8 percent year over year, while empty equipment, which accounts for a much smaller component of the overall total, increased by 12 percent, the port said.

Perhaps more tellingly from the standpoint of macroeconomic activity, there was surprisingly little problem clearing out the backlogs that built up during a nine-month impasse between dockworkers and ship management. The docks were swept at a much faster pace than originally expected, a reflection that dockworkers and management weren't overly burdened by fresh traffic simultaneously hitting the 29 West Coast gateways.

"I had expected to see more impact on the volume when the western ports cleared out, but if you blinked you missed it," said Rosalyn Wilson, an economist and author of the annual "State of Logistics Report," which will be released June 23. "The system was definitely not at capacity and it absorbed the extra load easily and quietly and without high rates."

GLASS HALF FULL?

At this time, folks are willing to give economic conditions the benefit of the doubt. The Federal Reserve today reported that economic activity in its 12 reporting districts expanded from early April to late May. Various economists expect the benefits of lower fuel prices to finally filter through the economy in the form of increased consumer spending, taking the pressure off an industrial sector that has carried much of the economic ball in the past couple of years but may now be out of gas. Truckload and less-than-truckload (LTL) rates are expected to continue rising, though the upward moves may have as much, if not more, to do with constrained supply than with percolating demand.

Wilson said she stands by her forecast from a year ago that the momentum which began in the second quarter of 2014 would carry forward through the balance of this year. The 2015 recovery is "taking time to build up steam," due to the dual effects of the strong dollar, which makes U.S. exports less competitive in world markets, and a still-stuttering global economy, Wilson said. But she sees the domestic economic picture brightening, with imports on the rise and consumers boosting their spending. "I see a couple of things that might trip us up, but generally I am still quite positive," she said.

Transport experts emphasize that the current numbers should be taken with a grain of salt. Second-quarter 2015 data will face tough comparisons, because the industry snapped back so strongly starting in the same period in 2014 following a brutal winter, they said. "The traditional summer slump arrived early this year," said Don Ake, FTR's vice president of commercial vehicles, commenting on the subpar truck-trailer data for April. "This is not surprising, considering the huge amount of orders placed late last year and the big backlogs." About 340,000 trailer units have been ordered in the past 12 months, creating a "still-healthy backlog," albeit 10 percent below the peak hit in January, Ake said.

As for truck orders, Jonathan Starks, the firm's director of transportation analysis, said that after a surge in the second half of 2014, activity is moderating to traditional levels. "So far it is following the typical ordering trend of slowing as we move into the summer months," Starks said. "If orders slow a lot further, say (by) low teens or (high) single digits, that would start to tell us something."

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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