Cass September data shows gains from August, leaving the climate only a bit less muddled

Freight shipments and payments rose sequentially in September, marking the first month of increases after two consecutive monthly declines and likely marking the year's last growth spurt as companies build holiday inventories, according to a monthly index released today by audit and payment firm Cass Information Systems Inc.

Shipment volumes rose 1.7 percent over August levels, while freight payments—which correlate with shipping activity—increased 2.4 percent sequentially, according to the index. Year-over-year, shipments and payments fell 1.5 percent and 6.6 percent, respectively, according to the report.

The gains in September volumes were expected as goods for holiday traffic begin to move strongly through the supply chain. But this is likely to be the top of the market, the report said. That view was affirmed last week by David S. Congdon, vice chairman and CEO of Thomasville, N.C.-based less-than-truckload (LTL) carrier Old Dominion Freight Line Inc. "We've seen the peak," Congdon said last week at the Journal of Commerce's (JOC) 2015 Inland Distribution Conference in Memphis. "What you see is what we've got for the rest of the fall season."

The bulk of September's gains tracked by Cass came from rail carload and intermodal traffic, which soared 22.6 percent from August. Cass generates its data from the $26 billion in shipper freight bills it audits and pays annually.

Freight volumes have remained sluggish since the first quarter as the U.S. economy's continued recovery remains far from robust; capital expenditures in the energy sector are curtailed due to the sharp decline in oil prices; and businesses increase their inventories relative to sales, lessening the need to place new orders to be shipped. The September manufacturing report published by the Institute for Supply Management (ISM) found that the "New Orders" index fell 1.6 percentage points from August, while the index of production dropped 1.8 percent from the prior month.

At the same time, the inventory-to-sales ratio tracked by the U.S. Census Bureau has been climbing for most of the past 10 months, though it has leveled off recently. The ratio, which tracks inventory levels in relation to a company's sales forecast, has risen to 1.37 from 1.31 in September 2014. A sequential increase in the ratio means that businesses are boosting their inventory levels; while there could be any number of factors for this strategy, the net effect is a dampening of new-order activity, and by definition, shipping demand.

The rising ratio is one of the concerns of Rosalyn Wilson, the author of the annual "State of Logistics Report," presented by Penske Logistics, in what is otherwise a bullish outlook for the industry. In a recent webcast with DC Velocity, Wilson said that executives she surveys for her ongoing data gathering either don't see the problem, or don't perceive the rising ratio as a worry. Wilson added during the webcast that she is not sure what they are seeing that she isn't.

Meanwhile, the supply of heavy-duty trucks in September rose faster than the freight demand needed to support that capacity, according to a monthly index released yesterday by ACT Research Co. The September figures represent the eighth time in the past 10 months that the supply of trucks has exceeded freight demand, according to ACT figures. Capacity additions will outpace freight creation at least through the end of 2015, according to the firm

Kenny Vieth, ACT's president, told the JOC conference last week that 2015 would likely set a record for heavy-duty truck sales. However, an estimated 208,000 new truck units is well ahead of the 150,000 to 160,000 units that would be better aligned with near-term demand, Vieth added. "The industry is building too many trucks right now," he said.

All of these ingredients have created an unconventional stew of lower rates as shippers and carriers begin the seasonal process of negotiating their contract rates. Generally, the fall season is not friendly to shippers sending out requests for proposals, according to Mark Montague, industry pricing analyst for DAT Solutions, a consultancy that tracks truckload noncontract, or, spot-market conditions. This year, however, is different, Montague said. "Carriers are uncharacteristically hungry right now," he told the Inland Distribution conference.

After an unusually strong year in 2014, due in large part to the impact of brutal weather in the first quarter that idled many truckers and sent spot market rates soaring, spot rates have declined this year while contract rates have increased. However, the drop in spot rates, which has led to a widening of the gap between spot and contract rates from 10 cents a mile last year to 32 cents this year, is expected to dampen the rise in carrier rates, according to Montague. Contract rates will often follow the prior movements in spot rates, which DAT estimated affects 20 to 25 percent of the U.S. truckload market