Don't judge book by cover when linking retail sales with transport, analyst says

All retail sales are not created equal, at least where trucking volumes are concerned. That's according to Thomas S. Albrecht, transport analyst for investment firm BB&T Capital Markets.

The U.S. Census Bureau reported last Tuesday that May retail sales climbed 2.5 percent from year-earlier figures, and 0.5 percent sequentially. Yet May's overall gain masked divergences in retail activity that impacted the trucking segment in different ways, according to Albrecht.

For example, e-commerce's year-over-year sales growth of 12.2 percent, the highest recorded so far this year, would mostly benefit parcel and less-than-truckload (LTL) carriers because they handle a disproportionate amount of online shipments, Albrecht said in a note last week.

Truckload carriers, by contrast, would be adversely affected by a 5.8-percent drop in department store sales, as demand for apparel sold through brick-and-mortar retail channels was pushed lower, in part by the growth in online traffic. Spending on health care and restaurants, both of which rose briskly year-over-year in May, would not move the needle much because neither category is dramatically freight-specific, Albrecht said.

Though refrigerated, or "reefer," carriers stand to gain from increased restaurant sales, they are hurt by the current excess capacity in the dry van non-contract, or "spot," market, from which the typical reefer carrier generates about 20 percent of its revenues, according to the analyst.

The dichotomy would explain why truckload executives are waxing pessimistic about market conditions even though total retail sales appear relatively solid, Albrecht said.

Another problem for truckload carriers is that retail inventory levels, related to sales, have stayed elevated for many months. This, in turn, dampens activity for new orders, and for shipping, because retailers are still struggling with existing inventories. The federal government's seasonally adjusted retail inventory-to-sales ratio in April came in at 1.50. This was down slightly from March data, but higher than the April 2015 figures, indicating a year-over-year rise in inventory bloat. The total inventory-to-sales ratio, which covers retail, wholesale, and manufacturing, came in at 1.40 in April, slightly below March's data but higher than the April 2015 results, according to government figures. In June 2013, the total ratio stood at 1.28.

Several factors have contributed to the inventory bloat, among them changing consumer habits, Albrecht said. "Baby boomers" already have a lot of stuff, while "millennials" apparently value experiences more than they do buying more things, he added.

Albrecht said that truckload capacity is about 4 percent higher than it should be and that supply and demand will not come into balance until the first quarter of 2017. It may even take longer than that, Albrecht said, noting that "working off 1-percent excess capacity per quarter is not as easy as it seems." He said June will be the carriers' best month of the year so far, with the rest of the year playing out true to normal seasonal patterns.

Last month, Albrecht said trucking had fallen into a "freight recession," which is characterized by weak pricing and capacity utilization. The last freight recession began in 2006 and lingered for about four years, exacerbated by the subsequent economic recession. However, Albrecht said there wouldn't be a general recession during this cycle because of the continued solid retail sales figures.