Demand for freight is likely to remain strong in the economy, as the manufacturing and construction sectors continue to see solid gains.
The Federal Reserve reported that total industrial production rose a healthy 0.5% in March from February’s levels, exceeding consensus expectations of a 0.4% gain. This comes on the heels of an impressive 1.0% gain in the previous month and rounds out a 1st quarter which saw industrial output rise at a 4.5% annualized pace.
Large gains in utilities and mining output helped drive much of the growth during the month, as unseasonably cold weather helped boost natural gas output for heating. Manufacturing industrial production, which strips out mining and utilities production from the total, saw a more modest 0.1% gain. This fell slightly below consensus estimates, but was enough to push year-over-year growth in manufacturing to a near six-year high of 3.1%. Autos, computers and electronics, and primary metals all saw big gains in production during the month, helping to drive the overall gains. (Story continued below)
Manufacturing activity plays a key role in the fundamentals of freight demand, helping to set the underlying demand for transportation in the economy. Truck tonnage and intermodal carloads are heavily influenced by domestic production of goods in the economy and should see a boost as a result of the improved demand
Housing starts slip, driven by multifamily housing
Results on housing construction were also generally encouraging, as home starts rose 1.9% to a 1.31 million annualized pace. This helped reverse some of the decline in the previous month, as construction activity looks to pick up some momentum in the 2nd quarter. The volatile multi-family component of starts was again behind the results this month, rising 14.4% in March after last month’s double digit decline. Single family home starts fell 3.7% during the month, as unseasonably harsh snowstorms restrained activity during the month.
Despite the month-to-month swings, home starts grew at a solid pace in the 1st quarter, although not quite as rapidly as the end of 2017. Weather can often influence the performance of construction activity during the winter months. That appears to be the case at the start of the year, particularly as it relates to single family residences, and it is likely that activity will pick up in the current quarter.
This, again, has important implications for freight markets. Housing starts and construction activity help drive demand for flatbed carriers and other carriers of building materials. In addition, home starts drive activity downstream as households purchase appliances and furniture as they move into completed homes. As a result, the improvement expected in housing starts in the 2nd quarter should provide some boost to freight demand.
Behind the numbers
Overall, the results from this month fall in line with much of what we’ve been seeing in the 1st throughout the 1st quarter. Quarterly industrial production growth was slower in the 1st quarter compared to the 4th quarter, but still healthy in a broader sense. The past couple of quarters yielded the strongest consecutive quarters of growth since the early stages of the recovery from recession even with the slowing in the 1st quarter, and most of the fundamentals for strong manufacturing are in place for strong growth going forward.
Similarly for housing starts, growth in the 1st quarter wasn’t as strong as the 4th quarter of 2017, but was still above average compared to post-recession history. After factoring in the odd weather patterns, there doesn’t seem to be too much cause for alarm in terms of the outlook for construction.
Ibrahiim Bayaan is FreightWaves’ Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.
