The big picture is a familiar one: “The first six months of 2018 have clearly signaled that, barring a negative ‘shock event’, 2018 will be an exceptionally strong year for transportation and the economy,” asserted the just-released Cass Freight Index Report for June.
In June, the Cass Freight Shipments Index grew 7.2% year-over-year, while Expenditures accelerated 15.9% compared to June 2017. Overall freight volumes are growing at a healthy clip, but are still being outpaced by expenditures. Clearly, capacity tightness across modes is driving inflationary pressure, but Cass does not think rising transport costs have developed into a drag on macroeconomic performance—yet.
“June’s 15.9% increase clearly signals that capacity is tight, demand is strong, and shippers are willing to pay up for services to get goods picked up and delivered in all modes throughout the transportation industry,” Cass wrote.
Cass cited three leading indicators of American industrial production that are all still bullish signals for the economy: demand for flatbed trucking (associated with manufacturers’ capital expenditures on equipment and construction activity); railroads’ chemical carload volumes; and the price of West Texas Intermediate crude.
To get a quick snapshot of flatbed activity, Cass cites the DAT Flatbed Monthly Barometer. On that index, a value of 50 represents ‘equilibrium’; anything above that number indicates growth. The Flatbed Barometer broke above 50 in the first half of 2017 and sharply accelerated into the mid 60s toward the end of the year. In 2018, the flatbed barometer left previous highs (~69 in the summer of 2014) completely behind on its unprecedented climb past 110 before settling at around 102. For the month of June, flatbed spot rates were up 26.7% year-over-year, and contract rates saw 10.5% growth over the previous June.
Chemical carload volumes moved by rail—even excluding petroleum—have also climbed steeply since the beginning of 2018. “We have asserted for years that one of the best predictive indicators of U.S. domestic industrial activity was the chemical carload volume moved via railroad. Our assertion is simple: it is almost impossible to manufacture, or even assemble, anything in mass quantity without consuming chemicals,” Cass wrote.
The current American oil boom is the result of two developments, one legislative and one technological. The legislative development was the 2015 decision by the US Congress to lift bans on most petroleum exports; the technological development was the marriage of hydraulic fracturing and horizontal wells, which enabled the shale oil revolution. Furthermore, the US oil index, West Texas Intermediate, has enjoyed a significant discount against the international benchmark, Brent crude, making WTI more attractive on the global market and spurring exports. “As long as WTI crude oil stays above the marginal cost of production (>$60 a barrel), in the major U.S. fracking fields, we expect to see continued strong industrial economic growth,” Cass wrote.
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