Sputtering recovery translates into fewer shipments.
Growth has been choppy since the U.S. economy pulled out of recession two years ago, alternating between lukewarm and anemic expansion.
Most economists have minimized the likelihood that the U.S. or global economies will fall into decline again, but economic data and shipment volumes at freight carriers in recent weeks have raised worries the economy is stalling.
Some of the initial warning signs are coming from a slow-down in business at companies that transport goods. Trucking and other transport modes are leading indicators of economic activity, usually showing upturns or downturns several months ahead of the broader economy.
Some experts suggest weak growth is normal and that the economy and shipments will rebound in the second half of the year. But for the first time since the 2008 financial crisis, the dreaded term “double dip” is being whispered — and it doesn’t refer to the number of scoops at the local ice cream parlor.
So, what is causing all the pessimism?
Much of last year’s early gains were attributed to the impact of federal stimulus pumped into the economy through the Cash-for-Clunkers auto program, tax cuts and increases in federal spending. Businesses replenishing depleted inventories led to an early surge in freight shipments. As government largesse faded, the economy slowed in the second half. Retailers began to place fewer orders and inventories began to climb again.
During the first quarter of 2011, U.S. gross domestic product grew 1.9 percent compared to 3.1 percent during the last three months of 2010.
In June, the unemployment rate rose 0.1 percent for the third consecutive month to 9.2 percent after employers only added 18,000 jobs, the fewest number in a year. Job growth was essentially stagnant in May too. The public sector continues to shed jobs in an effort to cope with budget pressures in the face of declining tax receipts.
Experts say employers need to add about 125,000 jobs per month just to keep the unemployment rate constant, and another 50,000 to whittle away at the pool of 14 million people without jobs. At the current pace, it will take until 2030 to return to unemployment levels below 6 percent enjoyed before the financial crisis.
Also reflective of the labor market was the news that average weekly work hours declined 0.1 percent in June to 34.3. And average hourly earnings for private sector employees fell a penny to $22.99. During the past year, wages have increased less than inflation.
Economists quickly downgraded their optimistic expectations for the rest of the year following the jobs report. Those previously polled by CBS Marketwatch had expected 2.3 percent growth in the April-June period.
In June, the National Association for Business Economics lowered its forecast for annual U.S. economic growth to 2.8 percent from its February prediction of 3.3 percent, primarily due to weaker-than-expected growth in the first quarter. The survey of 41 economists showed the likelihood of the economy slipping back into recession is viewed as relatively low, although 10 percent think the recovery will be uneven and dependent on government stimulus policies. Another 13 percent worry about stagflation — subpar growth combined with rising inflation — up from 6 percent in the February survey.
Economists surveyed by the Federal Reserve Bank of Philadelphia in early May scaled back their forecast for the second quarter to 3.2 percent from 3.5 percent, and now see real GDP growing 2.7 percent in 2011, down from 3.2 percent.
The bank’s index of business conditions shows the situation is barely better than in the third quarter of 2009.
Only 12.2 percent of 44 economists surveyed by the bank forecast the economy will slide back into negative growth within the next year. But even without a double-dip recession, the economy may grow at such a tepid rate that few jobs are created. That creates a vicious cycle because the large numbers of unemployed are a drag on the economy since they are not producing any value, consuming products and services, and paying taxes.
Several analysts were surprised by the job figures and hopeful they reflect shocks from the spring’s hikes in gas prices and the disaster in Japan rather than the future direction of the economy. Federal Reserve Chairman Ben Bernanke noted in June that the economy had slowed in recent weeks, but predicted growth would improve later this year as oil prices and the supply issues in Japan ease.
“There’s no question that we’re in a soft patch right now, largely due to transitory issues such as the Japan supply chain disruptions,” the impact of bad weather and rising oil prices, said Mike Glenn, executive vice president of market development and corporate communications for FedEx Corp., during a June 22 conference call with analysts about the company’s fiscal fourth quarter earnings.
But oil prices remained stubbornly high at $96 per barrel for West Texas Intermediate and about $117 per barrel for North Sea Brent crude as of July 10, despite the decision by the United States and other industrialized nations to release 60 million barrels of oil from strategic reserves.
FedEx projects U.S. productivity will increase 1.9 percent in the second quarter, 3.5 percent in the third quarter and 3.4 percent in the fourth quarter, Glenn said. The full-year projection of 2.5 percent is lower than original forecasts by many analysts at the start of the year. The freight and express delivery company expects GDP to reach 3 percent next year, with industrial production leading the way at about 4.25 percent, he added.
Officials said they were pleased with the company’s results last quarter, as international package volume increased 6 percent, domestic package volume slipped 1 percent and yields went up an average of 10 percent.
FedEx and UPS have been able to boost yields by raising rates on expiring contracts after low-price competitor DHL departed the domestic U.S. market in 2009, and implementing surcharges on fuel and other ancillary services.
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| “With our index falling in three of the last four months … it is clear why there is some renewed anxiety over the economic recovery.” | |
| Bob Costello chief economist, American Trucking Associations |
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Activity in the service sector grew in June, but at a slower rate than in May, according to the Institute for Supply Management. The drop was more than analysts expected. The organization’s index fell 1.3 percentage points to 53.3 percent, based on a survey of executives, while the index for new orders decreased 3.2 percent to 53.6 percent.
Overall industrial output was flat in April 2011 compared with March 2011.
The ISM’s manufacturing index grew 1.8 percent to 55.3 percent in June from the previous month, indicating expansion in the manufacturing sector (A reading above 50 percent indicates expansion).
The June figure represented a significant change from May when growth in the manufacturer sector slowed considerably to 53.5 percent from 60.4 percent — the biggest one-month drop since 1984. Experts attributed the slowdown to supply-chain disruptions related to the earthquake and tsunami in Japan.
Some economists suggested the June ISM report was deceiving because 12 of 18 industries tracked by the organization were growing compared to 14 in May, and because much of the increase was due to a large hike in inventories, up to 54.1 percent from 48.7 percent.
Larger inventories could signal slower sales.
May retail sales decreased 0.2 percent, seasonally adjusted over April, and increased 7.8 percent unadjusted year-over-year, according to the U.S. Commerce Department. The government figures include non-merchandise sales such as autos, gas stations and restaurants.
The National Retail Federation said sales for the core retail segment grew 0.1 percent month-over-month and 5 percent compared to May 2010.
Although total retail sales went up for the 11th month in a row, the NRF said only a few sectors actually experienced growth, and acknowledged that unemployment and high fuel prices were taking a toll on consumer spending.
A major drag on the U.S. economy is the stagnant housing market. Sales of new, single-family homes declined 2.1 percent in May, the Commerce Department said. Home prices continue to fall across much of the country. Sales are hindered by tight credit and weak demand.
The National Association of Home Builders’ June survey showed industry confidence in the housing market waning, falling to a reading of 13 from 16 in May and six of seven previous months. The last time the organization’s seasonally adjusted index was this low was in September 2010. In one component of the survey, builders collectively said sales expectations for the next six months are poor.
Any reading below 50 indicates negative sentiment about the market. The index hasn’t been above that level since April 2006.
NAHB said builders are squeezed by foreclosures on existing homes that make it difficult to raise prices while prices for materials continue to rise. As a result, new-home starts are less than half the amount economists consider healthy.
The uncertainty and high unemployment figures means consumers are less able or willing to spend than they have in other recoveries. A key survey of consumer confidence dropped 6 points in May from April. Americans feel poorer since the financial crisis and are saving more than in the past 20 years. And U.S. companies are reluctant to make significant hires or expenditures while the economy shows few clear signs of expansion.
Meanwhile, consumers and companies are coping with high fuel prices this year that have cut into disposable income available to spend on goods and services. Retailers and restaurants are responding to high commodity prices, including the cost of fuel to transport goods, by raising prices on products.
If all that weren’t enough, there’s the political drama brewing in Washington about whether the government will meet an Aug. 2 deadline to raise the debt ceiling. Not doing so would mean the government would not be able to borrow more money to meet its obligations and would default on some payments to Treasury bondholders, contractors or welfare beneficiaries. House Republicans are insisting on massive federal spending cuts and no new taxes in exchange for agreeing to raise the debt ceiling. A U.S. default would likely upset financial markets and lead to higher interest rates, which could lead businesses to lay off more workers.
Globally, there are also signs of a slowdown. China’s Purchasing Managers Index fell to a 28-month low in June. Manufacturing activity fell for the third straight month to 50.9 percent from 52 percent, a sign that the world’s largest economy is gradually slowing and that orders for Chinese exports to the United States and elsewhere have eased.
A similar manufacturing benchmark in the United Kingdom recorded its lowest level in 21 months at 51.3 percent as new orders fell for a second consecutive month. Barclays Capital sharply downgraded its forecast, saying the British economy will grow 1.1 percent this year (it earlier predicted 1.6 percent growth) and 1.9 percent in 2012 versus its earlier prediction of 2.2 percent growth.
Purchasing managers’ indexes for manufacturing in India and South Korea also dipped in June. And a survey in Taiwan showed a dramatic drop in manufacturing, with activity there recording the first contraction since October, according to the Wall Street Journal.
Economic activity in Japan, the world’s fourth-largest economy, is still hampered by the March natural disasters.
In early June, the World Bank revised lower its global growth estimate.
Freight Momentum Slows. Lower cargo volumes reflect sluggish consumer demand and the fragility of the recovery. U.S. freight shipments began to flatten in March and actually declined 0.2 percent in May, in part due to a dip in durable goods orders, according to the Cass Freight Index, a monthly report compiled by Rosalyn Wilson using transaction data from Cass Information Systems, a major freight payment processor in St. Louis.
Freight spending also leveled off after rising steeply for the first quarter of 2011, the report said.
Monthly freight volumes are dropping too as measured by Cass, with May only 9.6 percent higher than a year ago, compared to April when volume was 12.3 percent more than in 2010.
Freight shipments increased 4.9 percent in June, but the growth is not a sign that the economic pullback has reversed, according to the Cass report. It attributed the increase in freight activity to the recovery of manufacturing facilities affected by the cutoff in supplies from Japan that are now filling back orders, and further weakening of the dollar that has spurred more exports.
Truck tonnage fell 2.3 percent in May from April on a seasonally adjusted basis, according to the American Trucking Associations.
ATA’s monthly tonnage index, compiled by surveying the group’s members, stands at 112.3 compared to 114.9 in April.
Compared with May 2010, tonnage grew 2.7 percent, which represents the smallest year-over-year gain since February 2010. In April, when month-over-month tonnage dipped 0.6 percent, the tonnage index was 4.8 percent above a year earlier.
“Truck tonnage over the last four months shows that the economy definitely hit a soft patch this spring,” ATA Chief Economist Bob Costello said. “With our index falling in three of the last four months totaling 3.7 percent, it is clear why there is some renewed anxiety over the economic recovery.”
He added that he is cautiously optimistic that freight volumes will pick up in the second half of the year along with economic activity, as oil prices and Japan-related auto supply problems abate.
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Another indicator of lower truck shipment volumes, according to the Cass Freight Index, is the number of loads being advertised for bids on load boards, as shippers turn more to the spot market when capacity is more abundant.
St. Louis-based investment bank Stifel Nicolaus & Co. forecasts a slow-growth environment for freight for several years, but not a double-dip that would damage the industry, transportation analyst David Ross said during a conference call with American Shipper editors.
“We’re not seeing that indicates that’s likely. People talked a year ago about a double dip and we didn’t see it. Until we see evidence, we’re not in that camp,” he said.
Truckload supply is tight across the nation. The industry lost about 20 percent of its fleet during the freight downturn, stretching back to late 2006, through a combination of bankruptcies and decisions to idle or sell off excess vehicles, and postpone purchases of new equipment. There was still slack in the system because freight volumes plummeted about 30 percent during that period. As the economy recovered, about 10 percent of the lost volume returned. Supply and demand now are roughly at equilibrium. Shippers in some parts of the country have had difficulty getting trucks in a timely manner.
The truckload market, Ross predicted, will probably experience more business failures as banks become more willing to enforce loan terms and repossess equipment in response to better pricing in the used truck market. Bankruptcies, along with greater federal scrutiny of motor carrier safety and pending regulations to limit driver time behind the wheel, will lead to a further reduction in truckload capacity and higher rates in the next couple of years as long as moderate economic growth continues, he said.
At the bottom of the downturn, many motor carriers urged shippers to enter into longer contracts with more stable rates to ensure they would get preferential access to trucks when demand picked up. Transportation providers say the certainty provided by such collaborative deals helps them make decisions on how much to invest in new equipment and infrastructure. With recent gains in pricing power, some truckers have become cautious about committing capacity so they can take advantage of the rising market, said Joe Gallick, senior vice president of sales for Penske Logistics. The logistics provider is responding by sourcing dual prime contractors on certain lanes.
Logistics professionals say that motor and rail carriers are still willing to reach multiyear transportation agreements as long as rate escalators or other safeguards are included.
“The companies that are able to structure agreements and provide some safeguards stand to benefit,” Gallick said during a press conference held in conjunction with the release of an annual report on the state of the logistics industry. Penske sponsored the report, which is published by the Council of Supply Chain Management Professionals.
Meanwhile, U.S. import shipment volume for June decreased 7.4 percent from the same month in 2010, trade intelligence firm Zepol Corp. said. Volume, measured in TEUs, also decreased 4.6 percent from the previous month. Year to date, U.S. import volume is up 4.8 percent.
Zepol said the overall June decrease was largely due to a nearly 6 percent decrease in incoming shipments from Asia.
Import cargo volume at the nation’s major retail container ports is expected to remain at virtually the same levels as last year through August before increasing later this summer, according to the monthly Global Port Tracker report by the National Retail Federation and Hackett Associates.
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“With rising gas prices and challenges in the labor and housing markets, consumer spending has slowed and retailers have adjusted their inventory levels accordingly,” said Jonathan Gold, NRF vice president for supply chain and customs policy. “We are confident long-term consumer demand will grow, and that imports will pick up significantly in the fall.”
U.S. ports followed by Global Port Tracker handled 1.28 million TEUs in May, the latest month for which numbers are available. That was up 1 percent from May 2010. March was also flat, with only a 0.3 percent increase in containers year-over-year. In April, there were 1.22 million inbound containers at the ports, up 7 percent from 2010.
The report projects TEUs to decrease 0.8 percent in June, decline 1.3 percent in July and tick up 0.6 percent in August, followed by 10 percent, 18 percent and 19 percent increases, respectively in September, October and November. All the estimates were slightly revised downward since the previous report.
In July, the New World Alliance withdrew a transpacific service due to “slowing demand for retail merchandise and corresponding reductions in inventory replenishment by retailers.”
The PSW service, operated by Hyundai Merchant Marine, was restarted in May 2010 in anticipation of “expected growth of 2010 trade volume for Northeast Asia.”
That optimism ahead of peak season last year has given way this year to lower expectations.
“Softening consumer demand is giving importers cause to retrench in regards to inventory levels previously planned for the upcoming holiday shopping season,” said Lamont Petersen, vice president of marketing for Hyundai Merchant Marine.
Petersen added that economic growth seems to be slowing to a crawl due to myriad factors, including the weak housing market, high unemployment, growing inflation and uncertainty surrounding possible federal austerity programs in the United States.
“Volumes of imported goods are being negatively impacted,” she said.
The PSW service is the second transpacific service in a month to be dropped, with CSAV suspending its ASIAM service to the U.S. West Coast at the end of June, though that service included calls in India and Southeast Asia.
Analysts are eagerly awaiting June data to get a better handle on the direction of the economy and freight trends. Unemployment may be at 9.2 percent nationally, but the freight rail industry has enjoyed a hiring boom, thanks to increased customer demand to move commodities and consumer goods.
In May, the most recent month for employment figures, major freight railroads added 745 employees. May was the fourth straight month to see an employment increase, and the 13th monthly employment increase in the past 17 months, according to the Association of American Railroads.
BNSF Railway, which has 38,000 employees, is hiring 5,000 people for track and right-of-way maintenance, locomotive and car repair, train operations, and other skilled jobs, said John Lanigan, the western railroad’s chief marketing officer, at the press conference.
“We’re not having trouble finding good people,” he said.
More than half of the new hires are military veterans, a group that the company is actively targeting.
BNSF Railway’s high-water mark for weekly loadings was the last week of March, and it has not approached that number since then. Different parts of the business are doing well, such as consumer products moving via intermodal containers and agriculture, while others have tailed off. Shipments of iron ore and steel moderated in April as auto sales declined 2.9 percent, Lanigan said.
His observations conform to AAR data, which showed slower growth the past three months. Carloads in April dipped 0.2 percent, and then inched up 0.5 percent in May and 0.9 percent in June versus the same months a year earlier. Total carloads in the second quarter were 0.5 percent (17,462) above the second quarter of 2010, much weaker than the 5.1 percent growth in the first quarter compared to the same period a year ago. The second quarter increase in carloads is equivalent to two additional trains per day, which is barely noticeable in a 140,000-mile industry network.
Intermodal traffic was up 7.5 percent year-over-year in May, but growth slowed to 4.6 percent in June, marking the lowest monthly increase for trailers and containers on an annualized basis since January 2010.
Compared to April, carloads in May were flat and intermodal volume only increased 0.8 percent. Some of the drop-off can be attributed to the extreme flooding and tornadoes that devastated parts of the country, according to AAR. From May to June, carload traffic dipped 0.7 percent and intermodal traffic was down 2.4 percent.
In May only eight of 20 carload commodity categories gained compared with May 2010. Fourteen commodity categories were in positive territory in June, but one of those in decline was coal, down 3.2 percent. It was the third straight month of negative growth for coal on a year-to-year comparison. It is difficult for other commodities to make up the difference because coal accounts for 44 percent of non-intermodal U.S. rail carloads.
Industry officials hope the dip in shipment volumes is an anomaly and that business recovers soon to justify the addition of new workers.
AAR said railroads are slowly bringing idled cars out of storage as demand slowly rises. During June, freight railroads placed 2,847 cars in service. Another 18.2 percent of the fleet, or more than 276,000 cars, remain in storage.
During normal times, only about 2 percent to 3 percent of the fleet would be sidelined.
“We’re betting on the future that freight is going to come,” Lanigan said.
One area where business is booming for BNSF is the Bakken shale oil and gas fields in North Dakota and Montana. Huge reserves there are being tapped by a new process known as hydraulic fracturing. The field is already producing 225,000 barrels of oil per year.
Fort Worth, Texas-based BNSF is making money by hauling drilling equipment and materials for exploration into the remote region and moving out a 100-car unit train full of crude oil each day because there are no pipelines in North Dakota that reach refineries in the Gulf. The trains originate at a new terminal in Stanley, N.D., and terminate in Stroud, Okla. A new 17-mile pipeline moves the unloaded oil to Cushing where it can be taken to market through an existing pipeline network.
The Class I railroad has been shipping Bakken oil by rail since the beginning of 2010.
