This week we are using the Cass Information Systems data to review what is happening in the economy overall. Cass is the largest third-party payer of freight bills in the U.S. and as a result, we view its Shipments and Expenditures as very representative of the overall U.S. Transportation economy.
Volume has continued to grow at such a pace that capacity in most modes has become extraordinary tight. Pricing power has erupted in those modes to levels that spark overall inflationary concerns in the broader economy. Not only did the Shipments and Expenditures Indexes extend their run of positive YoY comparisons, but those comparisons have become increasingly positive, leading many to cite transportation costs as one of the many sources of potential inflation.
Although we expect outsized pricing power for service providers in the short to intermediate term, we are less concerned about long-term inflationary pressure. At the risk of pointing out the obvious, pricing in transportation is cyclical, for two basic reasons. One, the industry is asset intensive and beholden to the level of economic demand for its services (i.e., transportation companies are at the mercy of the economic cycle), as is true for many cyclical industries, especially in an era in which technology provides for both improved price discovery and enhanced asset utilization/asset visibility. The second reason is that times of improved pricing often spur decisions to create capacity – either through adding assets or using technology to improve asset utilization. We observe, then, the industry’s ability to use increased profitability to fund enough capacity to kill outsized pricing gains in the long term.
A Leading Indicator?
Shipments first turned positive seventeen months ago, while expenditures turned positive fourteen months ago. Throughout the U.S. economy, we are continuing to see a growing number of data points suggesting that the economy continues to get increasingly better. The 11.4% YoY increase in the February Cass Shipments Index is yet another data point confirming that the strength in the U.S. economy continues to accelerate.
Although a seasonally weak part of the year, February was roughly equal to the peak month in 2014 (June 2014 at 1.201 vs. February 2018 at 1.198), which is extraordinary. January and February are clearing signaling that 2018 is off to a strong start, with volume well above other recent years. A YoY stacked chart highlights that, similar to November, the December 2017 shipments index exceeded the previous four Decembers. We should point out that 2014 was during a very strong freight market overall and was before the industrial recession (which started in December of 2014) had begun.
When viewed on an unstacked basis, it becomes readily apparent that the nominal value for February was higher than all the monthly values posted in 2015, 2016 and 2017. Since February is normally the seasonally weakest month of the year, we find this data point extremely bullish. With both January and February 2018 well above January and February in the record freight year of 2014, we find it easy to predict that 2018 is poised attain new record highs.
The YoY percentage change is notable because the freight recovery started in the second half of 2016 (i.e., tougher comparison) and because only when comparisons were weak (i.e., 2009-2010) were the percentage increases so high. Said another way, we normally only see such high percentage increases in volume when related to easy comparisons. That these percentage increases are so strong – and strong against tough comparisons – explains why our outlook is so bullish, why capacity is so constrained, and why realized pricing is so strong.
Data continues to suggest that the consumer is starting to spend, albeit not with brick and mortar retailers. It also suggests that, with the surge in the price of crude in October of 2016, the industrial economy’s rate of deceleration first eased and then began a modest improvement led by the fracking of DUCs (drilled uncompleted wells), especially in the fields with a lower marginal production cost (i.e., Permian and Eagle Ford). We have been questioning, “How fast will the recovery from here be?” We would note that indications of accelerating strength have been coming from several modes of transportation.
The DAT Dry Van Barometer is giving us real-time indications of stronger demand and tighter capacity in this key freight group, indicating that the consumer economy is not only alive and well, but growing robustly.
In a similar fashion, the DAT Flatbed Barometer is indicating that the U.S. industrial economy is also alive and well and accelerating. There was first a pickup in activity in rebuilding from last summer’s hurricanes, but that strength has continued as the price of WTI crude has stayed above $55 a barrel and the U.S. oil industry has begun fracking new wells in all the major shale fields (Permian, Eagle Ford, Barnett, Bakken, etc.).
With all of the recent strength in demand, it should come as no surprise that the Cass Freight Expenditures Index posted strong percentage increases throughout 2017, and this has continued in early 2018. As we commented on the Shipments Index, we have to go back to the easy comparisons of 2009-2010 to find such large percentage increases. The current comparison is anything but easy. We have commented repeatedly that this is indicative of an economy that is continuing to expand. February’s 14.3% 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 modes throughout the transportation industry.
On a nominal basis, the index is just below the all-time high established back in June 2014 and appears that it will blow through that record with ease in coming months. Stay tuned …
Putting it all in Perspective
Expenditures (or the total amount spent on freight) turned positive for the first time in 22 months in January 2017, albeit against an easy comparison. Not since 2011 – when the economy was still climbing out of the recession – had this index been so low. Our Expenditures Index in January 2016 was the worst in five years, as demand had weakened and crude oil had fallen below $30 a barrel. Although February and March of 2016 were also weak, they were not nearly as weak as January 2016 and hence a slightly tougher comp. Since fuel surcharges are included in the Expenditures Index, fuel was a positive bias in 2017 and continues to be so in the current data.
Throughout much of 2017, fuel was up as much as 75% on a YoY basis (diesel is at $3.00 a gallon on a national average basis as we write this), and we have pointed out that part of the expenditures increase was a result of the relatively steady increase in the price of fuel and the related fuel surcharges. That said, the YoY increase attributable to fuel is now diminishing (up an average of 18.6% on a YoY basis in February), and we are also seeing some improvements in pricing power of truckers and intermodal shippers. As an example, the proprietary Cass Truckload Linehaul Index (which measures linehaul rates and does not include fuel) rose a healthy 6.5% on a YoY basis in the month of February. The proprietary Cass Intermodal Price Index (which does include fuel) increased 5.4% in February. But as we’ve pointed out, fuel is a now a diminishing factor on a YoY basis.
We should also remind readers of a fundamental rule of marketplaces: volume leads pricing. Repeatedly, we have watched in a host of different markets, that volume goes up before pricing starts to improve and volume goes down before pricing starts to weaken. Even in markets as basic as the weather, the number of hours of sunshine (sunrise to sunset) starts to decline long before the temperature starts to fall.
Viewing the Cass Freight Expenditures Index on a nominal basis shows how positive the trajectory has been in the last year. It is now at the levels achieved in the 2014 period, which is ahead of our “by the second quarter of 2018” prediction. To put how strong the underlying pricing is in perspective, we should remind readers that the price of oil was at or above $100 a barrel throughout most of 2014, versus the current price of ~$60 a barrel.
Similar to the Cass Freight Shipments Index, the Cass Freight Expenditures Index, when viewed on a nominal YoY stacked basis, highlights that the February Expenditures Index has exceeded all previous levels for January since the recovery from the 2008-2009 recession. As we’ve noted, since oil was markedly higher in 2013 and 2014, we see this data point as very encouraging.