Rapid growth in cargo volumes and spending has started to stretch domestic infrastructure to its limits, according to economist Donald Broughton.
Growth in the North American freight market continued in June, but at a slower rate than in recent months, according to the latest Cass Freight Index Report.
Shipment volumes increased 7.2 percent year-over-year for the month after an 11.9 percent bump in May, while expenditures grew 15.9 percent following a 17.3 percent increase. Both volumes and spending extended their runs of year-over-year increases that began 21 and 18 months ago, respectively.
On a sequential basis, shipment volumes declined 4.6 percent, while freight spending was relatively steady, rising 0.7 percent compared with the previous month.
“From both a volume and a pricing perspective, the U.S. freight economy continues to be extraordinarily strong,” wrote Donald Broughton, founder and managing partner of Broughton Capital and author of the report. He said the continued growth of the domestic freight market is a clear signal that, for the time being, “the U.S. economy is ignoring all of the angst coming out of Washington, D.C., about the trade war.”
“Despite concerns coming out of Wall Street about the increased threat of inflation or the continued increase in interest rates, [the Cass shipment and expenditure] indices are displaying accelerating strength on top of increasingly difficult comparisons,” he added.
Broughton warned, however, that given the sustained growth, there are signs that domestic “transportation infrastructure has reached its limit, at least in the short term, to accommodate higher rates of volume growth.”
“The current level of volume and pricing growth is signaling that the U.S. economy is growing, but that level of growth may have reached its short-term expansion limit,” he said. “The 7.2 percent YoY increase in the June Cass Shipments Index is yet another data point confirming that the strength in the U.S. economy continues, albeit at a lower than the extraordinary 10.0 percent-plus pace established in the January through May period.
“We are confident that the increased spending on equipment, technology and people will result in increased capacity in most transportation modes. That said, many modes are reporting limited amounts of capacity or even no capacity at any price shippers are willing to pay.”
Volume levels in May, April and March all exceeded any recorded in 2014, which was a very strong year, said Broughton, further noting that February volume levels were roughly equal to those of June 2014, a high point for the year recorded prior to the industrial recession that began in December 2014.
“We normally only see such high percentage increases in volume when related to easy comparisons,” he wrote. “That these percentage increases are so strong against tough comparisons explains why capacity is so constrained and realized pricing is so strong.
“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.”
In terms of expenditures, Broughton said the June index reading represented a new all-time high, exceeding the previous record set in June 2014, adding that spending “appears poised to stay at record levels with ease in coming months.”
According to Broughton, the 15.9 percent growth in June “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,” adding that as with shipment volumes, “we have to go back to the easy comparisons of 2009-2010 to find such large percentage increases and the current comparison is anything but easy.”
Freight spending turned positive on a year-over-year basis for the first time in 18 months in January 2017, although Broughton noted this was against an easy comparison, as the index in January 2016 reached lows not seen since 2011 when the U.S. economy was still rebounding from the Great Recession.
Broughton attributed the continued growth in large part to a steady increase in the price of fuel and the associated carrier surcharges but said that although the increase attributable to fuel is still “significant,” intermodal carriers are gaining pricing power independent of oil prices.
The Cass Truckload Linehaul Index, which measures rates excluding fuel surcharges, for example, grew 9.5 percent year-over-year in June, the third consecutive record increase for the index, while the Cass Intermodal Price Index, which does include fuel, continued a 21-month streak of pricing gains with a 10.9 percent bump.
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