A Deep Dive Into Trucking And Wholesale Inventories——Abundant Signs Of A Developing Slump

Trucking Spot Prices Plunge

Here’s an interesting chart and commentary courtesy of James Jaillet who writes Truckload Rates Sunk Again in November.

Average per-mile rates on the spot market fell again for all three major truckload segments in November, according to data from loadboard Truckstop.com.

This is the fourth straight month that rates dipped in all three segments, continuing a now year-long downward trend spurred by both a major drop in diesel prices and market conditions.

Paid rates, verified averages of rates paid to carriers, fell 4 cents from October in reefer and flatbed segments and 7 cents in flatbed.

Paid reefer [refrigerated] rates in the month averaged $2.14, down 43 cents from last November. Rates in the segment have fallen 26 cents since May.

Fuel Costs

Let’s dive into Freight Rate Index Data to see the reason for the plunge.

The index includes the following costs: Fuel, Wages, Equipment, Depreciation, Financing, Admin, Compliance, and Insurance. Nearly all of the volatility pertains to fuel and wages.

For August through November the downward trend is nearly all due to lower fuel costs. In the December 2 report a nearly 3 cent drop in fuel was nearly offset by a 3 cent rise in wages.

That tells us nothing about shipping volumes, the numbers I am really interested in. For shipments, let’s look elsewhere starting with the Cass Freight Index.

Cass Freight Shipments Index

Cass nicely provides the data for both costs and shipments. Here is a subset of one of their tables.

This was the worst October for shipments since 2011 and the worst September since 2010.

In addition, Every month this year except January and February were worse than the same month a year ago. That’s eight consecutive months of declining shipments year-over-year.

Next let’s take a look at a few highlights from the Cass Freight Report for October.

Cass Freight Index Report

Following the trend observed in the last four years, both total spend and the number of shipments for North American freight declined in October. The indexes have been below 2013 levels for the last several months. The first reading on third quarter GDP was a disappointing 1.5 percent annual growth rate, compared to 3.9 percent in the second quarter.

Consumer sector goods are, by far, the strongest in the market now. In many ways this is the silver lining in the storm clouds, because it means that consumers are still in the game. Consumer spending, which accounts for more than two‐thirds of U.S. economic activity, grew 3.2 percent in the third quarter after expanding at a 3.6 percent pace in the second quarter.

Shipment Volumes

The number of freight shipments dropped 4.7 percent from September. The freight shipments index now sits at its lowest October level since 2011. This month’s decline was much sharper than in recent years and can be directly correlated to falling imports and exports as well as decreased domestic manufacturing levels. Burdened by bloated inventories, and under the shadow of a possible interest rate increase by the Federal Reserve, businesses cut back on new orders placed in the last three or four months. This is resulting in lower import volumes, less freight to move and faltering industrial production. With the dollar still strengthening, export growth decelerated in the third quarter. The Association of American Railroads reports that October traffic was down 4.3 percent from 2014 levels. More importantly, though, is that carloads dropped 20.7 percent and intermodal fell 20.3 percent from the previous month. Rail has been hit particularly hard by the rapid drop in industrial commodities caused by the steady decline in industrial production. Coal, petroleum and ores were down, while grain was up. The reductions in energy production are being felt throughout the freight community as shipments of not only petroleum, but also pipe, water, sand and other drilling materials, have dropped off significantly.

Overall Picture

Third quarter GDP growth was indicative of the economic headwinds facing the economy caused by the strong U.S. dollar (making U.S. goods less competitive abroad) and the weakening world economy. However, the consumer sector is rising to the occasion and continues to improve, providing the missing element to a full recovery from the Great Recession. Consumer spending has been bolstered by low inflation, especially with fuel prices; improving jobs creation; and stronger household purchasing power. In October, the Labor Department reported that 271,000 jobs were added and the unemployment rate dipped to 5 percent. A report from the Labor Department showed new applications for unemployment benefits last week hovering near levels last seen in late 1973. Growth in durable goods spending (for long‐lasting items such as washing machines and automobiles) continued strong, rising 6.7% in the third quarter. Inventory levels remain a looming problem as the Federal Reserve has been actively hinting that an interest rate hike is very possible in December. The combination of record inventory levels and an interest rate increase will cause a significant hike in inventory carrying costs. This will most likely drive a drawdown much like the one we saw in 2009 and 2010. Expect freight to continue to trail off through year’s end. Retailers and wholesalers have ample supply for the holiday season, so imports and freight shipments should not strengthen considerably.

Mish Comments

All in all that was a balanced report by Cass. And providing the actual data to look at was a very nice touch.

Let’s now discuss other points of view regarding GDP, inventories, and consumer spending.

Consumer Spending as Percent of GDP

It is widely believed that consumer spending accounts for approximately two-thirds of the economy. A few dispute that claim.

In Is the US Economy Close to a Bust, Pater Tenebrarum at the Acting Man Blog points out …

One thing that we cannot stress often enough is that the manufacturing sector is far more important to the economy than its contribution to GDP would suggest. Since GDP fails to count all business spending on intermediate goods, it simply ignores the bulk of the economy’s production structure. However, this is precisely the part of the economy where the most activity actually takes place. The reality becomes clear when looking at gross output per industry: consumer spending at most amounts to 35-40% of economic activity. Manufacturing is in fact the largest sector of the economy in terms of output.

To that I would add much of consumer spending is transfer payments: Food stamps, Medicare, Medicaid, etc. And health care costs have soared.

In The GDP Illusion Tenebrarum writes …

Sure enough, in GDP accounting, consumption is the largest component. However, this is (luckily) far from the economic reality. Naturally, it is not possible to consume oneself to prosperity. The ability to consume more is the result of growing prosperity, not its cause. But this is the kind of deranged economic reasoning that is par for the course for today: let’s put the cart before the horse!

Both articles are worth a closer look.

Inventory Levels

Cass cautioned “Inventory levels remain a looming problem as the Federal Reserve has been actively hinting that an interest rate hike is very possible in December. The combination of record inventory levels and an interest rate increase will cause a significant hike in inventory carrying costs.”

That’s an accurate synopsis but I suggest Cass understates the inventory problem.

Let’s recap what I said Wednesday morning in Wholesale Trade: Another Bad Report, Inventories Decline, Prior Month Revised Way Lower; Expect Negative Revisions to 3rd and 4th Quarter GDP; What About Autos?

Inventories to Sales

Economists missed the wholesale trade report numbers by a mile. The Econoday Consensus Estimate for today’s trade numbers was +0.2% in a range of 0.0% to 0.4%. The actual report (for October) came in at -0.1%.

That’s bad enough, but some of the much touted inventory build for 3rd quarter (See Wholesale Trade Inventories Surge Led By Autos) did not happen.

Last month’s report had me scratching my head. I certainly didn’t expect such a jump. And it didn’t happen. Today, September inventories were revised from +0.5% to +0.2%.

Positives for Production?

Bloomberg comments “[Wholesale trade inventories] may be negatives for third-quarter GDP but are positives for the production and employment outlooks.”

Let’s investigate that claim with a dive into the actual Census Report on Wholesale Trade for a chart and more details.

Inventories to Sales

The inventory-to-sales ratio is clearly in the danger zone. Over-optimism across the board is generally what causes these spikes.

Year-on-year, inventories are up 3.6 percent but sales are down 3.7 percent. Inventories contributed heavily to rather anemic GDP growth this year.

For more on perpetual overoptimism, please see Persistent Overoptimism Three Ways: Truckers, Fed Economists, Manufacturers

What About Autos?

Inquiring minds may be wondering about autos. So, let’s take a look at autos and other categories.

Autos are one of the key things that has been strong most of the year. Sales are up 2.3 percent but inventories are up 13.1%. And subprime lending has been a driving force behind those sales.

Across the board, inventories-to-sales seem way out of line.

Unless sales pick up dramatically (and I highly doubt they will), inventories will be a huge drag on growth that will not only negatively impact 3rd Quarter GDP estimates, but also GDP estimates for multiple quarters looking ahead.

Demographics

The demographic picture is not that pretty. I covered that recently in When Does the Demographically-Related Pension Ponzi Scheme Blow Up?

As a reader pointed out “Aging populations consume less, and have different consumption patterns to working populations. Retirees consume less food, autos and real estate compared to young working couples. They use more healthcare instead. Also, aging populations take on less debt. These factors combined make the economic effect of lowering interest rates and printing money less pronounced than they would be in different circumstances.”

We’re not talking about lower rates (until the Fed dramatically reverses course in 2016). Meanwhile, what prices are going up substantially more than others? And who is affected?

• Apartment Rents
• Medical

Rising medical expenses are part of consumer spending, but a not very productive one.

And soaring rent prices strongly affect those who cannot afford a house. Millennials are in that group.

Overseas, we have outright Population Deflation: Spain Joins Germany with Negative Net Birth Rate; Italy on Threshold; Who’s to Blame?

The US is much better off than Europe and Japan, but what does that say for US export prospects?

Jobs

Cass noted “A report from the Labor Department showed new applications for unemployment benefits last week hovering near levels last seen in late 1973.”

That’s accurate.

But what does that mean looking ahead? That things are going to get even better? If so, how much better?

Initial Claims

Strong Case for Recession

Jobs are the laggiest of laggy indicators. A turn down here would not be welcome at all.

But why shouldn’t jobs turn down precisely here?

1. Inventories are up
2. Sales are down
3. The Fed is hiking
4. Corporate profits stalled
5. The recovery is above average in duration
6. Manufacturing is in outright recession
7. New home sales are weak at best
8. Existing home sales are down and a NAR Report Calls the Report “Disturbing”
9. Trucking is down
10. The energy sector is a bust
11. Auto sales are hugely subprime
12. Big box retailers struggling
13. Mall vacancies increasing
14. Consumer Spending Much Weaker Than Expected last two months

What’s next? No hiring? Outright layoffs?

I believe there’s a pretty decent chance the US is about to slip into recession, if it hasn’t done so already.

Mike “Mish” Shedlock