Freight Is Good – But Not Great

April 1, 2015
At FTR (Freight Transportation Research), we are literally “all about the freight,” no kidding. We believe understanding the freight market is the key to...

At FTR (Freight Transportation Research), we are literally “all about the freight,” no kidding. We believe understanding the freight market is the key to understanding trucking, railroad, intermodal, and, ultimately, the economy.

So we are very concerned that the February Industrial Production numbers showed manufacturing output dipped 0.2%, down three months in a row. In addition, the January and December numbers were adjusted downward.

Is there a problem lurking here? Every month the experts at FTR dive deep into the freight data to understand where we are and where we are going. It is a finger-on-the pulse and ear-to-the-ground type of analysis.  What is the Current Freight Situation?

Sectors doing well:

  • Food – more jobs equate to more consumption and more people eating out.
  • Fabricated metals – auto industry is expected to have another good year.
  • Stone, clay and glass – non-residential construction is on the upswing.

Sectors showing weakness:

  • Chemicals – not sure why yet, but the trend is not good.
  • Metal mining/primary metals – commodity prices are much weaker.
  • Lumber and wood – not horrible, but housing starts are still slow.
  • Petroleum – due to the drop in crude prices, but not as bad as expected.
  • Coal – regulation continues to batter this sector.

What this means for truck freight:

We see truck loadings down slightly, a minor deceleration of growth. Q1 weakens and Q2 weakens some more. This means our forecast for 2015 freight growth is now in the 3-4% range, down from 4-5%.

Much of this weakness is in the dry van trailer sector, especially in commodities hauled a long distance. The liquid tanker sector is also suffering due to the slowdown in chemicals and petroleum. The bulk/dump sector is down slightly, but the refrigerated van and flatbed sectors are holding up well.

What this means for rail freight:

On the rail side: grain, lumber, wood, chemicals, and motor vehicles are doing well. Coal, frack sand, petroleum, pulp and paper, and metals are weaker. Overall, the rail freight 4-week moving average is down 2.6% year-over-year.

The wild cards:

Normally this freight situation would be cause for alarm, but there are two external factors impacting the data. The recently settled West Coast port strike restricted component parts from getting to some manufacturers, causing disruptions. It also prevented some products from shipping out. In addition, it has created major problems for intermodal freight.

The second factor is the Siberian Express effect in February. Last year’s Polar Vortex caused major disruptions to manufacturing, especially in the Midwest. I do not see the similar trends from the Siberian Express this year. It did have an impact on commerce, especially retail sales, but it did not have a big impact on the industrial side.

Therefore, we know freight and economic growth are slowing, but we don’t know if it is a short-term situation caused by these abnormal factors or if there are other reasons behind it. The data and the trends are unclear, making it too soon to tell.

Service sector still lags:

Manufacturing (and thus freight) has been stronger than services in this recovery. It is usually the other way around and, therefore, we have been expecting the service sector to catch up. This has been confusing, however.  Maybe the depth and nature of the Great Recession provides an explanation. Many services are substitutable, meaning you can perform the service yourself. So maybe people are still doing their own landscaping, painting their houses, and grooming their pets, instead of paying others to do it. Real unemployment is still high and incomes have not recovered, so this would make economic sense.

If we now expect freight (and manufacturing) to grow around 3.5% this year, then, based on the last few years, the economy would be growing slower than that, somewhere in the 2.5% – 3% range. This is consistent with most current economic forecasts. My prior analysis of leading economic indicators would indicate the port strike and weather are minor factors, and the overall trend is pointing to slower growth.