Home Builder Sentiment Also Unexpectedly Improves in Early February
RedStone Resource
February 16, 2023
Inside This Edition
Cass Freight Indexes Mixed in January
The shipments index was down 3.2% between December and January. But it was stronger year-over-year by 4.3%. On a real basis, the shipments index was comparable to the ten year average prior to the pandemic. In other words, this level of shipment activity is within a normal range experienced in January stretching back to 2011.
Rail Systems Seeing Slow Volumes Early in 2023; Delays in Service Update
Rail networks are seeing carload volumes running 1% higher year-to-date than volumes a year ago, but that is being driven heavily by automotive and petroleum shipments. Intermodal activity is down 7.7% according to the AAR and total traffic over rail networks is down 3.6%.
Global Manufacturing Link to Transportation Volumes
Global manufacturing PMI’s in January were improving slightly. Despite 19 countries still remaining in contraction in January (down from 21 in December), only 5 experienced softer month-over-month activity. Most countries that were in contraction were inching closer to the critical midpoint of 50, signaling that there was a slight building of global momentum in manufacturing in the month of January.
ECONOMIC BRIEFING
Home Builder Sentiment Also Unexpectedly Improves in Early February
Although it still remains weak on a historical basis, home builder sentiment did sharply rebound in early February, rising from 35 points in January to 42 points in February. Keeping this increase in home builder sentiment in perspective, however, sentiment is sitting 48.1% lower than it was a year ago.
Home builders are facing some crosscurrents. Some slight softening of mortgage rates in early January pushed some buyers back into the market and some regions of the country continue to remain buoyant where housing demand is much higher than supply. The US housing market is important to transportation because the average single-family home can create as many as 7 full truckloads of fixtures and freight demand and the sector can drive as much as 11-16% of total GDP for the country.
Oil Prices Remain Steady, Diesel Softens Slightly
Oil inventories in the US have improved in the last month as cold winter weather starts to abate in the northeast. And a drop in US diesel consumption (as a result of the freight sector slowing) has led to diesel prices now sitting just 63 cents a gallon higher than a year ago (and roughly 6 cents lower than a month ago). Diesel fuel surcharges are still 20% higher than they were a year ago at this time, so there is still some operating pressure and higher costs in the sector.
Oil prices have settled back into the mid $70 range temporarily as US inventories of crude oil have built slightly in the latest weeks. Analysts are concerned that this won’t hold. Reports from global markets suggest that OPEC output has dropped with Saudi Arabia potentially falling as much as 156,000 barrels per day and Russian output has been lower. Some Wall Street banks are still calling for oil to go back above $100 a barrel in 2023, especially as China and most of Europe reopen after difficult winter energy supplies.
Retail Spending Unexpectedly Surges in January
In a report that was much stronger than expected, US retail sales for January came in 6.4% higher year-over-year and 3% higher month-over-month. Even when adjusting for inflation, sales were just short of all-time highs with January coming in 2.4% higher than December. Year-over-year, they were flat against January of 2022 (which was against strong comparisons).
Consumer spending accounts for more than 70% of US GDP and this strong retail sales figure will push Q1 GDP above the 2.2% current projection. Remember that the Federal Reserve, Conference Board, and many “Blue Chip” economist outlooks predicted Q1 would come in contracting at 0.5%. A strong jobs market and continued strength in consumer spending will keep economic growth stable, despite other sectors of the economy facing challenges.
The big question ahead for the transportation sector is how this will impact inventories and retailer sentiment regarding inventory building activity. Inventories were overbuilt going into Q4 and it looks like they will remain higher heading through Q1. What we don’t know is how these strong retail figures may change retailer plans, and how rebuilding activity could improve the rest of 2023’s freight volume demand.
TRANSPORTATION BRIEFING
Cass Freight Indexes Mixed in January
The Cass Information Systems index for freight shipments and expenditures came in mixed in January. The shipments index (which measures the volume of shipments being processed) was down 3.2% between December and January. But it was stronger year-over-year by 4.3%. On a real basis, the shipments index was comparable to the ten year average prior to the pandemic. In other words, this level of shipment activity is within a normal range experienced in January stretching back to 2011.
Freight expenditures measured in the index were 3.2% lower month-over-month in January. Like the shipments index, expenditures were 1.7% higher year-over-year and remained 59.5% higher versus the pre-pandemic period in January of 2020. Freight costs remain elevated based on historical measures. Unlike shipments which have fallen back in a “normal” range, expenditures remain elevated on a historic basis.
Rail Systems Seeing Slow Volumes Early in 2023; Delays in Service Update
Rail networks are seeing carload volumes running 1% higher year-to-date than volumes a year ago, but that is being driven heavily by automotive and petroleum shipments. Intermodal activity is down 7.7% according to the AAR and total traffic over rail networks is down 3.6%.
Canadian rail traffic is doing better with carload activities up 15.5% YTD; intermodal is lagging with a 6.3% dip in activity. Mexico rail carload traffic is down 5.3% YTD and intermodal is still lagging by 2.9% YTD.
There have been many questions about the various train derailments across the country (3 in the past 10 days). It appears to be a series of unfortunate events that have led to accidents, nothing allegedly ties the accidents together as a systemic or purposeful set of incidents. According to rail firms that have been impacted by the events, it appears as though transit time delays are less than 24 hours and workarounds are adequate and sufficient to keep freight flowing for now.
Global Manufacturing Link to Transportation Volumes
Global manufacturing PMI’s in January were improving slightly. Despite 19 countries still remaining in contraction in January (down from 21 in December), only 5 experienced softer month-over-month activity. Most countries that were in contraction were inching closer to the critical midpoint of 50, signaling that there was a slight building of global momentum in manufacturing in the month of January.
Some believe that this was the clearing of backlogs as favorable winter conditions improved industrial output. But domestic orders for products in many countries were improving and an emerging China market (as it comes out of zero-Covid policy) will likely experience increased demand for domestic products in the quarters to come. This has helped lift (slightly) global activity and could lead to a more robust second half of the year for the global supply chain. Some large Wall Street banks are predicting that recession risk may have just been delayed. They believe that consumer credit pressures and a drop in corporate investments may lead to a reduction in economic activity in the second half of the year.
Whether this happens or not, the current positive trends emerging out of the global economy could hint at a much softer slowdown, and one that is much shorter in duration.
