Investment and Spending Continue to Surprise with Strong Growth
RedStone Resource
August 18, 2023
Inside This Edition
Supply Chain Stall and Latest on Inventory to Sales Ratios
This sluggish supply chain cycle is being driven heavily by inventory overstocks and the latest data on inventory to sales ratios across the economy show that 65% of businesses that carry inventory are overstocked. This is based on the average inventory to sales ratio in the decade prior to the pandemic. In a normal cycle, this ratio should be below 45%.
Price Indexes for Modes of Transportation Mixed in July
The producer price index was released for various modes of transportation last week, and it showed most of them mixed. The less-than-than-truckload sector was 7.2% lower year-over-year, but it was .05% higher month-over-month (essentially flat). Importantly though, for those keeping score against 5-year averages, the PPI was still 22.7% higher than it was prior to the pandemic.
Key Economic Measure for Freight Volumes Increases Slightly in July
Studies have shown that Industrial Production in Manufacturing has a high correlation to daily truck freight shipments. The latest data from the Federal Reserve shows that July Industrial Production in Manufacturing (stripping out energy and utilities) was 0.5% higher vs. June levels. It was slightly weaker on a year-over-year basis, falling 0.7%.
ECONOMIC BRIEFING
Investment and Spending Continue to Surprise with Strong Growth
Many analysts had expected investment to drop off across many sectors heading into the second half of year largely due to higher interest rates and tougher bank regulations, but investments are continuing to surprise analysts, especially those that have a direct impact on freight activity.
Recent data from the Atlanta Fed shows the US economy now growing at nearly a 6% rate in Q3 largely on the back of private investment (which is trending at nearly an 8.8% rate). This includes residential, nonresidential, infrastructure construction, automation, and other types of investments, much of which includes the movement of products.
Corporations are also making capex investments in equipment and machinery and have accelerated spending close to all-time highs on an unadjusted basis, rising 1.7% year-over-year on $74 billion in annualized spending. Prior to the pandemic, companies were averaging roughly $65 billion in annual spending. Spending on technologies that help reduce the impact of labor shortages and increasing productivity are primary focuses for this capital goods investment.
Supply Chain Stall and Latest on Inventory to Sales Ratios
This sluggish supply chain cycle is being driven heavily by inventory overstocks and the latest data on inventory to sales ratios across the economy show that 65% of businesses that carry inventory are overstocked. This is based on the average inventory to sales ratio in the decade prior to the pandemic. In a normal cycle, this ratio should be below 45%. Some key peak season industries like general retail and department stores are largely in-line or even understocked, but they won’t reload those inventory levels as much as in prior years just before the peak retail season.
Freight volumes will still tick up from current levels, but they will fall short of levels seen since 2021. Sectors that are currently facing overstocks include furniture wholesale, building material stores, grocery wholesalers, machinery wholesalers, lumber and construction material wholesalers, commercial equipment wholesalers, durable goods wholesalers, hardware and HVAC wholesalers, household appliances and electronics wholesalers, and alcohol wholesale distributors. All of these sectors are showing inventory to sales ratios 3.5% to 26.7% higher than the ten-year average prior to the lockdown.
In 2014 when this cycle took place, it took from Q3 of 2014 to Q3 of 2016 to get inventories back in line. This cycle will be much shorter by most estimates, but it may still take until the summer of 2024 to clear overstocks.
TRANSPORTATION BRIEFING
Price Indexes for Modes of Transportation Mixed in July
The producer price index was released for various modes of transportation last week, and it showed most of them mixed. The less-than-than-truckload sector was 7.2% lower year-over-year, but it was .05% higher month-over-month (essentially flat). Importantly though, for those keeping score against 5-year averages, the PPI was still 22.7% higher than it was prior to the pandemic. Also keep in mind that this survey was conducted before Yellow Freight went through the process of closure – prices are likely to go higher in the coming months.
The truckload sector was slightly different in magnitude but was consistent in direction. The TL PPI was 22.2% lower Y/Y and it was 0.2% lower M/M. Against the same month in 2019, it was still 13.8% higher, but it has not hung onto its pricing strength as was seen in the LTL sector.
Freight rail was more moderate, but it also did not surge like other modes during the lockdown period. Freight rail was down 1.7% Y/Y, and it was down just 0.1% M/M. Against the pre-pandemic period, it was up a more moderate 15.2%.
Key Economic Measure for Freight Volumes Increases Slightly in July
Studies have shown that Industrial Production in Manufacturing has a high correlation to daily truck freight shipments. The latest data from the Federal Reserve shows that July Industrial Production in Manufacturing (stripping out energy and utilities) was 0.5% higher vs. June levels. It was slightly weaker on a year-over-year basis, falling 0.7%.
Industries that were higher in July M/M included: machinery, computers, autos, aerospace, textiles, printing, petroleum, and chemicals. Compared to last year, the industries that remain standouts and growing quickly are autos (up 10.3%), petroleum (2.8%), computers (2.4%), chemicals (1.4%) and aerospace (1.1%).
Industry overstocks are still an issue for many manufacturing and industrial production categories. Final product demand is still stable. Consumer spending is strong, corporate spending on construction and capital goods is still growing, and government spending on infrastructure and various bills that are starting to fund projects will keep industrial goods demand stable. If companies are able to pull overstocks down, the entire supply chain will move back into cycle and freight will flow upstream and downstream with more regularity.
Given these measures, freight demand will remain sluggish on a historical basis, but will continue to inch up in the coming weeks based on what is seen in this data.
