Will the Peak Season Show Up Late?
RedStone Resource
September 1, 2023
Inside This Edition
Inflation Still Too Hot, but the Trend is Positive
The transportation sector and the broader economy are being affected heavily by higher interest rates currently (the highest in 23 years). Tightening credit conditions are also slowing down borrowing by consumers, affecting everything from residential home construction and sales to durable goods purchases.
Transportation and Warehousing Job Openings Stable Through July
The latest job openings data show that the transportation and logistics industry added 102,000 jobs in July vs. June levels. They were 58,000 lower than they were last year at this time, but July has consistently added these levels over the past two years compared to some softening in July prior to the pandemic. The data shows the industry with currently 550,000 job openings.
Maritime Rates Continue to Fall; But Remain Elevated Above Long-Term Growth Trend
Global maritime rates continued to fall through August. Looking at the top 8 trade lanes around the world, the average rate of change for prices month-over-month was down 2.4%. Perhaps interestingly, the Shanghai to LA trade lane was down sharply by 5.1%, which suggests that order demand volumes are down more than expected and capacity was ample.
ECONOMIC BRIEFING
Will the Peak Season Show Up Late?
There are many varying opinions on the upcoming fourth quarter and what that might mean for peak season volumes. Some are hopeful. The National Retail Federation and Hackett Associates are predicting that Q4 will outpace volumes in 2022, despite volumes still down nearly 22% for the first half of the year.
One of the key measures that we monitor are the inventory-to-sales ratios across 19 different segments of the freight-moving economy because of their historical correlation to shipment volumes. Current ratios show that 65% of the country is still sitting 3% heavier (or more) than they were compared to the decade average prior to the pandemic. The good news is that the general retail category is sitting “balanced” relative to current sales volumes. With this balanced level of inventory, building into the peak is possible across the key retail segments.
But other measures (such as industrial production in manufacturing) that have an 85% to 90% correlation with shipments counts are flat. The latest manufacturing industrial production index is at 100.3, a level that is consistent with output in 2017 and during a cycle in 2007. It is flat at best, and this reflects weaker demand for a variety of products as a result of elevated inventory levels as mentioned.
Inflation Still Too Hot, but the Trend is Positive
The transportation sector and the broader economy are being affected heavily by higher interest rates currently (the highest in 23 years). Tightening credit conditions are also slowing down borrowing by consumers, affecting everything from residential home construction and sales to durable goods purchases. Each new home constructed in the US creates 7 full truckloads of freight volumes (not including materials going into the construction of the shell of the home). And the construction sector is the top competitor for CDL drivers in the country. When the housing market is booming, freight volumes and capacity are tight (and vice versa).
The Federal Reserve is still watching average inflation and the latest readings show it growing annually at 4.1%. Wages in the decade prior to the pandemic never really got above 2.5%, which is why the Fed has set a solid target of 2% for their inflation rate. Again, with current average inflation at 4.1%, it is still too hot despite slight softening over the past month.
The trend for inflation is good, but the current rate of inflation is far too hot. That suggests that higher interest rates will be in place at least through the early part of 2024 before some potential softening is possible.
TRANSPORTATION BRIEFING
Transportation and Warehousing Job Openings Stable Through July
The latest job openings data show that the transportation and logistics industry added 102,000 jobs in July vs. June levels. They were 58,000 lower than they were last year at this time, but July has consistently added these levels over the past two years compared to some softening in July prior to the pandemic. The data shows the industry with currently 550,000 job openings (the peak in September of 2021 was 635,000).
Peak season hiring typically affects the number of job openings by August and September (firms start posting the job openings in July and have those positions filled by early fall).
With freight volumes lower, typically there would not be this many job openings, especially with the Yellow Corp. bankruptcy and drivers/dockworkers shifting to other firms to fill open positions. There is a slight lag in the job openings data based on when the monthly business census data is collected, and some of the effects of timing of the closure and layoffs at Yellow could work to fill many of these job openings by the end of August. In other words, it would not be surprising to see a dramatic adjustment to job opening levels in the August data.
Job openings are likely to show us a stronger transportation market than expected, especially when we compare it to load-to-truck ratio data or other freight volume metrics. Companies are hanging onto talent much longer than normal given the difficulties in attracting quality talent coming out of the pandemic.
Maritime Rates Continue to Fall; But Remain Elevated Above Long-Term Growth Trend
Global maritime rates continued to fall through August. Looking at the top 8 trade lanes around the world, the average rate of change for prices month-over-month was down 2.4%. Perhaps interestingly (because it comes during the peak season), the Shanghai to LA trade lane was down sharply by 5.1%, which suggests that order demand volumes are down more than expected and capacity was ample. Largely, all the Shanghai routes (to Europe, US East Coast, etc.) were down between 3.4% and 5.1% month-over-month.
To keep it all in perspective however, we must compare rates to where they were prior to the pandemic, and most routes are still sharply elevated versus August of 2019. And this is part of the global inflation challenge that the world continues to work through. The average across the 8 primary trade lanes showed that rates today are still 25.6% higher than they were prior to the pandemic. Based on historic growth rates, prices are still 10% higher than they should be (based on the long-term growth trend). Carriers are pulling capacity out of the market and the backup at the Panama Canal has also worked to pull capacity out of the industry. Any weather impacts from Hurricane Idalia could also have some short-term freight flow impacts, but the area was largely spared from larger disruptions.
