Recession Watch: US Freight Drops to Worst Level since 2010, “Excess of Capacity” Crushes Rates, by Wolf Richter

While it is not yet official that the entire US economy is in a recession, the freight transport sector certainly is. From Wolf Richter at wolfstreet.com:

“Overall shipment volumes are persistently weak.”

When FedEx announced its quarterly earnings today, it included some telling tidbits. In its largest segment, FedEx Express, domestic shipping volume edged up merely 1%. In its smaller FedEx Ground Segment, shipping volume jumped 10%, “driven by e-commerce and commercial package growth.”

Sales by e-commerce retailers jumped 15.8% year-over-year in the second quarter, according to the Census Bureau, and companies involved in getting the packages to consumers and businesses have seen growth in those segments. For the rest, not so much – as the goods-based economy is getting bogged down.

And this has been showing up in broader shipping data. The Cass Freight Index for August, released today, fell 1.1% from a year ago, to 1.115, the worst August since 2010! The 18th month in a row of year-over-year declines!

“Overall shipment volumes (and pricing) are persistently weak, with increased levels of volatility as all levels of the supply chain (manufacturing, wholesale, retail) continue to try and work down inventory levels,” Donald Broughton, Chief Market Strategist at Avondale Partners, wrote in the report.

The Cass Freight Index is based on “more than $26 billion” in annual freight transactions by “hundreds of large shippers,” according to Cass Transportation. It does not cover bulk commodities, such as oil and coal but is focused on consumer packaged goods, food, automotive, chemical, OEM, and heavy equipment.

It’s not seasonally adjusted, so it shows strong seasonal patterns. In the chart below, the red line with black markers is for 2016. The multi-color spaghetti above it represents the years 2011 through 2015. So here’s how dismal the “economic recovery” has looked in 2016 so far:

The report pointed out the growth in e-commerce – the one aspects of the goods-producing economy that is hopping. But it also said that the transit modes servicing the auto and the housing/construction sectors were weak. Both sectors are crucial to the US economy.

And rail, as has been the case recently, caught the brunt of it. According to the Association of American Railroads carload traffic – which includes commodities such as oil and coal – fell 6.6% in August from a year ago, and intermodal traffic (containers and trailers), fell 4.8%.

The tonnage shipped by truck rose 2.6% on a three-month moving average basis. But truckload volume fell 3.5% in July, leaving the three-month moving average down 1.6%, according to Broughton. “No matter how it is measured, the data coming out of the trucking industry has been both volatile and uninspiring,” he says.

Trucking in “mixed” condition – tonnage up, load volume down – and railroads in the tank: hence the worst read in the freight sector since 2010,

Plenty of culprits. Weak demand is in part caused by inventories that had been rising so sharply, starting in 2014, that the all-important inventory-to-sales ratio reached Lehman crisis levels (my chart for June). Recently, businesses have been trying to whittle down their inventory levels by reducing orders, and this is impacting the freight sector. Given that inventories remain at very high levels, and the inventory-to-sales ratio at crisis levels, both the high inventory levels and the draw-downs, along with their impact on freight, are likely to continue.

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