Freight Economy Extra Strong Says New Report

From both a volume and a pricing perspective, the U.S. freight economy is extraordinarily strong.

According to the Cass Freight Shipments and Expenditures Indices, signs clearly signaling that the U.S. economy is ignoring all of the angst coming out of Washington D.C. about the potential of a trade war and all of the concerns coming out of Wall Street about the increased threat of inflation or the rise in interest rates.

These indices are displaying accelerating strength on top of increasingly difficult comparisons. Demand is exceeding capacity in most modes of transportation by a significant amount. In turn, pricing power has erupted in those modes to levels that continue to spark overall inflationary concerns in the broader economy. As we explained in previous months, we do not fear long-term inflationary pressure as technology provides multiple ways to ever-increase asset utilization and price discovery in all parts of the economy, but especially in transportation. In fact, we are seeing more signs that ELDs (Electronic Logging Devices) initially hurt the capacity/utilization of truckers, especially small truckers, but many of the truckers most adversely affected are now beginning to recover some of the loss in utilization through gains in efficiency.

Transportation is a Leading Indicator
Year-over-year, shipments first turned positive twenty months ago, while expenditures turned positive seventeen months ago. The current level of volume and pricing growth is signaling that the U.S. economy is not only growing, but that the level of growth is expanding. The 11.9% YoY increase in the May Cass Shipments Index is yet another data point confirming that the strength in the U.S. economy continues to accelerate. This level of percentage increase is usually only attained when emerging from a recession, not when comping against already strong statistics.

The first five months of 2018 are clearly signaling that, barring a negative ‘shock event’, this year will be an extremely strong year for the transportation sector and the economy. May, April and March exceeded all levels attained in all months in 2014 (also a very strong year) and February was roughly equal to the peak month in 2014 (June 2014 – 1.201 vs February 2018 – 1.198) which is extraordinary. A YoY stacked chart highlights that, similar to the pattern which began in November and December 2017, the shipments index is exceeding all previous respective months.

The Industrial Economy – With the surge in the price of WTI crude back above $45 a barrel in April 2016, the industrial economy’s rate of deceleration first eased and then began a steady improvement led by the fracking of DUCs (drilled uncompleted wells), first in the fields with a lower marginal production cost (i.e., Permian and Eagle Ford). Now with oil back above $60 a barrel (WTI is above $65 a barrel as we write this), the U.S. oil industry is now fracking new wells in all of the major shale fields.

We would note that indications of accelerating strength have been coming from several modes of transportation, but none more visibly than in flatbed trucking which we view as a key heavy industrial indicator. As long as WTI crude oil stays above the marginal cost of production (<$60 a barrel) in the major U.S. fracking fields, we expect to see continued strong industrial economic growth.

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