Positive News Kicks Off September (But Keep an Eye on the Fed)
Article by John Wagner Jr from Wagner Logistics published on September 5th 2013
September kicks off with positive news regarding manufacturing and construction.
The Institute for Supply Management's PMI survey of manufacturing supply managers came in at 55.7 in August, the highest reading of the year. Fifteen of 18 tracked manufacturing industries showed growth. Based on new orders, manufacturing should continue along this positive trend.
The Commerce Department reports construction increased 0.6 percent in July to $900 billion as both the residential and commercial segments grew. Public sector construction fell 0.3 percent.
Also in the positive column, second-quarter GDP grew at a 2.5 percent annual rate. The higher revised reading (projected at 1.7 percent) is due to exports, which grew at an 8.6 percent annualized rate. Business spending rose 9.9 percent in the quarter as investments in facilities and inventories were up.
All Eyes on the Fed, Confidence Mixed
All of these indicators point to the Federal Reserve taking action when they meet Sept. 17-18 to decide whether to scale back their $85 billion a month in bond purchases.
Once again we see conflicting consumer confidence reports with the Conference Board showing an increase from 81 to 81.5 in August while the Thomson Reuters/University of Michigan consumer sentiment index showed a decline to 82.1 from July’s reading of 85.1.
The Commerce Department said personal spending was up for the third straight month in July, rising 0.1 percent. Spending was up 0.6 percent in June.
Commerce also reported that July durable goods orders fell 7.3 percent after having risen the previous three months. Sales had been up 3.9 percent in June.
The Institute for Supply Management's factory index jumped to a 55.7 reading in August, indicating expansion. This suggests that manufacturers are expecting consumer spending to pick up later in the year.
Industrial Real Estate Still on the Rise
One of the largest cost factors in our distribution center business is industrial real estate, so it bears watching. According to Cushman & Wakefield, leasing volume increased in the second quarter on stronger transaction volume. Overall, industrial vacancy fell to 8.0 percent in the second quarter. Even with new construction, the rule of supply and demand is pushing lease rates up. This trend is expected to continue through the remainder of 2013.
The American Trucking Associations said truck tonnage in the U.S. increased 4.7 percent in July, led by heavyweight freight for the housing and oil/gas industries. This was the third-highest reading ever, coming in at 125.4 in July. On a year-over-year basis, truck tonnage increased in 42 of the last 44 months. This is borne out in other indexes as well and it will be interesting to see the Cass index, which will be released later this week.
Freight Rate Watch
Expect continued rising freight rates as LTL companies maintain pricing discipline and truckload carriers deal with reduced capacity under the new hours-of-service regulations. Carriers in the truckload segment are reporting 45-60 minutes of lost production a day due to the new mandatory 30-minute rest break.
With the increase in construction employment, finding CSA-qualified drivers is becoming very difficult. When planning your transportation budgets for 2014, expect trucking costs to be up by 3-5 percent.
With the growth in the freight brokerage industry we are seeing some interesting industry statistics. In the first quarter of the year, 72 percent of broker loads were truckload and LTL volume increased 3.1 percent year over year. Across all freight brokerage services, first-quarter gross profit was 13.8 percent. Under the MAP-21 regulations passed this year, brokers must carry a $75,000 bond by Oct. 1.
On the rail side of transportation, the Association of American Railroads said intermodal traffic increased 3.5 percent year over year for the week ending Aug. 24, with 257,080 trailers and containers handled. The carload segment fell 1.7 percent for the week. Petroleum products continue to show strong increases in volume, rising 15.3 percent for the week while grain led the decliners, dropping that same 15.3 percent.
Ocean freight is seeing more stability after years of severe financial losses. It was great news that A.P. Møller – Maersk increased its profit forecast for the year. Maersk controls 15 percent of the world’s container capacity and is doing a great job of cost control while benefiting from lower fuel costs. Fuel is the largest cost of operating as newer technology allows ships to operate with fewer crew members. However, strong competition with newer, larger ships coming into service will likely keep prices flat in 2014.