Logistics Managers Index climbs
A September supply chain survey shows transportation capacity has reached new lows. The Logistics Managers’ Index (LMI), a survey of leading logistics executives, showed capacity fell to new lows, dipping another 770 basis points during the month to a 23.8 percent reading.
The LMI is a diffusion index, wherein a reading above 50 percent indicates expansion and a reading below 50 percent indicates contraction. The survey captures the rate of change in activity for key supply chain trends in areas like transportation, inventory and warehousing.
The September transportation capacity reading was the lowest level ever for any of the eight metrics the survey tracks. The capacity situation was even worse for “downstream firms,” or those closest to the consumer, at 16.3 percent.
The lack of available capacity was also “reflected in the premium firms are paying.” The transportation pricing sub-index increased 410 basis points in the month to 87.9 percent, the highest reading since October 2018. “Observing the last two years of transportation prices shows a U-shaped trend, with September’s rate of growth representing a return to the heady days of mid-to-late 2018,” the report stated.
Employment and income challenges
Declining government census and education jobs overstated the monthly drop; private employment slipped to 877,000 from 1 million in August. The economy is not going into reverse, but the tailwinds are fading. Extra fiscal support for the jobless ended in August, and an uptick in Covid-19 cases has slowed the lifting of restrictions.
On Oct. 29, a few days before the election, we’ll probably learn the economy expanded at a record 33 percent annualized rate in the third quarter, according to IHS Markit. But that will be ancient news: The jobs data suggests the best is behind us.
A drop in household income and persistently high layoffs are threatening to further slow the U.S. economic recovery, which already appears to be losing momentum as the pandemic continues.
Personal income, what households received from salaries, investments and government aid, fell 2.7 percent in August as enhanced unemployment checks shrank, according to the Commerce Department. Meanwhile, another 837,000 workers filed for unemployment compensation last week after being recently laid off, the Labor Department said. In total, nearly 12 million workers are receiving unemployment compensation through regular state programs.
Manufacturing rebounds
U.S. manufacturing activity continues to rebound from the sharp downturn last spring, when factories closed to contain the spread of the coronavirus.
A pair of new manufacturing surveys shows firms saw solid demand domestically and from abroad in September, leading to backlogs of new orders.
The Institute for Supply Management said its purchasing-managers index of manufacturing activity registered 55.4 in September, indicating the fourth straight month of expansion. A reading above 50 indicates that activity is increasing, while a reading below points to a decline in activity.
Despite the gains, manufacturing activity in August remained 7.3 percent below its February level, according to Federal Reserve data released last month.
About 12.1 million people worked in American manufacturing in August, roughly 700,000 fewer than before the pandemic, according to the Labor Department.
Data firm IHS Markit, in a separate survey said its purchasing-managers index of manufacturing activity rose slightly to 53.2 in September from 53.1 in August. That survey showed a slight uptick in employment in September.
Also, the Labor Department said first-time claims for unemployment remained high, at 837,000 for the week ended Sept. 26. Several major employers, including airlines, theme parks and restaurants have announced layoffs in the past few days.
Headwinds that could slow the pace of the manufacturing recovery include a rise in coronavirus infections this fall that could prompt more businesses to shut down and workers to stay home. Second, schools’ move online could keep many parents home from work. Finally, uncertainty around the presidential election could prompt firms to postpone investments.
Consumers feeling better
At least consumers are growing more optimistic about the state of the U.S. economy according to September surveys. The labor market continued to gradually improve, and a summer coronavirus surge receded in parts of the country.
The Conference Board, a private research group, said its index of consumer confidence surged to 101.8 in September, from a revised 86.3 in August. The increase was the biggest since April 2003—reversing two months of decline and bringing the index to its highest level since March, when the coronavirus pandemic thrust the U.S. economy into a recession. This month’s preliminary reading on consumer confidence was based on survey responses collected Sept. 1-18.
Consumer bullishness likely reflected in part consistent improvements in the labor market. The share of respondents in the Conference Board’s index reporting jobs as “plentiful” climbed to 22.9 percent in September, from 21.4 percent in August—and compared with just 16.5 percent in May.
Housing market growth
Home-price growth began accelerating in July, a sign that the slowdown in home prices caused by the coronavirus pandemic may be reversing.
The S&P CoreLogic Case-Shiller National Home Price Index, which measures average home prices in major metropolitan areas across the nation, rose 4.8 percent in the year ending in July. On a monthly basis, prices rose 0.8 percentage points from June to July, after staying flat during the previous month.
Meanwhile, sales of existing homes have surged, rising 10.5 percent on an annual basis in August, according to the National Association of Realtors. That included a 44 percent increase in the sales of homes costing more than $1 million.
Home sales during the pandemic have been boosted by more families deciding to buy single-family homes where they can more comfortably work from home and have their children do remote learning. Their purchases have been aided by historically low mortgage interest rates.
“With buyer demand showing no signs of a slowdown, as well as limited inventory, more price increases are inevitably on the horizon,” said Danielle Hale, chief economist at Realtor.com.
Durable goods continue upward trend
Orders for long-lasting factory goods increased for the fourth consecutive month in August, a sign of the manufacturing industry’s continued recovery from coronavirus pandemic-related disruptions.
New orders for durable goods, products designed to last at least three years, rose 0.4 percent in August compared with July, the Commerce Department said Friday. The August increase was at a slower pace than earlier in the summer, when orders rebounded following a collapse in demand from early in the pandemic.
A closely watched proxy for business investment, new orders for nondefense capital goods excluding aircraft, also rose last month, increasing by 1.8 percent.
Orders for computers, communications equipment and machinery all rose solidly in August, helping drive the overall gain.
Andrew Hunter, senior U.S. economist at Capital Economics, said the report showed that “business equipment investment staged a V-shaped rebound in the third quarter.” A V-shaped recovery is a sharp and quick economic recovery after a steep decline.
Weakness in motor-vehicle, commercial-aircraft and defense orders weighed on overall gains.
Cancellations of orders for Boeing Co. ’s 737 MAX and other jetliners, as well as General Electric Co. and Pratt & Whitney engines, boosted the net loss of the industrywide aircraft and parts business above $27 billion this year through August, according to Friday’s report. In August, orders excluding transportation were up 0.4 percent and orders excluding defense were up 0.7 percent.
Distribution center real estate remains a hot commodity
A key measure of demand for big warehouses soared 51 percent in the first half of 2020 as the pandemic-driven surge in online sales sent companies scrambling for space to store and deliver goods to locked-down consumers.
The rush toward distribution centers was most pronounced at the largest end of the market, real-estate brokerage firm Colliers International Group Inc. said in a report released Thursday, as Amazon. com Inc. and other e-commerce and logistics providers accelerated a push toward sprawling facilities to process, package and ship digital orders. Amazon has been racing to meet surging online demand after a wave of orders from homebound shoppers slowed deliveries in the early months of the pandemic. The company said recently it was opening 100 buildings in September alone, including fulfillment centers, delivery stations, sorting centers and other sites.
The report covers industrial buildings of 200,000 square feet or more in major North American markets.
“There is a surge in big-box occupancy,” said Pete Quinn, the firm’s national director of industrial services. “Amazon obviously leads the pack. They’ve got multiple big boxes going up all over the country.”
Overall, the Colliers report said the net change in occupied big-box space—known as net absorption—rose by 51 percent in the first half of this year in the markets covered from the same period in 2019, to nearly 79.8 million square feet.
For sites of 750,000 square feet or more, net absorption came to 34.3 million square feet in the first six months of the year, more than double the amount recorded for all of 2019, Colliers said.
E-commerce continues to boom
E-commerce sales accounted for a record 16.1 percent of total U.S. retail sales in the second quarter on an adjusted basis, according to the Commerce Department. Online sales rose 31.8 percent from the first quarter and jumped 44.5 percent year-over-year.
For industrial real estate, the rapid expansion of digital commerce appears to be offsetting slowdowns and bankruptcies in sectors such as traditional retail. Companies are also looking for more space as they move away from lean just-in-time inventory practices following shortages early in the pandemic, when stockpiling shoppers emptied shelves and manufacturers struggled to ramp up production of in-demand goods such as toilet paper.
It's estimated that companies are increasing safety stock by about 5 percent to 15 percent, boosting their need for warehouse space.
A deep dive into the current freight market
The trucking industry is as healthy as it has been since 2017-2018 when the backdrop for carriers was strong, and the existing vigor might be the start of a “multi-year upcycle” for the industry, according to recent reports.
The third-quarter shipper and carrier rate reports by FreightWaves show the industry reached a peak in mid-2018 as too much capacity became available and contributed to an 18-month downward trend. The downturn came with other issues, including trucking bankruptcies, declining new truck orders and rising insurance premiums, and the result was a reduction in capacity.
Unlike the mid-2018 peak, the improving industry trends that have started to develop “have staying power,” and the industry looks to be “on the cusp of a new multi-year upcycle,” according to the reports.
As capacity tightens, contract truckload volumes have risen 27 percent at a time when they typically decline. The industry usually experiences a seasonal slowdown after Independence Day.
Load volumes have risen 28 percent above 2018 levels, which was a strong year for trucking. Because of the existing conditions, FreightWaves analysts expect upcoming contract rate negotiations to be at least flat to positive low-single-digit increases for carriers. Along with the tight capacity, as measured by tender rejections of above 20 percent, spot rates continue to rise.
However, the pace of the increases has slowed for dry van and temperature-controlled freight, but flatbed rates continue to rise rapidly. National spot rates were more than 25 percent above 2019 levels, and rates have been rising on most major trucking lanes and activity is up across the spot market, according to Truckstop.com.
Recently, shippers have started to renegotiate rates to obtain capacity because of the rise in freight volumes, according to a recent article in the Journal of Commerce. Freight demand has risen beyond expectations as U.S. consumers who would have normally been spending on summer vacations have instead purchased items for their homes, either online or in stores.
Some trucking companies have put a lower priority on customers that negotiated for rate reductions earlier this year, according to the JOC article.
“There are numerous examples of customers who have struggled to get their loads picked up, their tenders accepted, proactively come back to the carrier asking, ‘What is Index was 107.5 in August, compared with 113.9 in July. (The index equaled 100 in 2015.) On a sequential basis, truck tonnage was down 5.6 percent from July.
The surge on the consumer side lifted the DAT Truckload Volume Index, a measure of dry van, reefer and flatbed loads moved by truckload carriers.
The index rose 0.8 percent compared with August of 2019 and 1.1 percent compared with July, according to DAT Freight & Analytics, which operates an online marketplace for spot truckload freight.
Driver turnover at truckload carriers with more than $30 million in annual revenue fell 12 percentage points to 82 percent, the lowest level since late 2018.
The rate at smaller truckload carriers (less than $30 million) fell 10 points to 60 percent, the lowest level since the fourth quarter of 2011.
Meanwhile, researcher FTR said trucking is facing a possible problem regarding capacity and the driver shortage. Avery Vise, vice president of the trucking division, said overall capacity challenges are likely to continue because of uncertainties surrounding the pool of current and potential professional drivers.
He points to the difficulty new drivers face obtaining commercial driver licenses because of coronavirus-related challenges at driver training programs as well as the backlog of paperwork at state Department of Motor Vehicle offices.
Also tightening capacity is that more than 30,000 drivers have tested positive for illegal drugs, making them ineligible to drive until they complete a mandated return to duty program, said Vise, citing the new federal drug and alcohol clearinghouse for commercial drivers. He said more than 90 percent of those drivers have not completed the requirements and therefore are not driving.
The Drug and Alcohol Clearinghouse is a secure online database that gives employers, the Federal Motor Carrier Safety Administration, state driver licensing agencies and state law enforcement personnel real-time information about commercial driver license and commercial learner’s permit holders’ violations.
Currently we are seeing national van rate setting all-time high numbers in the seek ending October 4th hitting $2.38 in September, 6 cents higher than the previous record set in June 2018. Shippers have relied more and more on the spot market, with disruptions from the pandemic push freight away from the contract market, and capacity tightened last week with the rush to move freight ahead of the close of Q3 according to DAT Solutions.
The numbers below reflect the dry van national average rates for the month to date, including fuel surcharges.
- October $2.46 per mile
- September $2.38 per mile
- August $2.22 per mile
- July $2.04 per mile
U.S. rail volume decreasing but intermodal shines
U.S. freight-rail traffic declined 2.1 percent to 518,290 carloads and intermodal units during the week ending Sept. 26 compared with the same week in a year ago, according to Association of American Railroads (AAR).
Railroads hauled 224,146 carloads during the week, a 10.5 percent year-over-year decrease. But intermodal volume climbed 5.5 percent to 294,144 containers and trailers, AAR officials said in a press release.
Three of the 10 carload commodity groups that AAR tracks every week posted increases during the week. They were grain, up 7,7061 carloads to 24,995; farm products excluding grain, and food, up 464 carloads to 15,666; and motor vehicles and parts, up 421 carloads to 16,340.
Commodity groups that logged decreases included coal, down 21,008 carloads to 58,220; nonmetallic minerals, down 5,357 to 29,977; and chemicals, down 2,937 to 30,078.
For the first 39 weeks of 2020 compared with the same period in 2019 U.S. railroads reported 18,083,402 carloads and intermodal units, down 10.7 percent.
At Wagner Logistics
On October first it was hands on deck at the Lake City Ammunition Plant as Wagner took over all logistics functions under contract with Olin Winchester. Many thanks to all the associates who traveled in from other Wagner locations to assist in this important transition.
Next up, another distribution center in the southeast will be opened before the end of the year.
What may Wagner Logistics do for you? We have an extensive history of 74 years of service to our customers and would love the opportunity to collaborate with you.
As we say every day, Bring it!
Have a great day!
John Wagner Jr.
About Wagner Logistics
Wagner Logistics was founded in 1946 on the principle that every customer is a big deal and that continues to pervade our mentality, producing a superior customer experience. The company began in trucking and remains dynamic offering top-notch transportation, dedicated warehousing and robust fulfillment services. We strive to produce innovative solutions, in addition to our superior onboarding process which makes transitions seamless, and have been honored 20 years in a row by Inbound Logistics as a Top 100 3PL. Our customers drive our entry into new geographic markets, technological advances and ever-changing distribution challenges. Where do you want to be? Wagner says, Bring It!