As the Fed continues to pull levers to lower inflation, new housing figures and Home Depot's earnings report offer a glimmer of hope that the housing market has found its bottom. Meanwhile, manufacturing activity is still weak, but a drop in inflation-adjusted wholesale volumes could spell trouble for a deeper freight recession.
"It will take a substantial amount of time until we effectively get out of this recession because without some big jump in demand, we'll have to have enough capacity to leave the market," said Jason Miller, supply chain professor at the Eli Broad College of Business at Michigan State and veteran transportation economist. He also warns of accelerated carrier failures – particularly among younger carrier entities – as the year rolls on.
Contents of this video
00:00 May 2023 MarketPulse introduction
00:53 New inflation gauge showing improvement
02:55 Housing activity & Home Depot
06:26 Wholesale freight
07:23 Trucking freight recession
09:35 General freight rates long-distance truckloads
10:47 Specialized freight rates long-distance truckloads
Jeff Crissey (00:03):
Hello and welcome in to CCJ MarketPulse, your monthly look at trends and indicators in the broader economy and their impact on freight markets. Joining us every month to break down the statistics and data is our regular guest, Jason Miller, supply chain professor at the Eli Broad College of Business at Michigan State University. But before we begin, please like and subscribe to this channel to stay up to date on new episodes of MarketPulse, as well as the weekly 10-44 trucking series that brings you the latest trucking news and trends. And for more frequent economic updates, head over to LinkedIn to follow Jason Miller's insights and analysis on trucking indicators. So welcome back in Jason. Let's start this month talking about the Fed's adjustment of interest rates and their impact on the overall economy.
Jason Miller (00:55):
So one of the biggest questions right now is when is the Fed going to start lowering interest rates? Because we know that'll have a big knock on effect in terms of demand for truck transportation. Well, the New York Fed just recently released a new, what they call, underlying inflation gauge that's designed to strip out some of the volatility that exists in the data and also augment it with other information that's very useful for understanding inflation such as wage growth. And what I've done is produce that measure here and it gives us a sense of essentially what's year-over-year inflation growing like. So there's good news and bad news. The good news is that we are starting to see substantial evidence that inflation is indeed getting under control. So you can see that we peaked at about 6% year-over-year smoothing things out and we're now down to 4%.
The challenge is that 4% measure is substantially above where the Fed's target is. So the Fed's target is 2%. I, personally, don't think that's going to be a reasonable number. I think more that 3% figure where we were at in the mid-2000s and, let's say, in 2011 and 2018 may be more reasonable. But the big thing is as long as we're seeing the observed inflation data remain well above 2%, and as well as we're seeing these different measures that are designed to give a sort of cleaner picture, if those are staying well above the Fed's sort of appetite for inflation, there's no reason to expect the Fed is going to start reducing interest rates. If anything, just today, the president of the Dallas Fed was talking about potentially an additional interest rate hike likely driven by data like this. And so that is just something to keep in mind right now is that it's not looking like we're going to see interest rate reductions coming anytime soon, and I would certainly say not in 2023.
Jeff Crissey (02:56):
Okay. So speaking of inflation and its impact on the consumer, we got some pretty sobering news from Home Depot this week in its quarterly earnings report. Talk about, do you see that as a harbinger of things to come or is that sort of a misnomer?
Jason Miller (03:13):
What I'd say about Home Depot's earnings, if we look at headline sales, the challenge right now is if we take a look at product categories like lumber and plywood, prices are down 20%, 30% from where they were last year. And because of that, Home Depot is charging less than they were. So headline sales numbers are going to be down because of that. So what I have here is I've taken Home Depot's data and adjusted it for inflation using a price deflator specific for building material retailers. Believe it or not, the Bureau of Economic Analysis actually calculates such a thing. And what I'm seeing right now is, of course, activity has slowed from the torrid pace it was at, and the latter part of 2020 and 2021, but sales are still up about 10% from where they were before COVID. But most importantly, we saw essentially a seasonally adjusted gain in the first quarter of 2023, suggesting hopefully we've started to hit bottom.
And consistent with that, if we take a look at single family housing starts, what we have seen is essentially so far through the first four months of data in 2023, single family housing activity is tracking almost perfectly to where it was at in 2019 and also in 2017. Now that means that it's down 30% year-over-year as of right now because we were still seeing a lot of starts back in April of 2022. And so, the hope right now is that housing activity is essentially bottoming itself out, but it's bottoming out at 2019 levels, which isn't a bad thing and we'll certainly be looking to see if there's any type of further slowdown. The good news was the May consumer sentiment for home builders was actually in the positive territory for about the first time in a year. So again, barring something unexpected happening, there's reason to have hope that essentially the home building market is essentially bottomed out and it's found a floor back around where it was in 2019.
Jeff Crissey (05:31):
Okay, so stepping away from housing for a minute, looking at both manufacturing and wholesale indicators, what are you seeing?
Jason Miller (05:39):
Right now, the manufacturing sector, we've seen activity decline about 2% from where it was last year, and we seemed to have found sort of a new trough. We had activity down a little bit in March on a seasonally adjusted basis, but then it jumped back in April to kind of where it was. So we seem to have found a bottom about 2% below where we were last year, which actually brings us back to effectively the average amount of manufacturing output that we witnessed in 2019. Now, just to be clear, 2019 was a very soft year for manufacturing relative to 2018 when activity was 3% to 4% higher. So hopefully, what this is indicating is we've again found a floor. Now wholesaling activity doesn't really receive that much media attention, but it's important for everyone to understand that with how business establishments are classified by the Census Bureau, wholesalers tend to be the ones that are actually generating a lot more freight activity than retailers.
So that wholesale data really gives us a sense of where volumes are going to be moving as well. What we effectively are at is we're flat year-over-year and we've been flat and moving sort of sideways. This is in tremendous contrast to the back half of 2020 and the first half of 2022 and all of 2021 where wholesaling activity was going up on a year-over-year basis. And so what I would say right now from the wholesaling spaces, again, we kind of seem to be at a peak level. We haven't really come down yet from that, but it's going to be something very close to watch because if we would start to see a decline of inflation adjusted wholesaling, that would be very indicative that the freight recession that we're currently in is not only going to continue but could actually deepen.
Jeff Crissey (07:33):
Turning our attention now to the freight market, particularly trucking. We've been mired in a freight dip for almost a year now. We've had a slew of earnings reports in the last month since you and I spoke for the first quarter of 2023, and a lot of the publicly traded guys are saying that we are at or very near the bottom. Do you see it that way or is that just wishful thinking?
Jason Miller (07:58):
Given where we're seeing manufacturing ag, given where we're seeing imports, given where we're seeing wholesaling, the hope right now is we are near bottom. But it is important to keep in mind that this freight recession that we're in right now, we've seen activity decline about 3% year-over-year, which is a very steep freight recession. In comparison, 2019, we saw activity decline only about 1% to 1.5% percent for trucking. So 3% is a very steep year-over-year drop. March actually saw a deepening of that recession on a seasonally adjusted basis that was very consistent with many of the LTL and truckload carriers saying they didn't see that typical March bump and freight activity that they normally see. So right now, again, that hope is that we're kind of in the trough. The challenge is it's very difficult to see what is going to bring us out of that trough anytime soon.
And the one thing I would remind everybody is, historically, we've had freight recessions that last two, even three years. And so I think we've sort of forgotten that lesson of what we saw in 2015 and 2016, as well if we could look back even further in 2001 through 2003. And so it is very possible that even if we reach a trough, it will take a substantial amount of time until we effectively get out of this recession because without some big jump in demand, we'll have to have enough capacity to leave the market. And that tends to take quite a bit of time. And building on this issue of the freight recession, essentially a best case scenario being in a trough, we are continuing to see carriers experience rate pressure. So focusing first on the over-the-road drive van sector, which has the official name of general freight trucking long distance truckload, what we've seen is a 20% decrease in the producer price index for that industry.
Meaning, essentially, the rates these carriers are receiving are down 20% year-over-year. Now that is including fuel surcharges as well. So that is the steepest year-over-year decline as of April that we've ever witnessed. Now, part of the reason for that steep decline was we also saw the most rapid run up in rates in 2021 and the first part of 2022 that we ever experienced. So right now, rates on average are about 20% above where they were before pre-COVID levels, but we also have operating costs higher. And so that is especially putting strain on young establishments that may lack those relationships with shippers in orders to essentially get that contractual freight volume and pricing that they need to stay viable operations.
Now if we look at the sort of other part of the truckload sector, the specialized sector, so your refrigerated, your hazmat, long distance auto hauling, flatbed, et cetera, we are starting to see rate pressure continuing to build. Rates are down 2% year-over-year as of April. They're currently 25% above though where they were before COVID. And given that you have a very different nature of shipper carrier relationships here, I mean, take long distance chemical hauling, where there's a small number of shippers, but also a smaller number of carriers. We're very much unlikely to see the type of rate declines in this sector that we are seeing and the over-the-road drive van sector. And so as we think what that means for potentials for carrier failure as we move through the year, it would certainly suggest that the over-the-road drive van sector is likely to have more firms exiting the market over the coming months.
Jeff Crissey (11:49):
Well, that certainly wouldn't be a surprise, given the number of firms that we saw coming into the market in 2021 and 2022, right?
Jason Miller (11:56):
No, it certainly wouldn't be. And this is the one thing I always want to keep stressing to everyone. It's not so much about carrier size that predicts exit, it's actually carrier age. Young carriers disproportionately are more likely to exit than older carriers. It just so happens to be that young firms also tend to be quite small. So as we think about the capacity that's likely to leave the market over the coming months, don't think so much about size of the firms, think about how old they are. And so if you're a broker and you're looking at your carrier stable, I would be expecting that you're likely to see a much higher rate of capacity leaving from those younger firms. So I would focus very much on that dimension.
Jeff Crissey (12:46):
So that's it for CCJ MarketPulse this month. You can read more at ccjdigital.com. While you're there, sign up for our newsletter and stay up to date on the latest trucking industry news, trends and analysis. Please use the comment section below if you have any questions or comments on this month's episode. Don't forget to subscribe and hit that bell for notification so you can catch us next time. See you in June.