St. LOUIS — The economic outlook from a freight perspective can be summed up in a few words: Volume continues to be strong, pricing even stronger, but those two positive statements raise broader inflation concerns.
That’s the assessment of Donald Broughton, founder and managing partner of Broughton Capital, a deep data-driven economic and equity research firm.
The number of shipments has increased 12.5 percent year-over-year and expenditures — the total amount spent on freight — has increased 14.2 percent, Broughton said in the January Cass Freight Index Report.
“Not only did the shipments and expenditures indexes extend their run of positive year-over-year comparisons, but those comparisons have become increasingly positive,” Broughton wrote. “Volume has continued to grow at such a pace that capacity in most modes has become extraordinary tight. Pricing power has erupted in those modes to levels that spark overall inflationary concerns in the broader economy.”
Generally, inflation is caused by a sustained rise in the prices of commodities that leads to a fall in the purchasing power of a nation.
Shipments on a year-over-year basis first turned positive 16 months ago, while expenditures turned positive 13 months ago.
January volume was well above other recent years, even extraordinarily strong freight years such as 2014, Broughton said, adding that the December 2017 shipments index exceeded all previous respective months, even surpassing the record high established in October 2014.
It should be noted that 2014 was during an extremely strong freight market overall and was before the industrial recession, which started in December 2014, had begun.
“Throughout the U.S. economy, we are continuing to see a growing number of data points suggesting that the economy continues to get increasingly better,” Broughton said.
He said the 12.5 percent year-over-year increase in the January Cass Shipments Index is yet another data point which confirms that the U.S. economy is strong and getting stronger.
Broughton said current financial news headlines are full of stories about inflation and the resurgence of inflation in the U.S. economy.
“At the macro level, signs that there has been a rebirth of some inflation are present,” he said. “The yield on the 10-year U.S. Treasury has climbed from an ultra-low 2.1 percent to 2.9 percent in the last six months (a 38 percent increase in yield).”
He noted that the value of the U.S. dollar as measured in terms of the world’s other major currencies has gone down by 15 percent in the last year and down by 7 percent in the last three months alone.
“Given the number of smart people investing — and the amount of money they are investing — in these markets, it is risky to ignore what the ‘wisdom of crowds’ is trying to tell us.”
Broughton said data continued to suggest that the consumer is finally starting to spend a little, albeit not with brick and mortar retailers.
“It also suggests that, with the surge in the price of crude in October of last year, the industrial economy’s rate of deceleration first eased and then began a modest improvement, led by the fracking of drilled uncompleted wells, especially in the fields with a lower marginal production cost.
“We have been questioning how fast will the recovery from here be?” Broughton said. “However, the overall freight recession, which began in March 2015, appears to be over and, more importantly, freight seems to be gaining momentum in most segments.”
There is a reason for the tight capacity the trucking industry is now experiencing, Broughton said.
“We should point out that most modes of transportation under-invested in infrastructure and capacity over the last two to three years, with the notable exceptions being FedEx, UPS and XPO Logistics,” Broughton said. “Hence, capacity in general hasn’t expanded. The electronic logging devices rule recently imposed on the trucking industry may not constrain capacity as much as is widely feared, but it certainly won’t expand capacity. Capacity concerns aside, we believe this is much more of a demand story.”