Weekly Transportation Update: A Growing Economy Does Little For Freight Demand

Key Takeaways

• Real GDP rises 2.9% annualized in Q4.
• The freight economy declined once again.
• A spike in aircraft orders skewed December data.
• Real consumer spending falls again in December.
• Consumers’ savings rate rises sharply.
• Real retail inventories were steady in Q4.
• Sales of new homes rise for a third straight month.
• Mortgage rates are lowest since mid-September.
• Initial jobless claims are the lowest since April.
• Diesel prices rise by the most in three months.
• Truck spot rates fall sharply again.
• Rail carriers are cautious about the outlook.
• Intermodal volumes remain weak.
• Rail employment numbers tick up at year end.

Overview

The U.S. economy followed two slightly negative quarters in 2022 with two quarters of solid growth. Real Gross Domestic Product in 2022Q4 rose 2.9% quarter over quarter on a seasonally adjusted annualized basis, according to the initial estimate from the Bureau of Economic Analysis. GDP growth was only slightly weaker than the 3.2% gain in Q3. The two largest factors in Q4’s growth were stronger inventory investment and consumer spending. Less significant positive contributions included higher government spending, increased nonresidential fixed investment, and falling imports. Declining residential fixed investment and exports partially offset those strengths.

GDP Goods Transport Sector

Expansion of the broader economy did little to support freight demand. The portion of the economy linked to freight transportation – what FTR calls the GDP Goods Transport Sector (GTS) – dipped 1% annualized for the third straight quarterly decline. The most positive spin is weakness is decelerating. The GTS had fallen 4% in Q2 and 3% in Q3. The outlook is for little to no growth through 2023Q3.

The gain in inventory investment certainly bolstered freight, but few other factors did. Although consumer spending was a major contributor to economic growth, spending on services was far stronger than spending on goods. Goods spending was a positive contribution to GDP for the first time since 2021Q4, but vehicles and parts represented more than three-quarters of the contribution.

Because imports count as a negative in the calculation of GDP, weak goods imports in Q4 were a plus. Goods imports obviously are a positive for GDP Goods Transport, however, so falling imports were a minus for the freight economy in Q4. The improvement in nonresidential fixed investment also did little to support freight. The strength was centered within intellectual property, which has essentially no effect on freight demand. Investment in equipment was a negative, and investment in structures was essentially a non-factor.

While the broader economy’s strengths only partially fueled freight demand, the two main negatives – residential investment and exports – dampened demand. Within exports, a decline in goods more than offset an increase in exports of services. Stronger inventories are complicated because they support contemporaneous freight demand, but they potentially reduce future demand for goods. In Q4, however, inventory growth occurred mostly outside the retail sector. The largest contribution was in manufacturing, led by petroleum and coal products and chemicals. Inventories in mining, utilities, and construction also were stronger.

Manufacturing orders

December data regarding orders for durable manufactured goods shows why details matter. Total seasonally adjusted new orders for durable manufactured goods jumped 5.6% – the largest increase since July 2020 – but the gain was fully attributable to orders for civilian aircraft. New orders for nondefense aircraft and parts surged 115.5%.

Excluding transportation equipment, new orders eased 0.1% in December and have barely moved since declining nearly 1% in September. New orders excluding transportation equipment were about 19% higher in December than in February 2020. The Census Bureau data is not adjusted for pricing, so inflation at the producer level presumably accounts for a significant portion of that gap.

New orders for core capital goods – nondefense capital goods excluding aircraft – eased 0.2% for only the second decrease since February 2022 and appear to have peaked in the near term. Orders in were more than 22% above February 2020.

Consumer spending

Consumer spending adjusted for inflation declined 0.3% in December for the second straight decrease and the largest downtick in a year, according to the Bureau of Economic Analysis. The decline in real consumption was fully attributable to spending on goods, which fell 0.9%, matching November’s decrease. Real spending on services was flat, which is the weakest performance in nearly a year.

Real spending was down in both durable and non-durable goods, but the drop in durable goods spending was far larger at 1.6%, and the revised November decrease also was larger at 2.1%. Real spending on non-durable goods declined 0.4%.

One reassuring development for future consumption was the personal savings rate, which jumped to 3.4% in December on top of an upwardly revised 2.9% in November. Prior data indicated a 2.4% savings rate in December and a 2.2% rate in November. The lowest rate on record was 2.1% in July 2005.

Retail inventories

Advance data shows that retail inventories ticked up 0.5%, seasonally adjusted, on a current-dollar basis in December. The increase was the largest since August. Retail inventories excluding motor vehicles and parts increased 0.3% for the first m/m gain since August.

Inventories of motor vehicles and parts rose 1.1%, topping the 0.4% uptick in November but otherwise the smallest gain since a 2.2% drop in April. Although the inventory build is slowing, inventories are still outpacing sales of motor vehicles and parts, which fell in November and December.

Adjusted for inflation, total retail inventories were essentially flat in the fourth quarter. Real inventories excluding automotive declined 0.9%, which is the second straight quarterly decrease and the largest since 2020Q2.

Sales of new homes

Sales of new single-family homes rose for the third straight month in December, but the gain did not come close to offsetting the Census Bureau’s down-ward revision of initial estimates for November.

Sales increased 2.3%, seasonally adjusted, in December on top of a revised 0.7% uptick in November. The initial November estimate had been a 5.8% gain. The preliminary December estimate of 616,000 annualized sales is 3.8% below the originally released November figure. Sales were the highest in four months, but they were nearly 11% below February 2020 levels.

Mortgage rates

Mortgage rates in the latest week eased to 6.13%, which is the lowest since mid-September. Freddie Mac said that the continued downward trend is boosting home purchase demand.

As discussed last week, data on sales of existing homes declined for the 11th straight month in December. However, the National Association of Realtors’ figures are based on home sale closings rather than contracts as with sales of new homes and naturally lag movements in mortgage rates somewhat.

Unemployment benefits

First-time claims for unemployment benefits continue to run counter to reports of large layoffs that appear to be focused primarily in the tech sector. Initial claims for benefits fell by 6,000, seasonally adjusted, in the latest week to 186,000, which is the lowest figure since April. Continued claims for benefits rose by 20,000 to 1.68 million and have been elevated since late November compared to most of 2022.

Diesel and petroleum prices

The national average price of diesel rose 8 cents to $4.604 a gallon during the week ended January 23. While the increase was not especially large com-pared to weekly gains in many weeks since Russia's invasion of Ukraine, it is the largest since mid-October. Prices were up in all regions, led by the three regions where prices are the lowest – the Gulf Coast, Midwest, and Lower Atlantic.

The reasons for the price increase are unclear. Crude prices have drifted slightly higher, closing above $80 a barrel in seven of the past eight trading sessions. However, that slight uptick occurred too recently to have affected diesel prices last week.

Inventories and production of distillate are more likely culprits. Distillate stocks in the latest week declined to their lowest levels since late November, but perhaps a more alarming development is low production levels. Production of ultra-low sulfur distillate in the latest week was higher than during the week between Christmas and New Year's Day, but otherwise it was the lowest output since February 2022.