Smokey & The Bandit Inflation, Updated

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Smokey & The Bandit Inflation, Updated

Today we want to update an analysis we showed you back in July on inflationary pressures emanating from the US trucking industry. This was a hot theme mid-year as crude oil prices were north of $70/barrel and worries over shortages of truck drivers made it as far as the Fed’s Beige Book. The driver shortage issue still holds, but with oil at $52/barrel is there still as much transportation inflation?

Here is the data we presented in July 2018:

  • 9.4% inflation year over year for truckload shipments (typically used by larger businesses) for June 2017 – June 2018. This was a sharp rise from just 1.2% the year before.
  • 8.9% inflation for less-than-truckload shipments (LTL for short. mostly smaller customers) over the same period. The year-before levels were much lower, at 4.5%.

Here are the latest readings from yesterday’s November Producer Price Index data:

  • 9.1% annual inflation (November 2017 to November 2018) for truckload shipments, down 0.3 percentage points from June’s reading.
  • 5.3% annual inflation for less than truckload shipments, down 3.6 percentage points from June.

Three quick points on these declines:

#1. Falling crude oil prices have been slowly filtering through to lower trucking services inflation. Peak year-on-year pricing power for the industry was in June/July, at 8.9% (LTL) and 10.1% (truckload). Oil prices did peak slightly later (October), but it was a short-lived top that did not translate into permanent trucking industry pricing power.

#2. US truck tonnage shipped has also slipped from highs earlier in the year, indicating some softening in demand. Data from the US Department of Transportation shows September growth of 4.6% year-on-year from a June high of 10.0%. Also worth noting: the average for all of 2018 through September is 6.9%, so September was clearly below trend.

#3. Recent price action in large publicly held US trucking companies points to real market pessimism about a rebound in either pricing or volume trends (i.e. the market thinks both are going to get a lot worse). A few examples:

  • JB Hunt (JBHT, $11 bn market cap): Down 13.9% YTD, -22.0% since September.
  • Old Dominion (ODFL, $11 billion market cap): Unchanged on the year, but down 21.5% from the September highs.
  • Knight-Swift (KNX, $5 bn market cap): Down 34% YTD, -21.9% since September.
  • Landstar System (LSTR, $4 bn market cap): Down 6.7% YTD, but down 23.9% since its September highs.
  • Werner Enterprises (WERN, $2 bn market cap): Down 16.8% YTD, -20.9% from its September highs.

Summary Point #1: we wrote in our July note that then-current trucking industry pricing trends looked like a sign of a cyclical top when compared to prior peaks and were likely unsustainable. That has proved to be correct. Lower levels of demand combined with declining oil/fuel prices are beginning to take their toll on trucking industry pricing power.

Summary Point #2: Whether the data we’ve presented here (especially the industry’s stock performance) predicts a US recession or simply loss of industry pricing power is not clear. Given our long history looking at cyclical industries, we think it is the latter. The same input cost/pricing dynamics work in the replacement tire industry, for example. But if you want to include “worsening trucking industry fundamentals” with bearish indicators like stock market volatility and a flattening yield curve, we get that.

Summary Point #3: Inflation hawks made a lot of hay with the mid-year trucking industry pricing power data, but that story looks to be over. Credit lower oil prices, of course. But stock prices tell us that the trend to lower trucking inflation will continue.

Sources:

PPI Truckload Shipping Data (Long Distance): https://fred.stlouisfed.org/series/PCU484121484121

PPI Less-Than-Truckload Data (Long Distance): https://fred.stlouisfed.org/series/PCU4841224841221

American Trucking Association Truck Tonnage Data: https://fred.stlouisfed.org/series/TRUCKD11