Amid the hysteria and hand wringing about broad stock market selloffs, collapsing emerging markets, a supposed economic and financial crisis in China, and what the Federal Reserve will or won't do about interest rates, precious little space has been devoted to the meltdown in the Dow Jones Transportation Average (DJT).
But melt down the 20-stock index has. During the five trading sessions through Tuesday's close, the nation's oldest stock market measure—established in 1884 by Charles Dow—shed about 995 points, a staggering drop in such a short period. But it's not as if the five-day period suddenly pulled the DJT down from its high-water mark. By the time the market turned nasty at midweek last week, the index had already dropped about 800 points since the very end of 2014. At yesterday's close of $7,466.97, the index had fallen nearly 1,800 points, or 24 percent, from an all-time high of $9,217.44 set on Dec. 29. The index recovered ground today amid a broad surge in equity prices, closing the trading day at $7,654, up $187.03.
Since the year started, and especially since the end of winter, the transports have endured a grinding decline. In the minds of those who believe that as the index goes, so goes the U.S. economy--given its reputation as a leading indicator—the decline has raised questions about the durability of the multiyear U.S. recovery. Ironically, it has come during a period of free fall in oil prices, which in theory should benefit everyone in the supply chain, including the buyers of stuff who have more disposable income from falling gas prices than they've had in years.
There have been signs throughout 2015 that the worm was turning. The closely watched American Trucking Associations' (ATA) monthly for-hire truck tonnage index has performed suboptimally since February, leading the normally upbeat Bob Costello, ATA's chief economist, to wax concerned about the near-term outlook for trucking and the economy. Even last week, after ATA reported the July seasonally adjusted index jumped 2.8 percent over June to its second-highest level on record, Costello expressed worry about excessive inventory levels that would not require retailers to replenish as much stock, which in turn would curb ordering and shipping.
The nation's inventory-to-sales ratio, which analyzes a company's inventory efficiency by measuring its inventory investment in relation to monthly sales, rose sharply early in 2015 as retailers worked off inventories built up due to the disruptions at West Coast ports. Yet it has remained at elevated levels as the year has progressed. According to the U.S. Census Bureau, the seasonally adjusted level stood at 1.37 as of the end of June, at or near the highest point since the financial crisis and subsequent recession. The June 2014 ratio stood at 1.30, according to Census data.
Each month, the Department of Transportation's Bureau of Transportation Statistics (BTS) publishes an index measuring the output of the for-hire transportation industry by combining trucking, rail, inland waterways, pipeline, and airfreight activity into one database. The index peaked in November 2014, a month before the Dow Jones Transportation Average, and has since been trending down, with a couple of single-month upward blips in between. The June index, which consists of the most recent available data, fell 0.3 percent from May, BTS said earlier this month. The index dropped 0.6 percent in the second quarter, the first quarterly decline in a year and the largest quarterly decline since the third quarter of 2012, BTS said. As of June, the index had risen 28.8 percent from a cyclical low plumbed in April 2009, the depths of the "Great Recession."
Adding to the anecdotal and empirical evidence were comments made July 28 by executives at UPS Inc. that the U.S. economy was weakening. Atlanta-based UPS, the nation's largest transport company, transports the equivalent of roughly 6 percent of U.S. Gross Domestic Product and is seen as a proxy of economic activity. UPS management, which made the comments during an analyst call to discuss its second-quarter results, is generally circumspect in its public statements about the macro economy, given the company's conservative nature and the impact its words may have on financial and transport markets.
The question now is whether the months-long erosion in transport equities prices will manifest in a slowing economy. David G. Ross, transport analyst at investment firm Stifel Financial Corp., said on Monday that inventory destocking began sometime during the second quarter and is likely to continue through the end of the third quarter. Ross added in a research note that many carrier executives he's checked with are currently reporting "soft" business levels as high inventory levels curtail freight demand until the excess stock is worked down.
However, Ross said that the inventory adjustment should quickly run its course, and that the economy has yet to realize the full benefit of dramatically lower energy prices—both in terms of reduced supply chain costs and increased consumer spending as Americans have more disposable income after filling their vehicles. Ross said lower energy prices, better job growth, and rising real wages should lift spending beginning in October and extend through 2016.
Charles W. Clowdis Jr., managing director, transportation, for consultancy IHS Economics and Market Risk, said that predicting an economic downturn is hazardous business heading into the peak holiday season. Clowdis added that the raft of consumer confidence data that will be made public in the wake of the recent stock-market turbulence will shed insight into Americans' future spending behavior and its impact on supply chains and shipping patterns.
One bullish sign, albeit modest, is that three of the country's leading truckload carriers, Phoenix-based Swift Transportation Co., and Knight Transportation Inc. and Omaha-based Werner Enterprises Inc., all added rigs in the second quarter compared with their first-quarter fleet totals, according to company information and data from Stifel. The increases, which were not particularly large given the sizes of all three fleets, still signaled that the carriers were adding for potential growth rather than just replacing older equipment, which has been the norm for much of the last nine years.
