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Freight volume growth will be slack; peak season will be muted, analyst warns

MISSISSAUGA, Ont. - Expect slackening to flat freight volumes for the remainder of 2011, warned Cormark Securities' David Newman at yesterday's SCL-Nulogx breakfast conference aptly entitled "Transportation Strategy: Planning for 2012 in...

MISSISSAUGA, Ont. – Expect slackening to flat freight volumes for the remainder of 2011, warned Cormark Securities’ David Newman at yesterday’s SCL-Nulogx breakfast conference aptly entitled “Transportation Strategy: Planning for 2012 in Uncertain Times.”

Cormark’s Freight Monitor, which is an average of four key North American transportation market indices, declined to 3.6% in July after peaking at 12.4% in June 2010.  It has been on a fairly steady decline since the start of the year. The monitor includes the ATA Truck Tonnage Index, the Cass Freight Shipment Index, the Big 3 West Coast Port Volume Index and the US Trailers on Rail Car Index.

While pointing out the index is still in the positive territory, conditions have become more difficult in the face of anemic demand versus a supply chain inventory build last year, said Newman, analyst, institutional equity research analyst, transportation & industrial products.

“It looks like the peak season will be somewhat muted…We are in a period of tepid growth but we are not going into a full blown, ugly recession,” Newman told the capacity crowd gathered at the Mississauga Convention Centre.

The Truck Tonnage Index published by the American Trucking Associations is highly correlated to the inverse of the inventory to sales ratio.  A high inventory to sales ratio implies sales need to recover and inventories decline before freight picks up. After reaching an all-time high in January of 2009, the Canadian inventory to sales ratio declined substantially through January 2011. By June of this year, however, it had peaked again before dropping back down.

“Inventory levels edged down for the first time in July since September 2010, while sales increased after three consecutive monthly declines. We do not expect inventory restocking practices to remain strong in the second half of 2011 and early 2012 as a more modest peak season is expected this year,” Newman said.

The loss in momentum is reflected in the stock market. The TSX Transportation sub index is down 6.7% YTD while the Dow Jones Transportation Index is down 17.4% YTD.

What’s causing the weakness? The Canadian economy is expected to be amongst the top performers among the G-7, which may not be saying a lot at this point. Newman points to the weakness in the US economy as the main culprit. About 70% of the US economy is driven by the consumer but continuing high unemployment rates and weak housing practices are making the US consumer reluctant to spend.  The unemployment rate in the US held steady at 9.1% in August as US employers created net zero jobs that month. Things do look better on our side of the border with the Canadian unemployment rate at 7.3%. However, employment has been stagnant for two consecutive months.

On the positive side, employment in the Canadian transportation and warehousing industry posted the highest growth rate of all industries at 6.3% over the past 12 months, Newman noted.

US housing starts dropped to a three-month low in August at 571,000 as foreclosures, declining prices and unemployment held back construction. Canadian housing starts declined to a bit less than 185,000 in August from about 205,000 in July.

The various consumer confidence indices are trending downward. The Conference Board’s Consumer Confidence Index declined to 44.5 in August, its lowest level since April 2009. OECD’s Consumer Confidence Index for Canada declined to 76.9 in August, the lowest level since July 2009. And the percentage of Canadian companies expecting better performance next year dropped to 61.7% in August from 68.3% in July.

Still, Newman figures we should be able to “spin out of this within a short period of time.” He figures the indicators will start looking positive again mid next year.

He reminded the transportation professionals in attendance that Asian trade is continuing to drive global demand for commodities, Canadian businesses have strong cash flows and the debt reduction they underwent through the recession has left them in a better position to weather another storm. In addition, transportation companies have reduced their costs and reigned in capacity.

In addition, the Bank of Canada is keeping short-term interest rates unchanged and signaling that rates will remain low for many more months while the US Federal Reserve has pledged to keep the benchmark interest rate at a record low at least through mid-2013.

“Although we are witnessing early signs of a slowdown, economists are forecasting growth for the third and fourth quarter,” Newman said.

Wall Street Journal’s consensus for US GDP growth is 2.0% for the third quarter and 2.1% for the fourth quarter. The Bloomberg consensus for Canadian GDP growth is 2.0% for the third quarter and 2.2% for the fourth quarter.

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