According to the Cass Freight Index, both shipment volume and total freight payments declined significantly from December to January, as the economy slowed to a near stall. Total shipment volume has fallen in each of the last four months, mirroring the recent contraction in GDP. The 0.1 percent contraction in GDP for the fourth quarter of 2012 was the first negative result since the recession.

January Shipment Volumes

January shipment volumes fell off 4.8 percent from December and were 2.5 percent lower than they were a year ago. For each of the last two years, freight shipment volumes ended the year at about the same place they began. This was the first year since the recession period that January shipments were actually lower than January of the previous year.

Total railroad carloadings in 2012 were lower than 2011 and were contracting at year end. January rail movements looked strong at the beginning of the month, but declined in each of the last two weeks, ending 2 percent lower than a month ago. Similarly, truck shipments were sluggish in January. Intermodal volume, on the other hand, reached near record levels in 2012 and was up 3.5 percent in January compared to December 2012.

Amid signs that some sectors of the economy are trending positively, many factors are holding down freight shipments. Inventory levels ‐ which have climbed higher than pre‐recession levels ‐ accompanied by lagging sales, pushed up the inventory to sales ratio in the second half of 2012. In January, the inventory to sales ratio was unchanged from December at 1.28.This level indicates that the inventory buildup may be cause for some concern and is impacting future orders for goods.

Mounting unsold inventory could result in inventory rationalization and increased obsolescence. Retailers and their suppliers are placing smaller orders to bring the inventory sales to inventory ratio back in line. High inventories without corresponding high sales reduce the number of loads being shipped throughout the system. The Institute for Supply Management’s PMI Manufacturing Indexes show that while production was up 1 percent in January, supplier deliveries fell for the third straight month, inventories grew 8 percent, and the backlog of orders contracted for the tenth straight month. On the positive side for coming months, new orders were up 3.6 percent.

January Freight Expenditures

Freight spending followed its slight 0.9 percent increase in December 2012 with a sharp drop of 5.5 percent in January. January 2013 payments are 1.6 percent lower than they were a year ago. This is a strong departure from the year‐over‐year changes for the last two years. January 2012 was 22.1 percent higher than January 2011, which, in turn, was 27.2 percent higher than January 2010.

The decline in shipment volume accounts for a large part of the drop. With capacity not as tight in the truck spot market, diminished demand pushed spot rates down. Diesel fuel prices have been inching upward, but had little impact on rate behavior in January. Contract rates are traditionally negotiated around March, so this month and next are usually static. Exceptions to this pattern are the increases which went into effect for the nation’s major small package shipment companies.

Overall, 2013 will be a year of modest growth with GDP in the 2.0 to 2.5 percent range ‐ not enough to have a significant impact on the unemployment numbers.

• Consumer and business sentiment have been on the decline, mostly due to the number of economic uncertainties that are beyond their control.
• Employers are concerned about health care costs and tax changes that could affect their bottom lines. Business investment and hiring should continue to be depressed for the first half of 2013, but should pick back up in the second half, barring any unforeseen upheavals.
• Consumer spending predictions are even more difficult. Much of the pent up demand that economists hoped would spur consumer spending has either been slowly expended or abandoned altogether.
• The strengthening manufacturing sector is still seeing weakness in demand for consumer goods.
• Residential housing showed solid improvement in 2012, which, if this continues, could bolster the economy and produce some ripple effects in other industry segments such as appliances and other household goods.
• Imports and exports have been relatively weak as the global economy has contracted as well. A check of manufacturing orders placed and backlog for many of our trading partners outside North America shows a mixed bag, but finds each generally in a worse position than it was a year ago.

Resurgence in the freight industry is contingent on performance improvements in many sectors globally, and nothing seems poised for exponential growth. Continue to expect modest growth in freight volumes and higher shipping costs as the year progresses.