Tight Transportation Capacity, not Flagging Demand Behind ISM Report Showing Slowing

The consensus opinion of the most recent ISM report is that it reveals weakness in US economic output into 2014.  Industry pundits were quick to seek reasons for the slowing of activity.  “It is the brutal winter weather,” say some.  “It cannot be blamed on the weather,” say others.  Analysts point to the steep decline in orders for new transportation equipment as evidence that manufacturers are seeing weakness.  That would be a safe assumption if it were left more or less unexamined.  In reality, it may not be softening demand at the root of manufacturers’ slowdown in the bookings for new trucks, trailers and other equipment.   A scratch beneath the surface examines each of the factors involved and arrives at a more nuanced conclusion.  Follow over the fold for details.

Weather  –  If you’re in transportation you know all about the difficult state of affairs many North American shippers are faced with so far this year.  No fewer than three major transportation hubs in the US have been hobbled by some of the worst weather in decades.  While Chicago and New York/New Jersey hubs are no strangers to inclement winter weather, severe and widespread cold brought snowstorms to Atlanta and other southern US cities grinding transportation there to a halt as well.

Capacity – While the Northeastern winter disruptions may be “baked into” transportation plans, the closure of Atlanta, combined with Chicago and NY/NJ, resulted in widespread delays of shipments across the entire country for several days.  These weather related delays further exacerbates a capacity crunch already aggravated by the new Hours of Service rules which impacted capacity.  Further, the extreme cold has taken a toll on equipment, sidelining even more capacity.  So it was not necessarily surprising that these factors were reflected in a reduction in overall economic activity as seen in the recently released Institute for Supply Management (ISM) report.

The ISM report has delivered some conflicting information about the direction of the US economy.  On one hand, new orders for US factory goods (excluding transportation) rose for a third straight month in December easing concerns over an abrupt slowdown in manufacturing activity.  On the other hand, overall factory orders dropped 1.5% marking the largest drop in this metric since last July.  The report further revealed the largest drop in factory orders in more than 30 years, yet order backlogs reached the highest level since the government began tracking them in 1992.  What does all this contradictory information mean?

A telling statistic from the report may illuminate things.  The ISM makes a policy of excluding the volatile transportation sector when making these calculations so as to provide a more stable and clarified view of overall economic activity.  New orders for transportation equipment plummeted by almost 10% in the last month dragging down the numbers.  With transportation stripped out, the numbers showed modest growth – slowing but not yet contracting.   With the aforementioned, weather-induced delays and order backlogs, one might intuit that demand would be strong for new transportation equipment to help meet the deficit.  However, as one carrier quipped, “Equipment is not the challenge.  I could buy 50 new trucks but I still wouldn’t have anyone to drive them!”

And that is the crux of the matter.  The drop in transportation equipment orders that  have dragged down the outlook is not only a function of perceived weakness ahead amongst manufacturers.  It is driven almost completely by an acute and well-known driver shortage.  Coupled with really poor weather and the impact of newer HOS rules the economy is experiencing a “perfect storm” in transportation that has real cost and service ramifications for businesses.

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