Bloomberg News

Coming Into Los Angeles Signals Spending With Truckers: EcoPulse

May 29, 2013

An increase in goods entering California is signaling optimism about the resilience of U.S. consumer spending and the trucking industry this year.

The combined inbound-container volume at the Los Angeles and Long Beach ports has risen 3.5 percent in the first four months of 2013 from a year earlier, according to data compiled by Bloomberg. That comes after total imports through these locations grew 0.9 percent last year compared with 2011.

The activity suggests that an increase of 3 percent to 5 percent -- consistent with modest consumption growth -- is attainable this year, even as retailers keep inventories lean, said Todd Fowler, vice president and analyst in Cleveland with KeyBanc Capital Markets Inc., the investment banking arm of KeyCorp. Rising shipments through these ports -- which account for almost 50 percent of all container imports -- bode well for truckers because the same retailers that are top importers are typically the biggest customers of large trucking companies, he said.

“Containerized imports are a primary leading indicator of domestic transportation volumes, with about a three-month forward look,” Fowler said. For-hire trucking companies -- including Swift Transportation Co. (SWFT:US) and Knight Transportation Inc. (KNX:US) -- transport a majority of the freight for big-box retailers, so they will benefit from improved demand, he said.

Growing Volume

An index of U.S. truck loadings rose 3.9 percent to 120.95 in April from a year earlier, following a 4.2 percent gain the prior month, based on data from FTR Associates, a Bloomington, Indiana-based transportation-forecasting company. While this proxy for volume has grown for 17 consecutive months, it has moderated since the early phases of the economic recovery, when it grew by as much as 13.5 percent in the fourth quarter of 2010, said Jonathan Starks, director of transportation analysis.

“Trucking volumes are in a positive, but not extremely strong, stage of growth, and we expect that will continue through 2013,” Starks said. FTR is forecasting that truck loadings will rise by “just under 5 percent” this year, he said, compared with 3.2 percent in 2012.

An “inconsistent economy” is causing “fits and starts” in demand at Werner Enterprises Inc. (WERN:US), Chief Financial Officer John Steele said at a May 15 conference hosted by Bank of America Merrill Lynch. “It’s been a two-steps-forward, at least one-step-back” type of environment for the Omaha, Nebraska-based truck owner and operator, he said, with freight-demand trends improving in early May after a “softer” April marked by a “disappointing” loads-to-truck ratio.

Subsiding Sell-Off

Investors are warming to this industry, as a sell-off in companies’ shares has begun to subside, said Jim Stellakis, founder and director of research at Greenwich, Connecticut-based research company Technical Alpha Inc. and also a chartered market technician. Knight Transportation has risen almost 13 percent since May 1, compared with a 7.9 percent gain in the Russell 2000 Index.

Earlier this month, the Phoenix-based company ended a 34-month period when it lagged behind the benchmark small-caps index, indicating that “sentiment toward this stock is starting to improve,” Stellakis said.

For many investors, there’s a “constructive story” for trucking now because the “clear and logical” relationship between port and freight volumes suggests a steady pick-up in traffic, said Alan Gayle, a senior strategist at RidgeWorth Capital Management, which oversees about $48 billion of assets. “This is consistent with a low-trajectory expansion that probably will continue for the rest of the year.”

Rising GDP

Gross domestic product rose at a 2.5 percent annualized rate in the three months ended March 31, following a 0.4 percent gain in the fourth quarter, according to the Commerce Department.

Even amid “near-term concerns” -- including automatic across-the-board federal-government spending cuts known as sequestration -- Americans have “more capacity to spend,” Gayle said, as hiring steadies and home values strengthen.

U.S. employers have added an average of 195,750 jobs each month this year, compared with 180,333 during the last half of 2012, based on figures from the Labor Department. The median price of an existing house rose 11 percent in April from a year earlier, the fifth consecutive month that property values advanced more than 10 percent year-over-year, according to data from the National Association of Realtors in Washington.

Housing Recovery

Home Depot Inc. (HD:US), the largest home-improvement retailer in the U.S., is benefiting “from a recovering housing market that drove a stronger-than-expected start to the year,” Chief Executive Officer Francis Blake said in a May 21 statement. The Atlanta-based company reported earnings and revenue that day, beating the consensus estimate of analysts for the three months ended May 5, and raised its full-year profit forecast.

Other indicators of household consumption -- including real disposable income and household net worth -- have been “generally positive” recently, according to the minutes of the April 30-May 1 meeting of the Federal Reserve’s Open Market Committee released May 22. As a result, some policy makers observed that “consumer spending was reported to be strong in a number of areas of the country.”

Purchases by American consumers rose 0.2 percent in March, more than projected, after a 0.7 percent increase the prior month, which was the strongest gain since September, based on data from the Commerce Department. April figures are scheduled to be released May 31.

‘Cautious Optimism’

The recent gains in truck and port activity are another sign of “cautious optimism among U.S. retailers,” Gayle said. The ratio of retail inventories to sales was 1.39 in March, after reaching a 32-year low of 1.32 in October 2011, based on figures from the Census Bureau. That compares with a five-year pre-recession average of 1.52.

While retailers are keeping supplies lean to maximize profit margins, they are relying on real-time replenishment as demand picks up, according to Walter Todd, who oversees about $950 million as chief investment officer of Greenwood Capital Associates LLC in Greenwood, South Carolina. “We were a little concerned about consumption coming into the year; we haven’t seen it fall off, though.”

Target Corp. (TGT:US) remains “cautiously optimistic about both the macroeconomic environment and consumer behavior” in the remainder of the year, Chief Executive Officer Gregg Steinhafel said on a May 22 conference call, although the Minneapolis-based company’s positive sentiment is tempered by the prospect for “slow, uneven growth.” Sales and traffic were “softer than expected” for the three months ended May 4, he added.

American Resilience

Still, Americans have demonstrated resilience, helping to keep the expansion on track, albeit at a modest pace, Todd said. Transportation volumes are useful for confirming other indicators of consumer spending, which accounts for about 70 percent of GDP.

In addition, investors may be wise to monitor imports for clues about consumption, he said, adding that a pick-up late last year was followed closely by a rebound in truck activity.

“Growth in the economy isn’t gangbusters, but it’s grinding higher just like port and trucking volumes.”

To contact the reporters on this story: Anna-Louise Jackson in New York at ajackson36@bloomberg.net; Anthony Feld in New York at afeld2@bloomberg.net

To contact the editor responsible for this story: Anthony Feld at afeld2@bloomberg.net


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Companies Mentioned

  • SWFT
    (Swift Transportation Co)
    • $24.45 USD
    • -0.09
    • -0.37%
  • KNX
    (Knight Transportation Inc)
    • $24.1 USD
    • -0.27
    • -1.12%
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