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Less-Than-Truckload Volumes To Be Pressured By Weak September ISM Data

FreightWaves

Most less-than-truckload (LTL) carrier executives have already written off the balance of 2019 as far as tonnage growth is concerned. Judging by the weak September U.S. manufacturing data published October 1 by the Institute for Supply Management (ISM), the executives' assessments are well-founded.

The September ISM report, which takes the monthly temperature of U.S. manufacturing through the eyes of 300 respondents, hasn't been this punk since the Great Recession ended. The Purchasing Managers Index (PMI), the report's headline number, fell to 47.8%, the lowest level since June 2009. With the exception of supplier deliveries, which showed modest improvement, the other nine sub-indexes that comprise the overall report profiled forgettable months. The "New Orders" index was essentially flat. Order backlogs, imports, new export orders and inventories contracted. Prices rose by 3.7% month-over-month. Supplier deliveries slowed, but did so at a less-severe pace, indicating fewer supply chain constraints impeding delivery performance.

The PMI has been in a steady decline since hitting a 14 1/2-year high of 60.8% in August 2018. In August 2019, the PMI came in at 49.1%, the first time since January 2016 it had fallen below the 50% threshold that would indicate contraction in the manufacturing economy. The PMI would need to drop below a level of 42.9% to signal contraction in the overall economy. Based on the past relationship between the monthly data and U.S. Gross Domestic Product, the September results indicate US GDP is on track to end the year with a 1.5% annualized gain, according to ISM. 

The month-over-month weakening also coincides with escalations of the U.S.-China trade war, the effects of which were noted by several executives in the October 1 report. 

The uncertainty over progress on the U.S.-China front is weighing more heavily on business confidence, said Timothy R. Fiore, who chairs the group that publishes the monthly report. "Global trade remains the most significant issue," as reflected by an on-going decline in new export orders that began in July 2019, Fiore said.

LTL lives and dies by the manufacturing economy, with manufactured goods accounting for about 85% of tonnage. According to estimates by Deutsche Bank, there is an 86% correlation between daily fluctuations in LTL tonnage and the  PMI, a very high association. The data comes with a three-month lag from the release of PMI data to when it is felt in reportable tonnage numbers, according to Deutsche Bank.

The LTL industry, coming off a stellar year for demand in 2018, has been forced to re-set expectations as it confronts factors that are beyond its control. Carriers can do nothing more than to ship what is produced; thus if orders slow, so does its traffic.

"It still feels a little bit soft," LTL carrier Old Dominion Freight Line, Inc. (NASDAQ: ODFL) President and CEO Greg Gantt said in late July in reference to tonnage activity. Gantt added at the time that "we don't expect our tonnage to flip to positive" in the near future.

Saia, Inc., (NASDAQ: SAIA), whose volumes have remained relatively strong through the summer, has also noticed a throttling back in 2019 compared to where the LTL carrier was at the same time a year ago, President and COO Frederick "Fritz" Holzgrefe said in a recent interview.

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