Industrial anxiety shifts from supply to demand

Industrial demand is still robust, but many more yellow lights are flashing for investors than there were even just a few weeks ago. The first-quarter earnings season unofficially kicks off next week with industrial distributor Fastenal Co, whose results can often be a harbinger when its manufacturing customers report later this month. Last we heard from Fastenal, the company reported that average daily sales in February were up 21.3% compared with those in the month a year earlier. That was the fastest growth in more than a decade, according to Bloomberg Intelligence. Most of the actual first-quarter numbers from industrial companies are likely to be similar to those they reported for the final stretch of 2021 — strong growth (although not as strong as it might have been if supply chains were working properly) and margins pinched by rising costs and logistical logjams. But whereas last quarter was dominated by questions about how much longer supply snarls might last and frustrations that the kinks hadn’t yet worked themselves out, this coming earnings season will be pervaded by doubts about the durability of demand and concerns that shortages will quickly shift to a glut of inventory.
The past week brought a series of worrying data points. New orders for core capital goods in the US — a measure that excludes defense spending and volatile demand for aircraft — declined 0.2% in February, the first drop since the same month in 2021, according to the Commerce Department. The March reading for the Logistics Managers’ Index hit a record of 76.2; readings above 50 indicate the logistics industry is expanding, but the most recent update primarily reflected a spike in inventory and storage costs and a dearth of available warehousing capacity. Retailers in particular were left “with more inventory than they knew what to do with” as consumers shifted spending back to services and inflation curbed spending power, the report said.
Transportation capacity loosened in late March, a notable shift after 19 consecutive months of contraction, according to the Logistics Managers’ Index. Freightwaves’ tender rejection index, meanwhile, has dropped, indicating carriers are turning away fewer loads as more space opens up in their fleet and the “ship at any price” mentality of the past few months starts to fade. Freightwaves Chief Executive Officer Craig Fuller warned of a “trucking bloodbath” that could force newer entrants into bankruptcy as demand dries up. Ocean shipping costs are also coming down: Global average ocean freight rates for a 40-foot container have fallen more than 20% from the September peak, according to data from maritime advisory and research firm Drewry. Bank of America Corp.’s biweekly benchmark for shippers’ freight demand outlook has dropped sharply and is easing back toward the long-term average. Collectively, this has been enough to drag down the S&P 500 Transportation Index by about 6% this week while the S&P 500 Industrials Index declined about 2%.
As far as smoke signals go, none of this is particularly encouraging, but it’s worth noting that there is a lot of smoke. Don’t count out the extent to which rolling Covid lockdowns in China might be distorting both logistics markets and demand. Another complicating factor is companies’ efforts to stockpile goods amid concerns that labor talks at the West Coast ports, which are scheduled to begin in May, could turn contentious. The rise in fuel prices and a need for more warehouse space will likely encourage a greater shift to rail from trucks. Rail volumes are recovering from supply chain challenges, and early 2022 trends imply a full-year growth rate of about 1%, although that could swell to about 4% as constraints ease, Barclays Plc analyst Brandon Oglenski estimated. In other words, a trucking slowdown — should one materialise — isn’t bad news for all freight.
While there does appear to be some drop-off in consumer spending on physical goods, it’s not all that steep — at least not yet.

—Bloomberg