Industry news: Our take--YRC Worldwide Insight

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Industry news: Our take

Oil prices top $80 mark despite growing U.S. stockpiles--Where are oil prices headed? (03/10/2010)

Oil prices continued to move upward last week, eclipsing the $80 mark despite U.S. stockpiles of crude oil and refined gas climbing in the same period.

Our Take:

A number of counterbalancing trends are working on oil prices at a time when prices should seemingly be dropping. As the economic recovery of the U.S. struggles to find firm footing, oil prices continue to increase and now hover in the $80 per barrel range.

There are several items that should be pulling the price of oil downward. First, the jobless rate in the U.S. is still significant enough that commuter traffic is down, decreasing gas and diesel consumption. And second, U.S. crude inventory stockpiles continue to grow--up by more than 4.1 million barrels.

However, counteracting that downward pressure on prices were several conditions. On the demand side of the equation, Chinese consumption of oil is up nearly 2 million barrels a day and the country is expected to sell more than 12 million new vehicles in 2010, many of these ultimately triggering first-time auto buyers and increasing demand for oil. Also, the U.S. consumer has shown some important resilience of late, adding to speculation that U.S. demand will increase as well.

On the supply side, geopolitical problems continue in Nigeria and uncertainty in the Middle East has still kept markets on edge. Volatility in the U.S. dollar has also added to the pressure on oil prices. As the dollar falls against foreign currencies, the price of oil rises and vice versa.

So where is oil headed? Many analysts and the Energy Information Administration (EIA) believe that oil prices will hit at least $95 per barrel before the year is over. Yet, EIA believes that current prices are overvalued for the current market conditions. But given the growth of Chinese consumption and the projected improvement in the U.S. economy later in 2010, prices have greater potential to go well northward of current levels.

The Conference Board's Consumer Confidence Index dropped unexpectedly to 46.0, from January's revised 56.5 reading. (03/02/2010)

The latest survey from the Conference Board is disturbing for those that felt the economic turnaround was in full swing. The index had been rising for the last three months and in January had reached a reading of 55.9. Most analysts expected the index to come in at 55, making the plunge to 46 completely unexpected.

With 70% of the U.S. economy being driven by consumer spending, the drop in the confidence number is of significant concern. But, as with all surveys of the often complex consumer, there are caveats. The consumer is subject to the whims and moods of the moment when they are polled. And lately, the general news in the media has been negative on many fronts, creating some question as to the strength of economic recovery.

The Conference Board survey showed that the overwhelming rationale for the drop in confidence was fear that the job market would deteriorate further. This past week, a Gallup poll suggested that the Government figures on unemployment were understated and the “effective” unemployment rate (those underemployed or those that have quit looking for a job altogether) is now at 19.9%.

Yet, the consumer is now sending mixed messages. Consumers are obviously reacting most significantly to the overall impact that unemployment has had on the economy. Yet, on the other side of the coin, the latest reports from the retail sector have been more positive than they have been in many months. Major retailers in the home improvement sector reported that sales had started to recover and there were solid reports from many retailers coming out of the Valentine's Day weekend showing more traffic and improved sales.

So which is it? Is the consumer conflicted again?

Is what they say more important than what they do--or is it just the opposite?

To a manufacturer, the answers to these questions are critical.If the consumer is really just re-stating the concerns they are hearing in the press and are actually feeling a bit better about their personal situation, they may be more willing to spend. If the reaction being reported from the polls is more accurate assessments of consumer attitude, the inventory build will be coming to an end soon and retailers will once again be sitting on inventory. More here.

Fed raises discount rate--what is it, and what does that do to businesses? (02/24/2010)

The Federal Reserve raised the “Discount Rate” from .50 to .75% last week. The move rocked global stock markets--but isn’t intended to affect consumers. Yet, it could affect businesses and consumers alike.

Our Take:
During the economic crisis, the Federal Reserve used one of its powers to lower interest rates for emergency loans that are made to banks, to help them shore up balance sheets and remain solvent. That rate had dropped to .50% over the past two years, but was raised one-quarter of a percent back up to .75% last week. The move has rattled global stock markets. However, this is not the key Federal Reserve Funds Rate (the rate that is applied to funds transferred between banks overnight). The Federal Funds rate has a more direct impact on consumer and business lending. The Fed reiterated that this move on the Discount Rate does not signal that it will raise the Funds Rate anytime soon.

Markets are jittery after the announcement by the Fed. The Discount Rate will ultimately force banks to not rely on the Fed for boosting their balance sheets. In other words, it forces them to survive and thrive on their own--or pay a hefty price to get Federal aid. That move will tighten the lending policies for many banks overall, especially those that are not as fiscally stable. Over time, this will change the profitability of those banks using the Discount Rate and will tighten their lending practices. In the near term, there could be some tightening of lending practices to both consumers and businesses as a result.

The Federal Reserve stated that this was not a move to slow the economy (the worry being inflationary threats). But, the general marketplace is taking it as such. To counter those fears, the Fed made a statement that has perhaps worried the market more than anything--that the recovery is looking like it will be prolonged and slow. The agency admitted that it may keep the Funds Rate unchanged for most of the year. Once the market settles down after this action to raise the Discount Rate and wean banks off of Federal aid, many people will be watching for further implications of what a slower recovery might mean for business. Read more here.

Commercial real estate worries--should businesses worry about their lines of credit? (02/17/2010)

Estimates show that approximately $1.4 trillion in commercial real estate debt will come due over the next four years. Almost half of that is considered to be at risk of default.

Our Take:
The growing concern over the commercial real estate markets is beginning to catch some momentum. A report issued by the Congressional Oversight Panel administering the TARP program last week had alarming language in it--suggesting that the trickle-down and ripple effects of a looming crisis in the commercial real estate markets could weigh on financial markets.

Essentially, there is more than $1.4 trillion in commercial real estate debt, a big portion of which is held by small and medium-sized regional banks. Of this amount, nearly half of it is now considered to be at risk because property values have dropped enough that the loan value now exceeds the appraisal rate of those properties. As default rates move higher and banks work to balance debt ratios, something will have to give. This will likely come in the form of tighter lending practices for businesses that borrow from lending institutions that must go through this balancing act. In other words, working lines of credit may tighten for businesses or they have to seek alternative sources for working capital.

There are a number of things that can help to remedy the situation. The Federal Government could step in to help take a significant amount of the burden off of smaller institutions--those at the most risk from commercial real estate defaults. There has also already been a wave of foreign investment sweeping into the country purchasing commercial real estate that is currently far undervalued. Whether these investments will be enough to stem the tide of defaults that will come is likely the $700 billion question. For now, the mainstream media is beginning to cover the coming wave of commercial real estate adjustments that will sweep the banking industry. But, not too many people are willing to throw cold water on an economy that is starting to recover. So, this story may continue to fly somewhat low over the horizon for a while. Get more details at: http://www.cnbc.com/id/35352337

Manufacturing index shows strong January upside for the nation's manufacturers (02/10/2010)

The ISM's PMI rose sharply in January to 58.4%, its strongest showing in nearly 6 years. What is driving the PMI and what can we expect from it?

Our Take:
The Institute for Supply Management issues a Purchaser Manufacturing Index (PMI) which tracks the overall strength of the U.S. manufacturing sector. Historically, the PMI has proven to be accurate in predicting the direction of growth in the manufacturing sector and the prospect for the industry moving forward (through trending). The PMI has steadily risen over the past eight months, and recently hit its highest mark since August of 2004 at 58.4%. The overall index is up over December's figure of 54.9%.

Manufacturers and retailers are mostly responding to market conditions in which inventory levels of many have hit all-time lows. As a general rule, managers of inventory have opted to reduce their inventories going into the early part of 2010. As demand sets back in, these same companies have begun to engage in some preliminary re-stocking activity. Even if this inventory re-stocking activity begins after the January period, the early-stage activities of the sector had to begin in January. That January activity is largely being reflected in the January PMI figures.

Looking ahead, the big question for many retailers, wholesalers, and OEMs is how strong demand would come on in the latter part of the first quarter.

If the unemployment rate and other discretionary spending impacting events hits the consumer (such as oil prices, taxes, inflationary effects on food, etc.), there could be a rebuilding of inventory that takes place without the corresponding strong rebound in consumption. Until the strength of the economic recovery can be determined, the PMI is likely to expand and contract accordingly with swings in inventory build-ups and sell-downs--which will be a bit more volatile than in years past.

The ISM report is a strong index with much information on the manufacturing sector and other factors (such as employment, productivity, inventory, new orders, etc.). To get more information, please go to the ISM site at this link: http://www.ism.ws/ISMReport/MfgROB.cfm?navItemNumber=12942.

Sector Earnings--When does inventory replenishment kick in? (02/03/2010)

The over-the-road sector has had a challenging year as U.S. businesses kept inventory levels extremely low. With some hints of economic recovery, when do U.S. businesses restock?

Our Take:
Fourth quarter earnings reports show the slow rate of inventory replenishment by companies in the U.S. Across all trucking modes, there were general declines in both tonnage and profit as retailers and manufacturers continue to keep a conservative approach to inventory management.

Analysts watching the retail and manufacturing sectors still speculate that there will be a rebuilding of inventory levels in the middle of Q1, but the size and magnitude of that rebuilding effort is uncertain.

Retail sales in the fourth quarter were slightly weaker than expected, and with the unemployment rate still climbing, there is concern that the consumer may be slower to return to healthy spending levels.

The nation's retailers will use projections of consumer activity to determine how much inventory to replenish, and many do not expect it to return to pre-recession inventory levels.

The transportation industry seems to be taking the reduction in business activity equally across all modes. No specific mode of transportation seems to be faring any better than any other. The rail sector benefits a bit more than others during the winter months because of the movement of energy supplies across the country--but has suffered the same reduction in volumes in the intermodal segment as other modes.

All eyes will remain on inventory replenishment levels for retailers and manufacturing, the housing market, and a recent increase in durable goods activity. Explore further at: http://www.reuters.com/article/idUSSGE60Q0MP20100127

Conference Board Leading Economic Indicator Index continues to improve. (01/27/2010)

Conference Board Leading Economic Indicator Index continues to improve. The Conference Board Leading Economic Index™ (LEI) for the U.S. increased 1.1 percent in December, following gains in November and October.

Our take:

The Conference Board’s figures have its share of proponents and opponents. Since the index takes into account a significant number of different economic factors, there is some macro economic value in the general direction the index is taking. How it may or may not apply directly to a specific industry is yet a different story.

The official press release from the Conference Board shows that the areas helping the index grow in December were: “interest rate spread, building permits, average weekly initial claims for unemployment insurance (inverted), stock prices, index of consumer expectations, index of supplier deliveries (vendor performance), money supply and manufacturers' new orders for non-defense capital goods.” Essentially, there were a number of indicators that help to boost portions of the economy--those that should help to drive growth. But there are still a lot of questions about job growth.

Just last week, there were concerns that the weekly jobless figures are showing a more aggressive loss of jobs than analysts had expected. By the end of the month, the net change in the unemployment rate will be weighed against seasonality to truly determine whether that portion of the economy is improving. Job growth or loss is considered to be a lagging indicator, businesses reacting to economic activity make decisions to expand or reduce the workforce based on actual activity. Seeing the unemployment rate continue to decline is a negative input.

But, there are reasons to believe that the Conference Board’s Index is working. The Purchaser’s Manufacturing Index was still in a growth state in December. Future orders were still showing strong demand last month as well. Inflation remains in check and energy and commodity prices are relatively moderately priced. And several other factors give us either: 1) optimism that the worst is behind us and growth is ahead; or 2) that there are positive green shoots that (barring any activity to reverse course) will provide growth in 2010 for some sectors.

The economic picture in the U.S. and abroad is complex. For businesses, general sentiment starting to emerge is that there are reasons to expect economic improvement throughout the year--again, barring any major regulatory, environmental, or geopolitical crises. The Conference Board’s LEI is just another input that gives us some reason to hopeful that the best is truly ahead of us.

Get further details at: http://www.prnewswire.com/news-releases/the-conference-board-leading-economic-indextm-lei-for-the-us-increases-again-82251487.html

Retail sales higher than expected (01/20/2010)

Retailers exceeded analyst expectations in general, reporting stronger sales growth in December, despite continued pressure on consumers and a high unemployment rate.

Our take:

There was a significant amount of consumer psychology involved in this year's figures.

Despite an unemployment rate that was higher than this time last year and less consumer credit capacity, sales still increased over last year. Assuming that the recession started in earnest in the fall of 2007, many consumers were going into their third difficult Christmas. Many simply decided that they were not going to go without some celebration.

But, retailers also took on a different strategy for 2009.

Many cut inventories to low levels going into the season and limited sales and discounts as much as possible--while still promoting enough to get shoppers in stores. But consumers waited until the true last minute this year, perhaps in an attempt to take advantage of last minute discounts.

The area that analysts will be watching is the amount of additional gift certificate activity that comes in January as consumers redeem what is expected to be an even better gift card season.

Again, consumer psychology plays a role here. Many families, coming on hard times over the past year, will likely get more gift certificates. This allows the recipient to spend those funds on items that they need, more than in normal years when expenditures were on more frivolous types of items. This would also help to explain why apparel spending was higher in the season.

Looking ahead, retailers will have to do some significant inventory rebuilding in the spring.

In addition, the cold weather snap has pushed sales of winter merchandise to levels not seen in years. The latest "Arctic Clipper" is affecting 38 of the 48 contiguous U.S. states--pushing sales for retailers to better levels than average for January--in those categories. Find out more at: http://www.cnbc.com/id/34745479.

Manufacturing sector continues expansion in December (01/12/2010)

The Institute for Supply Management (ISM) released its Report on Business for the manufacturing sector and the survey indicated that the index grew from 53.6 in November to 55.9 in December.

Our take:

The Institute for Supply Management's Report on Business for December reflected the general sentiment for the economy--showing that optimism has set in for 2010. The PMI (Purchasing Managers Index), a key gauge of manufacturing activity in the country, increased to 55.9--a sign that the manufacturing sector is expanding. The index had softened in November, dropping to 53.6. Analysts pegged this change to a drop off in automotive activity after the replenishment of inventory following the Cash for Clunkers program in July and August.

Looking at 2010, there are a couple of items that need to be monitored closely--to see if the recovery is sustainable. First, capital availability for small business is still a key concern. If capital remains tight as it is at present, which would slow the purchase of equipment and slow the growth of the manufacturing sector. Second, the rate of inventory replenishment is going to be monitored closely as well. If retailers determine that growth in 2010 will sustain higher inventory levels, they will begin to rebuild those levels from an extremely low inventory base currently. Those efforts would spur more activity. But, the reverse could take place if they remain conservative for a while longer, and manufacturing could lag early in 2010.

Lastly, there is evidence that supply chain managers are looking to more near sourcing, producing more of the goods consumed in the U.S. within the U.S. The majority of importers will continue to import heavy volumes from Asia and abroad, but will begin to bring a small percentage of their purchasing closer to the U.S. market to help provide risk mitigation against rising fuel prices or a weak U.S. dollar. In all, the report for December was positive and will certainly help boost optimism going into 2010.

Get additional information regarding the Institute for Supply Management