Inflation Alert! Union Pacific extreme weather events interrupting service from the West Coast. AS we have previously covered, shipment volumes were already hindered by supply-chain constraints, here is a new wrinkle on that.
Hello! Jellyfish here and I would like to dive into Union Pacific's most recent service interruptions in the broader 'inflation in the transportation network' discussion.
We have covered the transportation network as a whole, but today I would like to drill dive further and review Union Pacific.
First, recapping at a Macro level:
The expenditures portion of the Cass Freight Index grew at its fastest pace ever on a y/y basis again in June, up 56.4% y/y, accelerated from 49.9% y/y growth in May. This acceleration occurred even against a slightly tougher comparison, as higher rate trends outweighed the slower shipment volumes.
Tougher comparisons in the coming months will naturally slow these y/y increases, but extraordinary growth rates will continue in the near term, driven by increases in both shipment volumes and freight rates.
Freight Rates
The freight rates embedded in the two components of the Cass Freight Index surged to a 23.4% y/y increase in June from a 10.8% y/y increase in May.
The embedded rates jumped 12.3% m/m on a seasonally adjusted basis in June, more than reversing a 7.8% m/m decrease in May.
This result confirms that the accelerating trend remained intact through Q2,
Freight Expectations
In June, Class I railroad trends slowed a bit more than tougher prior year comparisons, due in part to chassis shortages. But although automotive volumes turned negative y/y in recent weeks, they rose another 4% m/m in June after gaining 4% in May as parts shortages eased, beginning to recover from the 20% m/m decline in April.In Q2, rail volumes were slightly above sequential seasonal patterns, up 23% y/y, but momentum slowed in recent weeks. Against a y/y decline of 6% in Q3โ20, prior year comparisons will be more meaningful in the coming months, and this broad measure of freight volumes is still on pace for high-single-digit y/y growth in Q3.
Even with material supply constraints, the freight cycle remains in high-growth mode, benefiting from a strong retail economy, tight inventories, and a persistent backlog of containerships anchored in the San Pedro Bay. In addition, while the industrial sector continues to struggle on a relative basis, with record capital goods demand and likely infrastructure programs, an accelerating U.S. industrial sector should support freight growth for some time.
But the dynamics of tight supply and exceptionally strong demand, which have characterized the past year or so will not last indefinitely, and several of the indicators we monitor are auguring new trajectories.
Quickly recapping above, freight is increasing in price but backed up as supply cannot keep up with demand. Judging by the news from Union Pacific, this dynamic is about to get thrown more out of whack.
https://www.up.com/customers/announcements/customernews/generalannouncements/CN2021-42.html
In a letter at the end of June to customers, Kenny Rocker from Union Pacific detailed on-time shipment for domestic delivery at 68% and international at 73%.
'Robust demand is placing challenges on some supply chains, especially in the intermodal space.'
'Roadways and bridges in America are aging out of their lifespans, and that means more closures like the one in Memphis, whether planned or unplanned, are ahead. Fortunately, these closures donโt affect rail traffic, which means shipping by rail can help companies avoid the impacts of infrastructure improvements on supply chains.'
Funny, he brings up roads and bridges not affecting rail, and then BAM!
https://www.up.com/customers/announcements/customernews/generalannouncements/CN2021-45.html
So, bridges can affect your rail? I know trains are in a war with trucks to move freight but let's be honest about the infrastructure around here--it is falling apart everywhere!
Oh, and speaking of delays!:
https://www.up.com/customers/announcements/customernews/generalannouncements/CN2021-46.html
Not only is transportation trying to scramble to keep up with demand, but it is also having to contend with mother nature shutting down strategic pieces for unknown amounts of time. Yes, the bull of this will be handed off to trucking, but as we can see, costs are blowing up there as well:
https://www.dat.com/industry-trends/trendlines/van/national-rates
The average national spot rate for van-type trailers has been rising for the past 12 months and in June reached $2.67 a mile, up 47% year-over-year. The average national contract rate for vans jumped by 36% year-over-year, to $2.73 per mile
https://www.dat.com/industry-trends/trendlines/flatbed/national-rates
The average national spot rate for flatbed trailers (hauling heavy equipment, construction materials like those giant pipes you see convoys transporting on the highway, Kenny's Mayo Jar, etc.) jumped by 52% year-over-year to $3.15 per mile. The contract rate jumped 29% year-over-year to $3.12 a mile.
All of this while of course diesel prices are of course jumping as well:
The entire transportation network is facing spikes in costs and supply shortages, and you can bet the costs will get passed down the line. More fun to look forward to over the coming months. The CPI number from this week is a lie and a joke and inflation is not transitory--as Covid-19, Suez Canal, and Mother Nature all have continued roles to play in seeing it stick around.
All of this pain in the transportation system happening in the backdrop of the Fed still plowing away with $120 billion in assets purchases each month:
$40 billion a month in mortgage-backed securities. This will continue to depress mortgage rates and only continues to add gasoline to the inflation fire.
$80 billion in Treasury securities a month (with policy rates near 0%): represses short-term and long-term interest rates in general, and inflates asset prices and consumer prices, which further DESTROYS the purchasing power of the dollar.
While the rest of the world's banks are acting, The Fed still claims this inflation is โtransitory.
TL:DR - The Dollar losing purchasing power + Inflation = Permanent Loss of purchasing power
Buckle up.
