Economic Watch: New GDP Reading Disappoints, Consumer Sentiment Falls

Hopes that the American economy picked up a good head of steam in the second quarter of the year were quickly dashed on Friday following numbers being issued by the U.S. Commerce Department.

The nation's gross domestic product, the widest measure of economic activity, increased at an annual rate of 1.2% in the April-June period. In this advance estimate, the first of three, this compares to a downwardly revised 0.8% rate in the first quarter of the year and is well below what many economists were forecasting.

Growth in the first quarter GDP was estimated to be at rate of 1.1% a month earlier, while the department also revised down the fourth quarter rate from 1.4% to 0.9%. Part of the reason for the decline in the earlier figures is the federal government revised how it measures economic growth, affecting reports going back to 2013.

The disappointing headline reading was despite an as-expected jump in consumer spending that more than doubled the pace of growth in the prior quarter, rising 4.2%, according to RBC Economics. Strength in the household sector was not reflected in residential investment this time around, which fell 6.1% following sizeable gains over the last two years.

Nonresidential investment was also weak, declining for a third consecutive quarter, falling 2.3%, to extend the longest losing streak since the recession. Government spending declined for the first time in more than a year.

RBC also noted exports rose 1.4% following three consecutive quarterly declines amid an increase in the value of the U.S. dollar and slower global growth. With imports edging lower, net trade added 0.2 percentage points to growth, however, inventories continued to subtract from growth, with the drag accelerating to 1.2 percentage points in the second quarter.

"The strengthening in consumer spending is encouraging, and we look for households to continue to contribute to growth amid an improving labor market and low interest rates,” said Josh Nye, economist at RBC Economics Research. “However, the pullback in business investment, which has not been limited to the energy sector, remains a concern."

He noted these two themes were reflected in the Federal Reserves' latest policy statement, although their tone on overall activity painted a better picture than today's growth numbers indicate.

Adding to the disappointment to the latest GDP reading is that housing has been strong, with many considering it one of the brightest spots of the post-recession economy. And while the latest indicators show manufacturing remains down, it has moved higher from being in negative territory earlier this year.

According to the Wall Street Journal, since the “Great Recession” ended seven years ago, the ecomic expansion has failed to achieve the significant growth seen in past recoveries, with the average annual growth rate during the current business cycle being 2.1%, the weakest of any expansion since at least 1949.

Consumer Sentiment Declines But Still Strong

Also on Friday, a final reading on consumer sentiment was also released showing it turned slightly slower this month.

The University of Michigan Survey of Consumers fell below the June level mainly due to increased concerns about economic prospects among upper income households.

The Consumer Sentiment Index posted declines of 3.7% and 3.3%, from June and year-over-year, respectively.

“The Brexit vote was spontaneously mentioned by record numbers of households with incomes in the top third, more than twice as frequently as among households with incomes in the bottom two-thirds,” said Surveys of Consumers chief economist Richard Curtin. “Given the prompt rebound in stock prices as well as the tiny direct impact on U.S. trade, it is surprising that concerns about Brexit remained nearly as high in late July as immediately following the Brexit vote.”

The survey's measures of consumer feeling about current economic conditions fell from June, but are higher than they were this time a year ago. However, the measure of their expectations fell this month from both June and July 2015.

“While concerns about Brexit are likely to quickly recede, weaker prospects for the economy are likely to remain, Curtin said. “Uncertainties surrounding global economic prospects and the presidential election will keep consumers more cautious in their expectations for future economic growth.”

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Earnings Watch: UPS, YRC, Saia, ArcBest, Universal

The week wrapped up with more fleets reporting their second-quarter earnings. Like many that have already advised, profits for three were lower, while the largest trucking company in the nation and one a few years ago that was on the brink of extinction showed improvements.

UPS Profit Totals $1.27 Billion

Package and trucking giant UPS Inc. (NYSE:UPS) reported it increased second-quarter income 3.2% from a year earlier to $1.27 billion while earnings per share moved higher by 5.9% to $1.43 per share. Total revenue was $14.6 billion, up 3.8% over the same quarter last year.

Supply chain and freight revenue increased by more than 13% to $2.5 billion, mainly due to the acquisition of Coyote Logistics in the third quarter of last year, according to the company. Weak market conditions in the air freight forwarding and less-than-truckload markets weighed on top-line growth.

UPS Freight LTL revenue per hundredweight increased 2.9% over the same period last year. “Total tonnage remains challenged by current market conditions,” the company said. “The business unit remains focused on disciplined revenue management and profitable trade lanes.”

UPS' U.S. domestic package services saw total revenue increase 2.4% over the second quarter of 2015 to $9 billion. Average daily package volume increased 2.5%, with next day air up 5.6% and ground products up 2.4%. Revenue per package was flat compared to the same period last year.

“UPS produced solid second quarter results, despite the continued uncertainty in the macro economy,” said Richard Peretz, UPS chief financial officer. “The technology and productivity investments in our integrated network are delivering strong results. We reaffirm our guidance for 2016 full-year diluted earnings per share of $5.70 to $5.90.”

At a time when many in trucking are reporting not only lower earnings for the second quarter and first half of the year, that hasn't happened to UPS. Its net income this year is up 6.4% compared to 2015, totaling $2.4 billion, as revenue has increased 3.5% to $29 billion.

YRC Worldwide Earnings Inch Higher

Also on the LTL side is the holding company for carriers YRC Freight and others, which saw a small hike in second-quarter earnings while revenue fell slightly, according to numbers it released late Thursday.

YRC Worldwide Inc. (NASDAQ:YRCW) reported net income totaled $27.1 million, or 83 cents per share, compared to $26 million, or 80 cents per share a year earlier.

Revenue moved lower to $1.21 billion from $1.26 billion but operating income increased to $57.2 million from $56.9 million.

Second-quarter 2016 tonnage per day decreased 6% at YRC Freight and 2.4% at the regional segment compared to the second quarter 2015.

At YRC Freight, excluding fuel surcharge, second-quarter 2016 revenue per shipment increased 1.4% and revenue per hundredweight increased by 2.9% when compared to the same period in 2015. Including fuel surcharge, revenue per shipment decreased 1.6% and revenue per hundredweight was essentially flat with a 0.1% decrease.

At the regional segment, excluding fuel surcharge, second-quarter 2016 revenue per shipment increased 0.5% and revenue per hundredweight increased by 1.3% compared to the first quarter 2015. Including fuel surcharge, revenue per shipment decreased 2.2% and revenue per hundredweight decreased 1.4%.

"While the uncertain industrial economy continues to impact the trucking industry, we remain focused on actions within our control," said James Welch, chief executive officer at YRC Worldwide. "The second quarter 2016 financial results did not meet our expectation, but operationally we continue to strengthen the company for the long-term.”

He noted year-over-year revenue per hundredweight, excluding fuel surcharge, has increased for nine consecutive quarters at YRC Freight and 21 consecutive quarters at the regional segment. Year-over-year tonnage per day was down during the quarter, but in June the decline was much smaller than April and May.

“Pricing discipline in the LTL sector remains steady despite the ongoing challenges from the industrial economy and lower fuel surcharge revenue. We do not intend to change our long-term strategy in reaction to near-term headwinds,” Welch said.

Compared to the first six months of last year, net income increased from $4.4 million to $15.1 million in the most recent quarter.

The news is in sharp contrast to where YRC Worldwide was just a few years ago, when it came close to filing for bankruptcy more than once. Since that time, it is has gone through massive restructuring and renegotiated labor agreements.

Saia Net Income Falls by Nearly a Third

Meantime, LTL rival Saia, Inc. (NASDAQ: SAIA) reported its net income for the second quarter slid to $13.3 million compared to $19.2 million a year earlier as earnings per share followed, falling to 52 cents from 75 cents.

Revenue for the period totaled $312 million, a decline of 3.6% from the second quarter of 2015.

The results came as LTL shipments per workday fell by 2.6% and LTL tonnage per workday declined 4.3%. LTL yield increased 2%, in spite of lower fuel surcharges.

"Despite the challenging freight environment, we continued to deliver a high level of service and quality to our customers. We achieved 98% on-time service in the quarter and a cargo claims ratio of 0.77%,” said Saia president and CEO Rick O'Dell .The perceived value in those measures, by our customers, enabled us to improve our yield in the quarter. Core operations continued to reach productivity and cost savings goals, but were negatively impacted by accident expense volatility and health care self-insurance during the quarter.”

In the first half of this year Saia had net income of 23.9 million compared to $31.9 million a year earlier as revenue declined to $601 million from $616.6 million.

ArcBest Profit Declines Almost 50 Percent

Also on the LTL side of trucking, the parent to ABF Freight saw its profit cut by nearly half in the second quarter of the year.

ArcBest Corp. (Nasdaq: ARCB) reported second-quarter 2016 net income of $10.2 million, or 39 per share, compared to second quarter 2015 net income of $20 million, or 74 cents per share.

Revenue for the most recent quarter totaled $676.6 million, down from $696.1 from the second quarter of 2015.

For the first six months of the year, ArcBest's profit has fallen even more, coming in at $4.1 million, following a first quarter loss and compared to a first half of 2015 net income of $20.7 million as revenues are down only slightly at $1.3 billion.

“The inconsistent economic operating environment combined with a surplus of transportation capacity continues to impact available business levels and operating margins at ABF Freight and at each of ArcBest's asset-light logistics companies,” the company said in a statement.

ABF Freight had revenue of $486.7 million compared to $504.4 million in second quarter 2015, a per-day decrease of 4.3%. Year-over-year reductions in fuel surcharge associated with lower diesel fuel prices contributed to ABF Freight's lower revenue compared to last year, according to ArcBest.

ABF tonnage per day decreased 4% compared to second quarter 2015 while shipments per day Fell 0.4%. Total billed revenue per hundredweight increased slightly, by 0.1%, compared to the prior year reflecting reduced fuel surcharges.

ABF's operating income of $17.4 million and an operating ratio of 96.4% compares to $28.1 million and an operating ratio of 94.4% in second quarter 2015.

According to ArcBest, the factors affecting ABF Freight's business levels and operating results are consistent with those seen earlier in the year.

“ABF Freight's decreasing average weight per shipment has been driven by market factors that include abundant customer inventory levels combined with excess industry capacity available to move customers' larger-sized shipments,” the company said. “Along with the effects of lower fuel surcharges, these factors have contributed to reduced second quarter revenue compared to last year. Though the current LTL pricing environment is competitive, it remains rational.”

ArcBest's asset-light operations reported revenue of $205.2 million compared to $204.9 million in second quarter 2015, making up 30% of the company's total revenue.

Universal Logistics Earnings Fall to $9 Million

The company formerly known as Universal Truckload Services, now Universal Logistics Holdings Inc. (NASDAQ: ULH), on Thursday reported its second-quarter net income declined to $9 million, or 32 cents per share, compared to $13.3 million, or 44 cents per share for the 2015 second quarter.

Revenue slipped to $276.8 million from $295 million as revenue from transportation services decreased $17.4 million, including a decline of $5.9 million in fuel surcharges, to $162.7 million for the quarter ended July 2 for the Michigan-based asset light company that provides an array of trucking services. This compares to $180.1 million for the same period last year.

According to the company, the reduction in transportation services also reflects a 9.9% year-over-year decrease in operating revenue per load, excluding fuel surcharges. The declines in transportation services were, however, partly offset by a 1.5% increase in the number of loads hauled. During the quarter Universal hauled 158,283 transportation services loads compared to 155,874 during the same period last year.

"We've seen some positive momentum this quarter," said Jeff Rogers, Universal's CEO. "In this challenging freight market, both our transportation and intermodal services performed well in terms of load volumes. Our value-added businesses, excluding where we support the heavy-truck market, are also delivering solid results. However, the impact on pricing from the weak freight environment continues to negatively impact overall operating revenues and income.”

Value-added services revenue, which includes warehousing, cross-docks and other offerings, was positively affected by new business awarded in the second half of 2015, according to the company. Overall, value-added services increased $3.1 million to $78.2 million in the second quarter of 2016, compared to $75.1 million in the same period last year. The increase was partially offset by a decline in value-added services supporting the heavy-truck market, where operating revenues decreased by $7.4 million.

Revenues from intermodal services declined by $3.9 million to $35.9 million in the second quarter of 2016 from $39.8 million during the same period last year. The decline in intermodal services revenue reflects a $3 million decrease in revenues recognized on intermodal drayage services, of which $2.2 million was attributable to a decrease in fuel surcharges. The average operating revenue per load, excluding fuel surcharges, decreased by 3% during the second quarter of 2016, while the number of intermodal loads hauled increased modestly by 0.5% compared to the same period last year.

In the first six months of 2016 Universal's profit moved lower to $16.5 million from $21.5 million during the same time in 2015 while revenue has declined to $537.2 million from $558.6.

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