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10 THE JOURNAL OF COMMERCE www.joc.com NOVEMBER 16.2015 COVER STORY U.S. SHIPPERS AND the surface transpor- tation providers that serve them can be excused for feeling a bit jittery about the nation's economic recovery. Nearly every day there's a new data reading suggesting the U.S. economic rebound is slowing, as high inventories, weak exports, limping do mestic factory output and global head- winds, exacerbated by a winded China, take a toll. With U.S. GDP slowing to 1.5 percent in the third quarter from a 3.9 percent clip in the prior quarter, and October's miniscule retail sales growth, executives are gripping the rails ahead of uncertain holiday season and an even cloudier 2016. Complicating matters for shippers and logistics providers is the inventory hang- over from the West Coast port congestion that eased in the spring after the Interna- tional Longshore and Warehouse Union and waterfront employers signed a six-year labor agreement after nine months of contentious negotiations. That inventory hangover has made the slowdown this year feel even slower by depressing demand for new orders and freight shipments well into the fall. But it's not all bad. Lower fuel prices are giving logistics managers some relief from rising transportation costs, and driv- ing modal changes in some cases. And that much-ballyhooed trucking capacity crunch didn't appear this year, dashing fears that rates would skyrocket. Many of those sentiments are refl ected in Wolfe Research's most recent survey of 600 shippers, with annual transportation spends totaling more than $10 billion. The quarterly "State of the Freight" report from the New York-based transportation research fi rm provides an illuminating and nuanced view into what U.S. shippers see through the third quarter of 2016. RISING INVENTORIES DEPRESS SHIPPING DEMAND The hangover from the U.S. West Coast congestion debacle lingers, although marine terminals have returned to productivity. "U.S. businesses are experiencing inventory overstock at a level we haven't seen since the beginning of the fi nancial crisis in the fall of 2008," YRC Freight said in an October statement. Shippers' fear of being out of stock on the store shelf or on the factory fl oor pumped up inventories and inventory-to-sales ratios to 1.35 in August, the most recent data avail- able, according to the U.S. Department of Commerce. Retail-only inventory-to-sales ratios are even higher. The adjusted retail sales ratio, which hovered between 1.42 and 1.43 for much of last year, shot up late in the year and had reached 1.47 by February. That rise in the adjusted retail inventory- to-sales ratio coincided with the West Coast port crisis. The ratio fell to 1.45 by April but was back at 1.47 in August, indicating choppy progress toward destocking by retailers. Those higher inventory levels muted shippers' freight volume growth projec- tions, with surveyed executives expecting on average a 2.3 percent increase in same- store volumes through the third quarter. It's an improvement over the 2 percent growth shippers reported in the second quarter, but still down from the 2.8 percent they forecast in the third quarter of 2014. The Wolfe survey, conducted through- out September and early October, found that higher-than-average inventories among shippers nationwide have been a drag on freight volumes since the second quarter of 2015 and they will likely continue to tug on volume growth for the remainder of the year. Some 22 percent of shippers surveyed said they intend to ship less in the current quarter, the highest level in 3 1/2 years and more than double the amount they said three months ago. Moreover, just 22 percent of respondents said they expect more shipping activity in the fourth quarter, "the lowest level since we started asking this question almost fi ve years ago," the research fi rm said. While inventories were lower in the third quarter than in the second, they were still higher year-over-year, Wolfe reported. Approximately 44 percent of shippers said current inventories were higher than a year earlier, down from 48 percent in the As cargo owners take stock, economic uncertainty mutes the transportation outlook By Reynolds Hutchins second quarter but still up from 35 per- cent in the third-quarter 2014 survey. Conversely, 27 percent of shippers sur- veyed said inventory levels were down compared to last year, up from 17 percent in the second quarter but slightly lower year-over-year. Asked if they intended to increase, decrease or maintain inventory target levels over the next six to 12 months, most shippers said they expect inventory levels to remain the same. "Again, this would suggest that inven- tory decisions could remain a near-term headwind to freight volumes," Wolfe Research said. That begs the question: After the disruptions of the past two years, are shippers willing to carry more inven- tory, and potentially pay higher carrying costs, to avoid disruptions and reduce stock-outs? "THIS IS THE FIRST TIME SINCE 2010 THAT MORE SHIPPERS CITED TRUCKLOAD OVERCAPACITY THAN LTL OVERCAPACITY."